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What happens when an insurance firm collapses
IRA steps in prioritising protection of policyholders from the risk of a disorderly collapse since they have put in their money in the form of premiums. A sudden collapse could leave customers completely exposed.
A growing number of insurance firms in Kenya have been placed under statutory management, sparking confusion and anxiety among customers.
The law allows the Insurance Regulatory Authority (IRA) to step in through statutory management in a bid to stabilise struggling insurers and protect customers.
Here is a breakdown of how the process works, the role of IRA and the Policyholders Compensation Fund (PCF), and what policyholders should expect.
What does it mean when an insurer is placed under statutory management?
It means the regulator has effectively taken control of the company because it is no longer operating soundly.
In many of the previous cases in Kenya, IRA appointed PCF to play this role. At that point, the powers of the board and shareholders are suspended. PCF steps in to assess the company’s financial position, safeguard remaining assets, and determine whether the business can be rescued.
Why would IRA step in and take over an insurance company, yet the insurer has owners?
IRA intervention usually happens when there are clear warning signs that an insurer may not be able to meet its obligations, and shareholders have failed to make any serious move to stabilise operations.
Some of the triggers include persistent losses, failure to maintain the required capital buffers, and failure to pay claims as they fall due. In some cases, governance issues such as mismanagement or fraud may also trigger IRA intervention.
IRA steps in prioritising protection of policyholders from the risk of a disorderly collapse since they have put in their money in the form of premiums. A sudden collapse could leave customers completely exposed.
What role does PCF play in protecting customers?
PCF is designed to cushion policyholders when an insurer fails. It can step in to compensate customers for certain claims, particularly in cases where the insurer is unable to meet its obligations.
In Kenya, the law provides for compensation of up to Sh500,000 per claim once an insurer is under statutory management.
The compensation comes from the insurance levy that insurers and policyholders contribute to PCF and the investments it makes with the money.
PCF is also usually appointed the statutory manager, effectively running the affairs of the troubled firm in a bid to resuscitate it and save customers from further losses.
What happens to existing policies once an insurer is under statutory management?
Once an insurer is placed under statutory management, it is barred from underwriting any new business.
Customers with existing policies are advised to seek coverage with other insurers. This can be chaotic, especially for those with short-term covers such as medical and motor vehicle.
For those with long-term covers, IRA usually advises on how to manage such covers, including asking the customers to continue paying premiums to keep policies active but under the management of PCF.
Can policyholders still make claims when an insurer is under statutory management? How about other creditors?
PCF normally issues a moratorium that stops policyholders and other creditors from making claims against an insurer under statutory management.
In the case of Trident, Kuscco Mutual, and Corporate Insurance Company, which were recently placed under statutory management, the moratorium period is six months.
However, during this period, the law protects the policyholders and creditors by providing that such parties are not liable to pay any claim not payable by the insurer.
Once PCF has taken over the caretaker management role and assessed the financial health of the insurer, it opens a window for policyholders to submit their claims against the insurer. This can be for three months.
PCF then compensates the affected insurance customers up to Sh500,000 per claim as provided for in the insurance law. Claims above Sh500,000 that remain unpaid are then hinged on the insurer getting resuscitated or liquidated.
If it is rescued, it resumes normal operations and becomes liable for settling the claims and amounts due to other creditors. If the resuscitation fails, PCF recommends liquidation, which, if approved in court, results in the sale of the insurer’s assets and the amount used to settle obligations. Shareholders are given the balance, if any.
How long does statutory management last, and what determines whether a company is revived or liquidated?
The law allows for an initial six-month period. This can be extended by six months. If the insurer’s operations fail to improve, PCF recommends liquidation.
The outcome depends on whether a viable turnaround plan can be found. This might involve attracting new investors, restructuring debts, or merging the troubled insurer with a stronger one. If these efforts succeed, the company may return to normal operations. If they fail, the process shifts toward liquidation.
What steps should policyholders take when their insurer is in trouble?
When an insurer shows signs of distress, policyholders need to keep track of official updates from the regulator and the statutory manager. This helps in understanding how the situation is evolving and whether they should scout for another insurer.
Policyholders should also ensure they have the proper documentation, including policy contracts, premium receipts, and any correspondence, just in case there is any conflict regarding the existence of the cover.
In addition, policyholders should begin evaluating alternative insurance options, especially if confidence in their insurer continues to erode. An insurance broker or agent can help in navigating the process and making informed decisions.
