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Proposed insurance industry taxes deepen woes for firms

Last week, National Treasury Cabinet Secretary Henry Rotich made some of the most radical and far-reaching changes in the insurance industry.

While undertaking “Robin Hood” tax measures – where money from wealthy corporations and individuals is collected in form of levies and directed towards the poor – is a common thing in liberal economies, the CS, by raiding the pockets of insurers pulled a fast one on industry players.

Treasury has introduced a capital gains tax arising from the transfer of property under the general insurance business.

This means that if an insurance company sells any of its stocks, bonds or tangible assets, it will have to part with a capital gains tax of five per cent.

Only insurers involved in the life business have been spared from this tax.

The second tax that has hit insurers is the introduction of a five per cent withholding tax on premiums paid to foreign insurance companies.

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Kenya has 50 insurance firms of which almost half are foreign-owned.

Audit firm PriceWatehouseCoopers (PWC) argues that with the State going after the foreign-owned insurers, major negative effects are set to reverberate within the industry.

“The introduction of a five per cent withholding tax on insurance premiums paid to non-resident insurance firms could adversely affect the sector by increasing the cost of reinsurance. The high cost of reinsurance will not spare both foreign and local underwriters,” said PWC in an alert to its clients.

There are four major reinsurance firms operating in the country. These are Kenya Reinsurance Corporation (Kenya Re), Continental Reinsurance, East African Reinsurance and Swiss Reinsurance.

Of these, only Kenya Re is locally-owned.

While the taxation measures undertaken by Treasury might seem stringent, experts argue that for long, the insurance industry has remained untouched by the taxman and more levies couldn’t have come sooner.

According to PWC, Insurance relief at the current 15 per cent of the premiums paid capped at Sh5,000 per month, have stagnated at the same level for the last 10 years and its time Treasury reviewed them upwards.

Perhaps one of the most fundamental proposals that Treasury has floated to further realign the industry, is the plan to press for the amendment of the Insurance Act to do away with insurance intermediaries and have individuals pay premiums directly to the underwriters.

“The current provisions of the Insurance Act allows the insured to pay for insurance premiums through intermediaries. The intermediaries delay the payments for the premium thereby putting the insured at risk,” said CS Rotich.

“In order to ensure prompt payment of premium to the insurer and taking into account the expanded mode of payment of premiums, through digital platforms, I propose to amend the Insurance Act to require the insured to make payments in respect of premiums directly to the insurer. This will enhance prompt coverage of the insured,” said CS Rotich said in his speech.

The intermediaries include insurance agents, brokers and other outlets such as bancassurance.

Treasury has further proposed to amend the Insurance Act.

Mr Rotich has proposed to bring changes in the industry by boosting an obscure insurance segment that covers agriculture, especially crop failure.

The CS wants traditional indemnity-based insurance, which has had challenges due to the requirement for assessment of losses to be conducted before any payment is made, done away with.

He argues that this traditional way of doing things has led to the low uptake of agricultural insurance. “In order to provide an alternative to the indemnity based insurance, I propose to amend the Insurance Act to introduce index-based insurance which will lead to higher uptake of insurance by our farmers,” said Rotich.

While most of the proposals may appear hard-hitting to the industry, some were favourable and are meant to bring some rationality in terms of fighting fraud which has been skimming money from insurers, especially in the medical and private motor segments.

For long, insurance companies have struggled to make profit in the medical and private motor vehicle sector – where fraudulent hospitals and doctors connive with patients to offer healthcare services to persons who are not covered by a specific insurer.

They also inflate the cost of drugs to exaggerated levels and pass the additional cost to the insurer. “We have witnessed increased instances of fraud in the insurance sector mainly due to lack of adequate provisions to govern the sector. In this regard, I propose to amend the Insurance Act to introduce provisions to criminalise insurance fraud and protect the consumers,” said the CS.

Commenting on the proposals, PWC said the insurance industry has for long been impacted by fraud that is hard to investigate or punish – leaving insurers with unwarranted losses.

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The radical changes in the industry comes at a time when insurance companies have been targeted by new, global and mandatory accounting rules which experts say could trigger more mergers and acquisitions.

The rules, dubbed (International Financial Reporting Standards) IFRS 17, come with strict reporting requirements for insurance firms’ financial results rand tight requirements to increase their capital bases.

The rules also come with harsh requirements for the insurers to invest more in data collection and hiring of more actuaries – requirements that could inflate their costs and burden their balance sheets.

The new Treasury proposals and the stringent accounting rules form a difficult disruptive environment for insurers, one that is likely to change the entire industry in the long-run.

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