2011 is gone. We are in the New Year 2012. Political and economic analysts have commented on the lows and ups the country went through in 2011. The journey was a bumpy one. As far as matters of insurance are concerned, 2011 was a tumultuous year that the insuring public and insurers alike would have liked to leapfrog.

Lester Chinyang'anya reflects on some of the events of the year.

Regulatory reforms

The insurance fraternity opened the year with several regulatory reforms. The regulator of insurance institutions in the country, Reserve Bank of Malawi, issued four new directives for transaction of insurance business. The new directives include; risk management, fit and proper persons, corporate governance and premium payment. This brought total number of directives to six.

Previously, there were two insurance directives in issue, viz; financial reporting requirements directive and minimum capital & solvency requirements directive. The directives, which are part of continuous reforms, as enshrined in the Insurance Act, are aimed at, inter alia, strengthening the legal and regulatory framework for supervision of insurance institutions in Malawi. The directives seek to close deficiencies and mop up excess market imperfections that have been rocking the insurance industry for many years.

In Malawi, insurance business, both short-term and long-term, is regulated by the Insurance Act of 2009. One of the strong points of the Insurance Act is that it empowers the registrar of financial institutions to carry out on-going regulation and supervision of insurance entities. The Act gives powers to the regulator to issue directives, relating to major areas of soundness, solvency, liquidity and technical reserves.

For starters, directives are legal instruments that are issued to supplement existing legal frameworks. From legal perspective, directives allow flexibility, since certain regulatory issues are better dealt with via directives other than having them coined in the main Act. As some insurance veterans observed at an Insurance Institute of Malawi conference in October, "insurance risks are dynamic, regulatory tools ought to be dynamic, too." This statement has been echoed by many practitioners.

The introduction of new directives is a turning point for the industry. The directives have significant consequences on insurance business and how insurance organizations are structured and run.

Insurance institutions and officers that choose not to comply with provisions of the directives stand to be punished through payment of pre-determined sums of money or have trading licenses revoked. The new directives have compelled insurance organizations and individuals to change the way business is conducted in the market.

The fit and proper directive, for example, ensures that insurance institutions are managed and overseen by competent and qualified officers. The directive cites directors, chief executive officers, heads of technical departments, senior managers, internal auditors, actuaries and external auditors, as responsible persons.

For instance; it is required under the fit and proper directive that chief executive officers of insurance and reinsurance companies should be associate of the Chartered Insurance Institute (holder of advanced diploma in insurance) and have at least ten years insurance experience. It is less demanding for principal officers of broking firms; one needs either advanced diploma in insurance or ten years experience.

Following the introduction of this directive, enrolment at Insurance College and other insurance learning institutions has swelled up tremendously. In economics, we say: 'keeping up with the Jones.'

The Risk management directive aims at setting minimum standards for risk management of insurance entities. In essence, the directive puts onus on board of directors to devise and implement sound risk management methodologies and periodic reviews of insurance companies.

The Corporate governance directive, on the other hand, apart from setting minimum standards of good governance, prescribes a code of good corporate conduct in relation to all stakeholders (not only shareholders).

The directive rests on the broader term of the triple bottom model of economic, social and environmental benefits as recommended by King's Report III, read together with Malawi Code II.

The Corporate governance directive specifically addresses and identifies rights and responsibilities of shareholders, board of directors, internal auditors, external auditors and the public at large.

The Premium payment directive, that came into force in August, ensures that insurance premium is received by an insurer as and when insurance cover is provided, to enable insurers build up appropriate technical reserves.

Part III, section 3 of the directive forbids policyholders to make out cheque payments to insurance brokers or agents. Stated differently, premium payment must be made in favour of an insurance company. The law stipulates that 'a broker or agent who receives and retains premium cheque payment directly from a policyholder shall be guilty of an offence.' In the past, brokers were allowed to collect premium from policyholders.

After many years of consultations and debate, the insurance industry in the country saw the introduction of Pensions Act. The Pensions Act, which came into force on June 1, mandates employers of five or more employees to set up a pension fund to cater for benefits of employees after retirement. It is required under the same Act that an employer must arrange group life insurance for employees.

With these new laws in place, the future of insurance in the country looks buoyant and promising. This should excite practitioners, regulators and the insuring public, alike, since the provisions of the laws are up to date and in tune with current trends and practices in the insurance industry in CISNA region and worldwide.

The other beauty with the new legislation is that it introduces a systematic procedure for dealing with unsound insurance entities, through direction of compliance and proper exit administration procedures. In August, the Insurance Association of Malawi saw one of its members, Citizen Insurance Company, being put under statutory management by the regulator. The matter is in court awaiting determination for possible liquidation.

Acts of God

The global insurance industry witnessed and picked a number of catastrophic claims in the year just ended. In March, Japan was hit by a devastative earthquake measured 8.9 magnitude on Richter Scale. The earthquake was followed by a ruinous tsunami. Almost all major reinsurance companies dotted across the globe were affected by Japan disasters through reinsurance and retrocession programmes.

According to AIR World and other international experts the insured loss estimate reached $35 billion. It has been reported that the Japan loss is the costliest in insurance history in the world. In spite of the magnitude of the loss, over 90 percent of the loss was reported to have been paid within three months. By the way, what is the average turnaround period for local insurers for a loss of this nature?

The eruption of Grimsvotn volcano in Iceland also affected the global insurance industry in a big way, especially travel insurers and business operators that rely on air transport. In April, when mount Grimsvotn loosened up, throwing out volcanic debris into the air, most European airliners grounded their planes for safety reasons.

Global airline is reported to have lost more than $1.7 billion of income as a result of the volcano. Ninety five thousand flights are said to have been cancelled, affecting more than 1.2 million passengers per day. The disruption had far reaching effects not only in Europe, but across the globe. A large number of industries, in the world, including insurance in Malawi, depend on Europe for market and standards. Global insurers were affected as they had to pay claims arising wherefrom.

In Africa, countries such as South Africa, Kenya and a number of West African states were also hit by the closure. South Africa, for example, is a major producer and exporter of vegetables. Kenya is famous for its rose flowers. Most of these vegetables and flowers are exported by air to Europe. The closure of airports culminated to loss of business for the flower and vegetable exporters. Thanks to insurance, part of the loss was recouped.

The archipelago Philippines had its share of natural catastrophes. A devastative typhoon killed 35 people and damaged property worth millions of dollars. In May, a destructive tornado hit Joplin in USA. Sri Lanka, India, Bolivia, Brazil and Newsland also experienced terrible acts of God of different magnitude. Perhaps, the second costliest insurance loss in 2011 was the Australia floods that sub-merged and destroyed buildings, crops and public infrastructure, such as roads, railway lines, water pipes, telephone and electricity distribution network.

Acts of man

2011 was one of the worst years for domestic property and transport insurers, especially minibus insurers. The country experienced a number of fatal and serious minibus road traffic accidents.

Records indicate that May was the worst month for minibus operators and their insurers. For example; in a space of three days, 13 people perished in Ntcheu in two separate accidents involving minibuses. On May 21, nine people died in a road accident in Ntchisi.

Karonga district also experienced a number of fatal road accidents; five people died on the spot on June 8 when a minibus driver lost control of the vehicle and rammed his vehicle into a tree at Nyungwe. Another minibus overturned at Nbembwera, near Mlare on M1 road. With these statistics, I am not surprised that most insurers in the country do not write minibus business. The loss frequency and severity is high.

Residents of Blantyre shall live to remember May 17, 2011. On this day, a building that housed Kips restaurant in Blantyre subsided to gravitational force. The entire building collapsed following architectural and maintenance works that were being carried at the premises.

Four people, including the owner of the restaurant, are reported to have died on the spot and 20 were injured with various degrees of injury. Asset all risks insurers and workers compensation insurers must have been hit claim-wise.

...To be continued on Monday

Lester Chinyang'anya is an insurance expert working at Nico General Insurance. He runs a regular column in the Business Times every Wednesday called 'Insurance Issues'. He writes the article in his personal capacity.