Treasury softens payouts in collapsed insurance firms

Standard Assurance offices

Standard Assurance offices. The company was recently placed under statutory management. 

Photo credit: File | Nation Media Group

Policyholders in collapsed insurance firms have won a reprieve after the Treasury formally removed a strenuous rule requiring that courts first conclude insolvency proceedings before compensation starts.

In new regulations published by Treasury Cabinet Secretary Njuguna Ndung’u, compensation payouts will now kick off immediately a collapsed insurer is placed under statutory management and its licence cancelled by the Insurance Regulatory Authority (IRA).

Previously, it was a requirement that collapsed insurers go through insolvency proceedings before the Insurance Policy Holders Compensation Fund (PCF) compensate claimants. This worked against claimants because insolvency procedures are windy and last up to 10 years in most cases. Under the new rules, all that is required is a notification by the IRA that an insurer had collapsed.

“A policyholder who does not make a claim for compensation within two years from the date of the notification by the Board shall not be entitled to claim any compensation from the Board” Prof Ndung’u said in changes to the Insurance (Policyholders’ Compensation Fund) Regulations.

The PCF, formed on September 24, 2004, insures policy holders’ funds with a maximum compensation of Sh250,000.

Insurers and policyholders contribute to the PCF fund through a 0.25 percent levy on gross direct premiums written. Before the formation of the PCF, policyholders simply lost all their benefits when their insurance companies went insolvent.

In recent years, several insurance firms, including Resolution Health, Concord Insurance Company Limited, and Standard Assurance Kenya Limited have run into trouble and risk liquidation if attempts to turn their fortunes around are unsuccessful.

For example, the IRA in April last year placed Resolution Insurance under statutory management on unmet obligations.

Liquidation is the process by which the management of the company’s affairs and control of its assets are taken out of its directors’ hands and vested in a liquidator.

The property and assets are then converted to cash or cash equivalents by selling them on the open market and debts paid out of the proceeds in order of priority. Once the assets are sold and creditors paid, the liquidator closes the company.

Liquidation of assets may be either voluntary or forced. A voluntary plan may be effected to raise the cash needed for new investments or purchases or to close out old positions.

A forced liquidation may be used in bankruptcy, in which an entity chooses or is forced by a legal judgment or contract to turn assets into a liquid form.