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Thursday, May 26, 2022

What To Do After Your Insurance Company Collapses

  • In the first week of April, the country was awash with news that one of the leading insurance companies had collapsed and was being auctioned. According to Kenbright Actuarial and Financial Services Ltd, the company collected Ksh3.6 billion in premiums for the year 2021 out of which Ksh3.3 billion was in health cover and Ksh0.2 billion in motor insurance. 

    Following the collapse of the insurance company, policyholders have been left stranded with many not knowing what to do. The  Insurance Regularity Authority of Kenya (IRA) – the body charged with the responsibility of governing insurance companies – says the policyholder remains protected when an insurance company collapses or files for bankruptcy.

    Insurance experts opine that most of the collapsed companies go out of businesses due to underpricing of their products or having higher than expected insurance claims. In Kenya, the first major insurance to run out of business collapsed in 2005. Since then, four other big insurance firms have gone bankrupt.

    The recent collapse of a major insurer has exposed the loopholes in the sector that has seen thousands of policyholders remain stranded, further casting a cloud of uncertainty on the regulation of the sector.

    File photo of a motorist checking an insurance sticker on his car.

    In Kenya, the Policyholders Compensation Fund plays a central role in complementing regulatory efforts through consumer protection and promotion of market stability.

    Despite being at the center of compensations, the anticipated benefits from these funds have not been fully actualised, leaving most claimants unprotected.

    If an insurance company goes out of business, the government through Insurance Regulatory Authority (IRA) takes over the company by placing it under receivership.

    The authority will try to rehabilitate the firm to bring it back to profitability. However, if these efforts fail, the insurance company is declared insolvent thus prompting the sale of its assets.

    What To Do When Your Insurance Company Collapses

    According to IRA, policyholders should continue paying their premiums for the remaining part before the expiry of their policy.

    Paying premiums keeps coverage intact for the remainder of the period. 

    “If you have a life insurance policy and the insurance company is closed down, your policy remains valid and you should continue paying policy premiums throughout the remaining term of the policy. 

    “Failure to continue paying premiums leads to termination of the policy by the insurance company. You have the right to claim under the policy immediately the policy matures,” IRA states on its official website.

    If an underwriter does not have enough funds to pay policyholders’ claims, The Policyholders Compensation Fund (PCF), which takes over the firm as the statutory manager, uses the funds from the sale of assets to pay claims.

    At this stage, most policyholders and creditors depend on the amount capped by the government to receive their payouts.

    Policyholders contribute 0.25 per cent of their premiums to the compensation fund and their insurance companies match with a similar percentage.

    Policyholders whose underwriters collapsed before the Policyholders Compensation Fund was set up have to wait for the courts to liquidate the collapsed underwriters for their claims to be settled.

    In cases of motor vehicle insurance policyholders, most of the policies will be cancelled immediately the underwriter is placed under receivership. This means that the motor vehicle becomes uncovered and the owner has to get another cover as using a cancelled one is unlawful.

    File image of NTSA traffic police inspecting a PSV matatu

    How to Spot Insurers that Might go Under

    Before buying a policy or insurance cover, policyholders are advised to check up on the firm’s history to establish if it is financially sound.

    Checking ratings from independent agencies with different rating standards also offer an insight to policyholders if the company is financially stable.

    Paying particular attention to press releases about rating downgrades and the agency’s reasoning for lowering a company’s ratings helps policyholders to determine if the insurer has the ability to withstand market forces and remain afloat.

    Low ratings are an indicator that the insurance company’s financial stability is in doubt. However, it is advisable for an insured person to continue paying the premiums until a new policy is in place.


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