1. REVIEWING RISK BASED SUPERVISION IN E.A.
EZEKIEL MACHARIA
ACTUARIAL SOCIETY OF KENYA – RISK BASED SUPERVISION WORKING PARTY
23RD SEPTEMBER 2015
SCOR CAMPUS
NAIROBI, KENYA
1

2. COMPLIANCE BASED SUPERVISION
The good old days? For whom?
2

3. AGENDA
 Review of the East African Market
 Risk Based Supervision Framework for Kenya
 Risk Based Capital Calculation
 Conclusion
3

4. REVIEW OF THE EAST AFRICAN MARKET
4
GDP Growth (2014): 6.3%
% of population below 14yrs: 44.44%
Insurance Penetration (2013): 0.6%
 Key Characteristics of
East African Market
 Growing economy
 Young Population
 Low Insurance
Penetration
GDP Growth (2014): 1.5%
% of population below 14yrs: 29.4%
Insurance Penetration (2013): 15.4%
Source: World Bank, Country Insurance Regulator
GDP Growth (2014): 7.0%
% of population below 14yrs: 44.79%
Insurance Penetration (2013): 0.9%
GDP Growth (2014): 5.3%
% of population below 14yrs: 42.04%
Insurance Penetration (2013): 3.4%
GDP Growth (2014): 4.5%
% of population below 14yrs: 48.18%
Insurance Penetration (2013): 0.85%
GDP Growth (2014): 4.7%
% of population below 14yrs: 44.75%
Insurance Penetration (2013):
GDP Growth (2014): 7.0%
% of population below 14yrs: 42.07%
Insurance Penetration (2013): 1.6%
Population(2013)

5. PRE-EMPTING CHANGE IN REGULATION?
 Change to
RBS is
expected to
spur M&A.
This is already
happening
and we
expect a
higher level
of
consolidation
5
Acquirer Acquired Country
Prudential Sheild Assurance Kenya
Prudential Gold Star Uganda
Old Mutual Emerging Markets UAP Group Kenya, Uganda, Tanzania, S Sudan, Rwanda & DRC
Sanlam Emerging Markets Gateway Kenya
Sanlam Emerging Markets NIKO Tanzania & Uganda
Sanlam Emerging Markets Soras Rwanda
Soras SOCAR Burundi
Metropolitan Life Canon Kenya
ICEA (merge) Lion Kenya
Barclays Life - (greenfield) Kenya
Barclays General First Assurance Kenya
Britam General Real Insurance Group Kenya, Zambia, Malawi, Mozambique
Saham Mercantile Insurance Kenya
Saham CORAR Rwanda
Grean Oaks (USA) COGEAR Rwanda
Union Insurance of Mauritius Phoenix of East Africa Kenya, Zambia, Malawi, Mozambique
DEALS: MERGERS & ACQUISITIONS IN EA (2013-2015)
Acquired

6. AGENDA
 Review of the East African Market
 Risk Based Supervision Framework for Kenya
 Risk Based Capital Calculation
 Conclusion
6

7. KENYA MOVING TO RISK BASED SUPERVISION BY 2018
7
Kenya: Risk Based Supervision Timetable*
• New Insurers: RBC in 1 Oct 2015
• Existing Insurers: RBC in 30 Jun 2018
*Changes contained in Finance Bill 2015

8. KEY COMPONENTS OF RISK BASED SUPERVISION
8
 Changes in Kenya are inline with International Association of Insurance Supervisors (IAIS) -
Insurance Core Principles (ICP). All East African (Kenya, Uganda, Tanzania, Burundi & Rwanda)
countries are members of IAIS.
 Onsite inspections and increased level of reporting requirements through electronic regulatory
submissions.
Qualitiative Supervision Disclosure
Investment Requirements Corporate Governance (Fit & Proper forms) Financial Condition Report
Valuation of Technical Provisions (non-life) Actuarial Function Quartely Solvency Reporting
Valuation of Technical Provisions (life) Risk Function Quartely Valuation of Technical liabilities
Capital Compliance Function Risk Appetite
Solvency Capital Requirments Internal Audit Function Risk Framework
Minimum Capital Requirements Treating Customers Fairly (TCF) Reinsurance Management Strategy
Onsite Inspections Investment Strategy
Stress Testing & Scenario Analysis
KEY FEATURES OF RISK BASED SUPERVISION ROLLOUT IN KENYA
*Roll-out Schedule - Green: Introduced in 2013, Blue: Introduced in 2014, Red: Introduced in 2015

9. FOCUS ON KENYA: KEY CHANGES TO MCR
9
 Onsite inspections and increased level of reporting (electronic regulatory submissions), disclosure
and market discipline.
 Introduction of an annual Financial Condition Report.
Underwriter
Fixed Amount
(KES 'millions) % of Proxy Risk Based Capital MCR Assets Required Capital
Insurer (Long Term) 400 5% of Liabilities
Insurer (General Insurance/P&C) 600 20% of NEP*
Insurer (Long Term) 500 5% of Liabilities
Insurer (General Insurance/P&C) 1,000 20% of NEP*
*NEP - Net Earned Premium of previous year
PROPOSED REGULATION - KENYA : MINIMUM CAPITAL REQUIREMENTS (MCR)
The maximum of …
calculated on rules
set by Authority from
time to time
Government Securities
or
Bank Deposits/Cash
Can be higher than specified
MCR depending on nature, scale
& complexity of insurer and risk
profile

10. KENYA: REGULATORY BALANCE SHEET
10
 In compliance/rules based regime, the
minimum capital requirement (MCR)
was the solvency capital requirement
(SCR).
 Introduction of risk based capital
increases the possible solvency
requirement.
 Special asset classes for minimum
capital. This means that Own Funds
assets will be divided into Tiers with MCR
backing being most restrictive
 Technical provisions to be based on best
estimate + risk margin

11. KENYA: CAPITAL ADEQUACY RATIO
11
Capital Available Capital Required
Automatic acceptance
Paid up capital
Retained earnings
Capital Reserves
Require approval by regulator
Subordinated debt (over 5 years, payable after
policyholders, unsecured, redeemed at maturity or at
option of insurer with prior approval from Authority,)
CAPITAL MANAGEMENT UNDER RBS
Max(RBC, MCR)
 The required Capital Adequacy
Ratios will depend on the size of
insurer (CAR) - initial proposals show
an acceptable CAR of 130%
 Management of Insurers will
recommend a higher CAR, say
200%.
 Assets will be valued based on fair
value approach, i.e. (i) readily
available price (listed securities) or
(ii) price determined from an arms-
length transaction between willing
parties.

12. AGENDA
 Review of the East African Market
 Risk Based Supervision Framework for Kenya
 Risk Based Capital Calculation
 Conclusion
12

13. KENYA: RISK BASED CAPITAL – STANDARD MODEL
13
Statutory Capital
Requirement (SCR)
Risk Based
Capital
(RBC)
Minimum
Capital
Required
(MCR)
Maximum of
RBC
&
MCR
Basic Solvency
Capital
Requirement
(BSCR)
+
Operational
Risk Capital
Insurance
Risk Capital +
Market Risk
Capital +
Credit Risk
Capital
 VaR measure of basic Own Funds with a 95% confidence interval over a one year time horizon

14. Insurance
Risk Capital +
Market Risk
Capital +
Credit Risk
Capital
KENYA: RISK BASED CAPITAL – INSURANCE RISK CAPITAL
14
 Insurance Risk Capital charge covers
the variation of the actual experience
from that assumed in the pricing basis
 Capital requirement is based on
change in Net Asset Value (Δ NAV)
following a permanent
increase/decrease of x% in the
parameter value
Mortality
Longevity
Morbidity/Disability
Lapse
Expense
Catastrophe
+
Premium
Reserve
Lapse
Catastrophe
+
Similar to Life (SLT)
Non Similar to Life (non-SLT)
Health Catastrophe
Life
Underwriting
Risk
Non-Life
Underwriting
Risk
Health
Underwriting
Risk
SLT:
Critical illness,
Income Protection,
Long-term care Insurance
Non-SLT
Private Medical Insurance
(PMI)

15. KENYA: RISK BASED CAPITAL – INSURANCE RISK CAPITAL
15
Class of Business
Outstanding Claims
Risk Factor (%)
Unearned
Premium Risk Factor (%)
Aviation 13 17
Engineering 10 14
Fire Domestic 5 9
Fire Industrial 12 16
Liability 10 14
Marine 5 9
Motor Private
Material Damage 5 9
Liability 15 19
Motor Commercial
Liability 5 9
Material Damage 12 16
Motor Commercial
Liability 10 14
Material Damage 15 19
Personal Accident 11 15
Theft 6 10
Workman’s
Compensation
Medical 11 15
Miscellaneous 9 13
6 10
 Initial charges based on regulators
internal QIS 1
 New charges under consideration

16. +
Market Risk
Capital +
Credit Risk
Capital
KENYA: RISK BASED CAPITAL – MARKET RISK CAPITAL
16
 Market Risk Capital charge covers the
volatility in the asset prices.
 Equity, Property & Currency Risk
Capital charges are pre-determined
 Interest Risk Capital – based on
change in surplus due to change in
interest rate
Equity Risk
Capital
Equity Portfolio
+
Land & Buildings
Investment Property
+
Currency Risk
Capital
Liabilities denominated
in foreign currency
+
Interest Risk
Capital
Change in Surplus
(Asset - Liabilities)
Property Risk
Capital

17. +
Credit Risk
Capital
KENYA: RISK BASED CAPITAL – CREDIT RISK CAPITAL
17
 Credit/Counterparty risk capital charge covers the likely loss resulting from changes in the value
of assets and liabilities as a result of unexpected default or retrogression in the credit rating of
independent counterparties
 Key counterparty for insurers Reinsurance and capital is required for Reinsurance share of claim
provisions

18. AGENDA
 Review of the East African Market
 Risk Based Supervision Framework for Kenya
 Risk Based Capital Calculation
 Conclusion
18

19. CONCLUSION
19
 East Africa is moving towards Risk Bases supervision framework
 Kenya has taken the lead and will implement RBS in 2015 for new insurers and by 2018 for existing
insurers
 Disclosure requirements and internal supervision requirements already in place in Kenya with
quantitative requirements to be introduced in Q4 2015.
 Risk based model under review by Working Party of The Actuarial Society of Kenya
 Preliminary Risk Based Capital Requirement shows that Kenyan Insurers may need to inject capital

20. ?
QUESTIONS
Ezekiel Macharia, Actuarial Society of Kenya
ezekiel.Macharia@gmail.com
20