Insurers want banks to reduce interest on premium financing

In the wake of the new Cash and Carry regulation introduced early this year, insurers have appealed to banks to reduce insurance premium financing interest rates.

Insurance premium financing interest rate is the percentage charged by banks when paying insurance premiums on behalf of the insured to the insurance company.

Speaking on the sidelines of the 44th Chief Executive Officer (CEO) breakfast meeting last week, Mr Allan Mafabi, the Britam Insurance chief executive officer, urged banks through Uganda Bankers Association to reduce the premium financing interest rate to encourage more insurance uptake.

“What we are saying is can you drop the interest rates from the current rates because they are counter guaranteed by insurance players. When a client defaults, the bank informs the insurer, we cancel the policy and payback the loan,” he said, noting that banks are pivotal in insurance growth, especially through their intermediary role as bancassurance agents.

The Cash and Carry regulation was conceived in January, directing that insurance companies can only take cash payments for premiums in a bid to eliminate large debts from the sector.

Insurance Regulatory Authority (IRA) explained then that the new regulation would enable insurers to have more liquidity for both investment and timely payment of claims to the public.

How premium financing works
According to Mr Mafabi, banks through insurance premium financing issue up-front payment on behalf of clients to insurance companies payable over a 10-month period.

Currently, banks charge about 6 per cent interest for dollar-based policies and between 8 per cent to 10 per cent for shilling-based policies.

However, insurers are now seeking for a revision from banks to reduce the interest rate to 1 per cent for dollar policies and 3 per cent for shillings-denominated policies.

Their argument, is that the co-guarantee from insurance companies eliminates the risk borne by banks when they finance premiums since insurers pay the loan back in case of default by the insured.

Speaking to Daily Monitor in a phone interview at the weekend, Mr Wilbrod Owor, the UBA executive director, said a discussion between bankers and insurers is currently ongoing to determine if the proposals are possible.

“Yes, we have had discussions with the insurance association and we formed a technical committee to review the technical aspects and what is making it costly,” he said, emphasizing that he was confident of finding a breakthrough.

To enforce the Cash and Carry regulation, Insurance Regulatory Authority gave insurers an ultimatum of November to have cleared all legacy debt amassed from premium receivables from their books of account.

New regulations

The insurance sector, in addition to the Cash and Carry regulation, welcomed stiffer regulation in 2019 including the roadmap to risk based capital.

Risk-based capital, which places strong emphasis on understanding and assessing the adequacy of each financial institution’s risk management system, requires insurers to recapitalise to about 200 per cent.

A requirement that is proving strenuous to insurance companies that say it might not be attainable in 2019.

However, Mr Ibrahim Kaddunabbi Lubega, IRA chief executive officer insists that: “The issue of 2019, you said 200 per cent is not possible, if you are maybe at 150 per cent and we gave you a target of 200 per cent, I cannot exactly remember the target we gave, but for those who were in 170 per cent, we asked them to reach 200 per cent, that is possible.”

IRA pegged the attainability of recapitalisation on the elimination of legacy debt.