Microinsurance is meant to provide protection to those on low incomes and is critical in helping households manage risks. Kenya’s microinsurance landscape is relatively young, with increasing participation from insurance companies. Regulation is also being updated to complement this growth: recently, Kenya amended its Insurance Act so it includes the Microinsurance Regulations. This change emanated from the Kenya Microinsurance Policy Framework Paper, which sets out the Kenyan Insurance Regulatory Authority’s (IRA) future regulation and supervision of microinsurance products.
The captive cell insurance model presents a great opportunity for Kenyan insurers as they pursue this line of business.
What is a cell captive, and how do they work?
The concept of the cell captive has grown out of captive insurance. A cell captive is a vehicle created by an insurance company (the ‘cell provider’) to extend the use of its insurance licence to another organisation (the ‘cell owner’). The cell owner uses this licence either to cover its own assets or to cover the assets or lives of its members or customers. The former is called a first-party cell and the latter a third-party cell. Any profits or losses are accumulated to, or deducted from, the capital provided. The cell owner can either provide capital for the cell as assessed by the insurance company, or the insurance company can capitalise the cell (partially or fully) and in return receive a fee or share of underwriting profits. The cell owner is essentially ‘renting’ a cell from the cell provider.
Cell captives are used in many jurisdictions worldwide; in Africa the concept is largely confined to South Africa, whose Financial Sector Conduct Authority is seeking to regulate third-party cell captives through a conduct standard. It has not yet gained much traction in Kenya, but some small players have been exploring the role that cell captives may play in their operations, and the IRA is open to dialogue that will create a space to pilot such innovative models.
One advantage of cell captives is that they have lower requirements than are usually needed to start an insurance company. The cell provider takes over compliance responsibilities with respect to minimum capital, technical skills and reporting. Owners can also benefit from the provider’s expertise.
Cell captives and inclusive insurance
The cell captive model could address some of the constraints faced by Kenya’s inclusive insurance market and bridge the protection gap for little-understood risks, such as microinsurance. Insurers in Kenya find it challenging to create products that are tailored to the needs of the under-served. Third-party cells could be particularly useful to players outside the insurance space that have huge access to the under-served and are interested in providing coverage. Institutions such as mobile network operators, churches, retailers and other aggregators could serve their client base without having to set up insurance subsidiaries or register as an intermediary. The return on investment for them would be in the form of preference share dividends on profits earned in their cells.
These aggregators have a lot of knowledge about their customers, meaning they could create personas and design products that meet specific customer needs, as well as structure the value chain in a way that meets business needs and provides a seamless customer journey. They get autonomy in shaping the complete product offering, and do so without the legacy IT systems and processes that constrain more traditional insurers. This kind of autonomy and share in profits means the aggregators are incentivised to develop innovative, cost-effective products and distribution processes that best fit customers’ needs and circumstances.
An alternative case is for the use of mutual cell captives. These are structured such that the cell is set up jointly by a group of participants who share the same primary and systemic risks and would like to pool the risks and insure through a mutual. This would be attractive for participants who would be too small to set up a cell individually – for example, a group of funeral parlours could come together to provide funeral insurance.
“Cell captives have lower requirements than those usually needed to start an insurance company”
Risks and regulation
There will be challenges in unlocking the cell captive model for the low-income segment of the Kenyan market.
Statutory recognition and regulation of cell captives will be required. Legislation will need to provide legal separation of each cell captive, with each cell having a separate legal personality. Current legislation for cell captives differs by jurisdiction, but the basic premise is that the assets and liabilities of one cell are legally separate from those of another. If the cell captives do not have legal and separate personalities, the creditor of a cell provider can go after the assets of all cells within the company, and the funds within the cells may be lost if the cell provider is wound up. IRA participation in such legislation will be required to jump-start the use of cell captives in Kenya and ensure both cell owners and cell providers are well protected. Reference to international examples could help with this.
The legal and operational relationships between cell owners and cell providers are usually complex, set out in the shareholders’ agreement and articles of association. Given the complexities, they should vary between different cells. However, most implementation of these agreements shows templates of shareholder agreements with broad scopes that are not tailored to the cell owners’ specific needs. This prevents cell owners that ‘break the mould’ from drafting these documents in a way that maximises their returns.
Cell owners are naturally involved in the day-to-day running of the cell and would need good knowledge of how to do so. Insurance skills will be needed, as well as proper data and systems that can be used to run a cell captive successfully.
Insurance regulation would be required to ensure that each cell captive is financially sound and that there is no cross-subsidisation between cells or to the cell provider. As an example, excess capital within cells would not be included in the total assets of the cell provider, or be used to offset claims in other cells. The cell provider would need to continually assess the cells’ capital levels to ensure its own ongoing solvency. If accumulated capital is more than the required levels, the cell owner can receive the profits. If it is lower than required, the cell owner would need to provide more to re-establish solvency. This is especially key for third-party cells where losses in the cell are first funded by the cell owner’s capital. If this capital is insufficient, the cell owner is liable to cover the deficit; where they cannot do so, the provider carries the risk and could become insolvent, bringing down all the cells. Proper actuarial investigation will be required to ensure the assumptions used for each cell take account of the experience, in order to reduce insolvency risk.
Realising the value of the cell captive model for more inclusive insurance will require a clear regulatory framework that will support its adoption and implementation in a way that is appropriate to the Kenyan market. In its consideration, the IRA should be guided by the primary objective that the cell captives are to address.