Kenyan Insurance Company Regulations

• Insurance companies in Kenya are regulated by the Insurance Regulatory Authority (IRA).
• The Insurance Act (Cap 487) mandates the IRA.

Pre-registration Requirements

• The company must be a public limited company incorporated under the Companies Act, 2015.
• A general insurer needs a minimum capital of Kes. 600 million.
• A life insurer needs a minimum capital of Kes. 400 million.
• A composite insurer (offering both life and general insurance) needs Kes. 1 billion.
• The company needs qualified professionals like a CEO, Head of Actuarial Services, Head of Underwriting, and Head of Claims
• The company must have a physical office in Kenya with a valid address.

Application Process

• The company must apply to the IRA.
• Requires certified copies of the certificate of incorporation and memorandum/articles of association.
• Requires details of the company's shareholders, directors, and management.
• Requires a business plan outlining the company's intended business activities, market strategies, and financial projections
• Requires audited financial statements or projections for the first three years of operations.
• The applicant must pay the prescribed application fee.
• The IRA conducts a "fit and proper" test on directors, management, and key personnel.
• The company must demonstrate adequate technical and financial capacity.

Approval procedure

• The IRA reviews the application to ensure compliance.
• Upon approval, the IRA issues a license to operate as an insurance company.

Ongoing Regulatory Compliance

• The company must adhere to all provisions of the Insurance Act.
• The insurance company must submit annual audited accounts and actuarial reports.
• The company must maintain a solvency margin as determined by the IRA.
• Compliance with prudential standards is mandatory.
• Fair treatment of policyholders and addressing complaints is required.
• The company is required to pay annual licensing fees to maintain its license.

Decision-Making in Risky Environments

• Decision-making involves assessing uncertainty, potential consequences, and available information.
• Uncertainty where a lack of complete information makes prediction difficult.
• Time pressure requires quick decisions, which increases stress.
• High stakes mean mistakes can have significant consequences.
• Cognitive biases, like overconfidence, can influence decisions.
• Emotional influence impacts rational thinking.

Strategies for Effective Decision-Making in Risky Environments

• Risk assessment involves identifying potential risks, their likelihood, and impact.
• Risk assessment provides insight of exposure to risk
• Scenario planning involves considering different possible outcomes and preparing contingency plans.
• Data-driven decisions use available data, probabilities, and past experiences.
• Heuristic approaches involve experience-based intuition.
• Diversification spreads risk across multiple options where possible.
• Decision trees use structured methods to weigh risks and rewards logically.
• Red teaming challenges assumptions by taking an opposing perspective.
• Adaptive learning involves improving future choices based on past decisions.

Net Present Values

• Present value is the current value of a future shilling which is obtained through the formulae or discounting table.
• Net present value is the difference between the present values of future inflows (PVIF) less the present value of future outflows (PVOF).
• An investment is viable if the NPV is positive.
• NPV Formulae= Ct 1(1.r)¯¹ +Ct2 (1.r)-² +Ct3 (1.r)-3) – Co
• Ct = Cashflow at a given time.
• r = Discount rate / the required rate of return
• Co = initial investment

Risk theories

• Insurance risk theories assess, quantify, and manage the risks that insurance companies face.

The Law of Large Numbers (LLN)

• According to the concept with more policies reduces the risk and increases convergence.
• With a large number of policyholders, the actual loss per event will equal the expected loss per event.
• Insurers rely on LLN to forecast losses, set premiums, and manage risk.

The Central Limit Theorem (CLT)

• The CLT suggests that the distribution of identically distributed random variables approximates a normal distribution with a large sample size.
• Insurers use CLT to approximate the aggregate claim amount.

Risk Pooling

• Risk pooling combines multiple risks to reduce the variability of the overall risk.
• In insurance, pooling spreads the risk of loss among many policyholders.

The Theory of Moral Hazard

• Moral hazard occurs when an entity has an incentive to take on more risk because they do not bear the full consequences of that risk.
• Insurers address moral hazard through deductibles, copayments, and coverage limits.

Adverse Selection

• Adverse selection occurs when there is asymmetric information between the insurer and the insured.
• Insurers combat adverse selection through underwriting practices.

The Expected Utility Theory

• Expected utility theory suggests that individuals make decisions based on their expected utility, rather than just their expected monetary value.
• Insurers use this theory to understand consumer behavior and design policies.

Capital Allocation and Solvency Theory

• This theory focuses on how insurance companies manage capital to ensure they can meet future claims and remain solvent.
• Insurers use capital allocation models to determine how much capital is needed to meet regulatory requirements.

Reinsurance Theory

• Reinsurance is the process by which insurers transfer part of their risk to other insurers (reinsurers) to reduce their exposure to large losses.
• Reinsurance helps insurers manage extreme risks and stabilize their financial position.

Risk-Return Tradeoff

• This theory suggests a balance between the level of risk an insurer is willing to take and the potential return they can achieve.
• Insurers use this principle to set premium rates and decide which risks to take on.

Overview of Kenyan insurance company regulations as mandated by the Insurance Regulatory Authority (IRA) and the Insurance Act (Cap 487). It covers pre-registration requirements such as company type, minimum capital, key personnel, and physical office.