Presented by Jerry Sogoli at the 4th Annual East Africa Finance Summit A comparative analysis of the independent regulatory agency approach vis-à-vis direct government oversight and the appropriateness of the former in regulating today’s insurance sector

1. 4TH EAST AFRICAN FINANCE SUMMIT
Insurance Oversight - A comparative analysis of the
independent regulatory agency approach vis-à-vis direct
government oversight and the appropriateness of the former
in regulating today’s insurance sector
4th – 5th December 2019, Addis Ababa, Ethiopia

2. 2
 Abstract.
 Insurance regulation and oversight.
 The types of regulatory frameworks.
 Strength of the independent regulatory agency approach.
 Evolution of regulations (a comparative look).
 The various approaches in the region.
 Study – a look at the Kenyan experience.
 What way forward for Ethiopia.
Table of Contents

3. 3
Abstract
Overview
 This presentation explores the history of insurance regulation in general and compares and contrasts the two
main oversight approaches i.e. independent agency regulation vis-à-vis direct government regulation.
 The presentation will highlight the advantages and disadvantages of either system and strive to show why the
independent regulatory model is the more effective and relevant to supervisory needs of the insurance
industries in the region
 The ultimate aim is to generate discussion on the independent regulatory agency model and whether it is
appropriate for Ethiopian environment.
Deliverables/
Outcomes
 Understand the different approaches to reinsurance regulation.
 Appreciate the effectiveness of the independent regulatory agency model.
 Undertake a surgery of the independent regulatory agency model to determine its relevance for the Ethiopian
insurance environment.

4. 4
Insurance Regulation
Definition
 Insurance regulation refers to the government overseeing the insurance market to ensure fairness and
professionalism among those working for the insurance industry in order to prevent the market from
collapsing.
Regulatory
Framework
 Regulatory framework is the body of statutory law, administrative regulations and jurisprudence that governs
and regulates the insurance industry and those engaged in the business of insurance.
 Laws are created for the industry and the government directly or through an agency makes sure these laws
are observed.
 Functions of the regulatory framework include; licensing and regulating insurance companies; monitoring and
preserving the financial solvency of insurance companies; regulating and standardizing insurance policies and
products and controlling market conduct to prevent unfair trade practices.
Why
 Insurance, although primarily a matter of private contract, is nevertheless of such concern to the public as a
whole that it is subject to governmental regulation to protect the public’s interests.
 The fundamental goal of insurance regulatory law is to protect the public as consumers (either as
policyholders and beneficiaries).

5. 5
Types of Regulatory Approaches
Co-Regulation  The government and the industry agree on standards and best practices to regulate the sector.
Regulatory Agency
 A public authority or government agency responsible for exercising autonomous authority over some area of
human activity in a regulatory or supervisory capacity.
Self Regulation
 Industry players set industry standards and best practices, professional code of ethics and corporate social
responsibility that guide their conduct. This approach does not require any stand-by regulator to monitor the
day-to-day activities in the industry.
Independent
Regulatory Agency
 A regulatory agency that is independent from other branches or arms of the government.
Direct Govt
Regulation
 The government sets laws and regulation and through a department or an entity controlled by the Executive
to oversee the conduct of the industry.

6. 6
Pros and Cons – Direct government oversight vs regulatory agency approach
Direct Government
Regulation
Regulatory Agency
 Agencies are small in nature and flexible enough
to respond quickly to sector requirements.
 A regulatory agency is more dedicated to sector
needs (sector needs are its sole purpose).
 Policies are proactive and reflective of all
stakeholders.
 Accountable to both government and
stakeholders.
 There is more visibility for the regulator since the
agency is the first and last point of call.
 Poorly structured regulatory agencies can be victims
of political or stakeholder capture – resulting in
interference in their performance.
 Regulatory agencies sometimes lack the powers to
enforce oversight effectively.
 The agency may be removed from key policy makers
or find it hard to access policy makers to effect
change as appropriate.
 Budget allocations and resources to fulfil effective
oversight may lack hindering the work of the
regulatory agency.
 Easy access to the policy makers and decision
makers.
 Inherent enforcement powers (backed by state
machinery).
 Policies tend to favour consumer protection
(government is political in nature).
 Easy to get budget allocations for programs and
policy enforcement if the government is
supportive of the oversight programs.
Pros Cons
 Bureaucracy and inflexible implementation
processes leads to slow reactions times.
 Policy making sometimes is unpredictable and
depends on the views of the government of the day.
 Decision making lacks of independence and policies
are mainly reactive in nature.
 Less priority given to micro sector needs.
 Less visibility for regulator.

7. 7
Reasons for the increased drive to have independent insurance regulators
Effects of Political
Meddling
 History has shown that lack of independence has always worsened oversight and resulted in financial crises.
 In many of the world's recent financial crises, politicians and policymakers in the countries affected sought to
intervene in the work of regulators often with disastrous results.
 It is now increasingly recognized that political meddling has consistently caused or worsened financial
instability.
Influence of
independent
regimes
 Interest in regulatory independence has grown after a review of success achieved by regulatory agencies in
other jurisdictions.
 Policymakers and legislators have been forced to rethink institutional alignment after benchmarking to
provide better oversight.

8. 8
Reasons why governments choose independent agency regulation especially after crises or liberalisation of industries
Prevention of
Govt Failure
 Direct government regulation can have its challenges in a liberalized economy. The government may fail to
provide stable and impartial regulation thereby creating an unreliable environment for the players to
compete fairly.
 There is also uncertainty with government decisions and policies. They are volatile, unpredictable and
sometimes policies may be changed abruptly.
 Delegation of the decision making to an independent regulator removes this uncertainty and increases the
confidence of stakeholders.
Prevention of
Market Failure
 The big challenge for governments at the onset of liberalization is to ensure that markets don’t fail. The
government as custodian of all rights has the obligation to ensure that consumer protection is maintained,
and stakeholders compete fairly.
 Regulation through dedicated agencies has been found to be the most effective way to discharge this
objective.
Overview
 The United States of America was among the earliest adopters of using independent regulatory agencies to
regulate key sectors. This has since expanded across many jurisdictions in the world.
 With the liberalization of regional economies and opening up of sectors such as the insurance industry the
critical question has been how should these sectors be regulated.
 Fewer governments are engaged in the business of finance and have been elevated to position of arbiter –
question is how best should regulatory oversight be effected.

9. 9
Key characteristics of agency independence
Regulatory
Independence
 A regulator should have wide autonomy in setting rules and regulations that financial institutions must adopt
to maintain their safety and stability.
 Regulators who are able to set rules independently are more likely to be motivated to enforce them
Institutional
Independence
 The regulatory agency should have an independent status outside the executive and legislative branches of
government.
 This can be achieved by giving the regulatory security of tenure, establishing a governance structure with
experts and making the decision-making process open and transparent.
Overview
 For a regulatory agency to be truly independent and effective there are key dimensions that need to come
into play and align in terms of independence in the areas of regulation, supervision, the agency itself and
financial matters.
Budgetary
Independence
 A regulatory agency should not rely on the charity of the executive or parliament for its budget allocations
and how it is used.
 The most common way of ensuring budget independence has been to fund the agency from set industry fees.
Supervisory
Independence
 A regulator should be able to inspect and monitor the institutions and enforce sanctions without fear or
favour.
 This can be achieved by protecting supervisors' integrity through legal protection for their official work and
crafting a rules-based system of sanctions and interventions.

10. 10
Qualities required to have an effective Regulatory Agency
Appointment
 The appointment of regulator or the members of the regulatory agency especially the chairman will
determine how independent a regulator is.
Organisation and
Operations
 The regulator must have an independent office and staff and full control over the affairs within its office
including the power to displace, promote or dismiss staff.
 Operational independence is realized when a regulator does not need the approval of a ministry, the
government or parliament for its decision or actions.
Independence
 An independent regulator is able to create a stable and reliable regulatory environment for all stakeholders.
 Independence has been defined as the ability to make decisions without undue influence from the
government and the industry or other interest groups.
Budget
 There should be earmarked, secure and adequate sources of funding that are not conditional on outside
influences to enable the regulator to fulfill its functions effectively.
Removal
 Dismissal of the regulator should be procedural and should not be wholly and unquestionably retained by the
government as a means of enhancing credibility and independence.
Accountability and
Transparency
 Accountability ring-fences against the arbitrariness of the independent regulator and prevents the regulator
from abusing his independence and taking unjustifiable decisions.

11. 11
Standard progression and evolution of regulatory oversight
Stage 1
- Formative years of the sector
with either monopolies or a free for
all framework.
- Absence of oversight and very
little regulation.
Stage 2
- A growing insurance sector
characterized by challenges due
to lack of oversight resulting in
crisis.
- Direct government regulation to
address and manage crisis and
reactive regulation.
Stage 3
- Liberalized and maturing
insurance sector.
- Government cedes oversight to
independent regulatory agencies.
- A proactive regulation framework
to support industry growth and
protect public interest.

12. 12
History of insurance regulation – Sample 1 (The United Kingdom)
Office of Assurance
• Established in 1500
• Life Assurance Act 1870 came
into being due to insurance firm
scandals and collapse.
• Governmental control but mostly
reactive.
EEC
• New legislation enacted in 1973
to align with expectation of
European Economic Community
• Mainly liberalised markets.
FSA
• Enacted in 1986
• Prescriptive approach, largely
rules based but minimal
oversight.
• In 2000s a sophisticated
approach that was more
outcomes focused, risk based
and interventionist came into
effect

13. 13
History of insurance regulation – Sample 2 (The United States)
Onset
• Insurance was primarily
regulated by corporate charter,
state statutory law and by the
courts in judicial decisions.
New Hampshire
• The first state commissioner of
insurance was appointed in New
Hampshire in 1851.
• Other states followed suit and
started an association to co-
operate.
Federal Intervention
• 1939 the Supreme Court
provides aspects of insurance
contract can be regulated
federally such anti-trust.
• Federal govt sets minimum
standards state regulators have
to comply with.
• After the 2008 financial crisis, a
"principles-based" approach to
insurance reserving was
adopted.

14. 14
History of insurance regulation – Sample 3 (Kenya)
Pre 1987
• Absence of dedicated insurance
oversight.
• Insurance companies operate in
line with Companies Act
Commissioner of
Insurance - 1987
• The office of the Commissioner
of Insurance is created.
• Office is a department under the
Ministry of Finance.
Insurance Reg Authority
• In 2006 the Insurance
Regulatory Authority was
created.
• It is an agency created to
provide oversight.
• It has a Board, CEO and
management team to discharge
functions.

15. 15
Sample regulatory approaches in the region
Direct Executive
Oversight
• None
Central Bank
Oversight
• Ethiopia
• Rwanda
• Malawi
Regulatory Agencies
• Kenya (IRA - K)
• Uganda (IRA - U)
• Tanzania (TIRA)
• Zambia (PIA)
• Zimbabwe (IPEC)
• D.R. Congo (ARCA)
• Burundi (ARCA)

16. 16
Governance setup under the two approaches
CEO
Specialised
division
(Regulation)
Specialised
division
(Supervision)
Specialised
division
(Licensing)
Board
Governor
Vice Governor
Regulation
Banking
Regulator
Insurance
Regulator
Board
Independent Regulatory Agency model Central Bank Oversight model

17. 17
Kenya – journey to independent regulatory agency
Transition Period
 1984 the Insurance Act of Kenya is enacted.
 The office of the Commissioner of Insurance is established as a department in the Ministry of Finance to
regulate the industry.
 The oversight system works well but fails in one area – supporting the development of the industry. The
framework was more reactive and less proactive and forward looking.
Establishment of
IRA
 The Insurance Act was amended in 2006 to establish the Insurance Regulatory Authority as the new
independent regulator and supervisor of the insurance industry.
 The authority replaced the office of the Commissioner of insurance.
 The Authority's mandate is to regulate, supervise and develop the insurance industry in Kenya.
 The Insurance Regulatory Authority has a Board of Directors and a CEO. Its operations are funded from
premium levy charged on all policies issued in Kenya
Overview
 Pre 1987 the Kenyan insurance framework was characterized by absence of a regulator.
 There was also no specific insurance regulation - insurance companies were operating under normal
company regulations contained in the Companies Act.

18. 18
Kenya – journey to independent regulatory agency
Objectives of IRA
under the Act
 Ensure the effective administration, supervision, regulation and control of insurance and reinsurance business
in Kenya.
 Formulate and enforce standards for the conduct of insurance and reinsurance business in Kenya.
 License all persons involved in or connected with insurance business, including insurance and reinsurance
companies, intermediaries, loss adjusters and assessors, risk surveyors and valuers
Governance
 The management of the Authority is vested in the Board of Directors of the Authority. The Chairman of the
Board is appointed by the President on the recommendation of the Minister in charge.
 The Board comprises the CEO (ex officio), a representative in the Ministry of Finance, the head of the
Retirements Benefits Authority, the Governor of the Central Bank, head of the Capital Markets Authority, a
representative of the Insurance Institute and at least four other members as appointed by the Minister of
Finance.
 The Board is vested with all the powers necessary to perform the regulator's functions under the Act
Commissioner and
CEO of the
Regulator
 The Commissioner of Insurance is the Chief Executive Officer of the Authority.
 The Commissioner is appointed by the Board through an open and competitive process on terms and
conditions determined by the Board.
 The Commissioner is an ex officio member of the Board with no voting rights at any meeting of the Board.
 The Commissioner is, subject to the directions of the Board, and responsible for the day to day management
of the affairs of the Authority.

19. 19
Kenya – journey to an independent regulatory agency
Funding of IRA
 The Authority has a general fund known as the Insurance Regulatory Authority Fund.
 Insurance premium levy and any monies raised by the Authority or granted by the government are paid into
the fund.
 Expenditure incurred by the Authority in the exercise of powers and performance of its functions and duties
are drawn out of the fund.
Regulations and
Guidelines
implemented since
IRA came into
being
 The Authority introduced a risk-based supervision model e.g. there is no common minimum capital
requirement. Each company’s capital needs would be premised on the risk profile of each regulated entity.
 Corporate Governance guidelines have been introduced to achieve the separation of ownership and
management.
 Life insurance and general insurance businesses cannot now be undertaken by the same company.
 Establishment of a policyholder's compensation fund with respect to troubled insurance industry.
 Localization of life and marine business (to support local capacity).
 Guidelines to help regulated bancassurance, takaful business and micro insurance.
 Establishment of an Insurance Fraud Investigation Unit charged with conducting investigations into insurance
fraud allegations.
Stakeholder
engagement
 The Authority regularly engages stakeholders in the market to determine their needs, obtain feedback and
brainstorm and share ideas on how to grow the sector and overcome existing challenges.