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The East African : April 7th 2014
The EastAfrican BUSINESS APRIL 5-11,2014 BOOSTING FINANCIAL STABILITY Reforms in Uganda’s insurance sector Indust≥y ≥egulato≥ has given fi≥ms up to Octobe≥ to t≥iple thei≥ minimum paid-up capital By STEVE MBOGO Special Correspondent their minimum paid-up capital, as the regulator seeks a financially stronger industry that will enable companies to insure higher value businesses. Life insurance companies are U required to increase their paidup capital to $1.2 million, from the current $394,000, while the non-life companies are to increase theirs to $1.6 million. “Some companies have very low retention ratio and this is among the reasons this decision was taken,” said Protazio Sande, the assistant director of Research and Development at the Insurance Regulatory Authority of Uganda (IRA). As a further measure of strength- ening the industry, IRA requires that all composite insurance companies separate their life and nonlife business into independently managed units by September this year. Uganda is following in the foot- steps of Kenya, which made the move two years ago, aimed at improving the financial stability of the industry. This was expected to enable companies to take more risks and also force mergers and acquisitions, although the latter did not happen. The ownership and capital requirements saw several insurers to tap into capital markets in 2012 to raise additional funds, and also to divest some equity stake. Kenya has set the minimum paid- up capital for general insurance business at Ksh300 million ($3.5 million), and Ksh150 million ($1.76 million) for life insurance. The capital requirement for a composite insurance business is Ksh450 million ($5.3 million). Kenya indicated re- FRAGILE AIG Uganda stand at an expo. AIG is one of three firms (including Jubilee and UAP) that control half of the insurance market in Uganda. Pic: File cently that the minimum capitalisation threshold could go up again to encourage more insurance companies to form bigger and more stable firms through mergers. Insurance companies in Uganda are also expected to comply with a new law requiring them to separate their general and long term business units by September, as the country moves towards aligning its insurance sector with the rest of the East African region. Hardest hit by the IRA order are the six composite insurers. Executives argue that while the new regulations will increase the number of insurance companies to 28 from the current 23, it will erode premium income accruing to individual operators while increasing operational costs. Under the order issued last year, insurers would also be required to appoint separate fund managers and administrators to run private pension schemes under $1.2m By DICTA ASIIMWE Special Correspondent A DEPRECIATING shilling and the return of thermal generation into the energy mix are likely to push up power tariffs in Uganda this month. The Uganda Electricity Regulatory Au- thority (ERA) is set to announce new tariffs for the second quarter of the year, coming against the backdrop of a recent decision to authorise low-level thermal generation and a depreciation of the local currency against the US dollar — two of three factors used to calculate power tariffs under the Automatic Tariff Adjustment regime which is currently in use to determine quarterly charges. Movements in international oil prices is the other Power pylons in Kampala. Picture: Morgan Mbabazi their portfolios, which the industry argues will make their management more complicated and expensive. Uganda’s move comes ahead of full implementation of the riskbased supervision system, similar to the model being implemented in Kenya. Under this model, companies will only take risks commensurate with their capital strength. The need for additional paid up capital increase in the EAC region is becoming more urgent because of the emerging new unique insurable business, as the economies grow, key among them being the opportunities presented by oil and gas discoveries. Oil and gas risks require finan- cially stronger companies with reinsurers of such risks also opting to work with firms that have the capital size advantage. Uganda’s insurance sector has been growing at a rate of 20 per cent in the past six years, according to the IRA. Near or higher similar growth Amount in paid-up capital that life insurance companies in Uganda are required to have by October. has been registered in Kenya and Tanzania, indicating the growing demand of insurance services particularly from the expanding middle class, industry players say. The challenge, however, has been Like in the rest of the East African region, most insurance companies in Uganda are small and control less than one per cent of the market, making their financial stability fragile. For instance, half of the insurance market in Uganda is controlled by only three companies: Jubilee, AIG and UAP. Insurance penetration remains low at 0.7 per cent. According to the Insurance Regulatory Authority of Uganda, it is also impossible for most insurance companies in Uganda to do cross-border investments because of their low capital outlay. having too many insurance companies in one market, which has resulted in price undercutting and poor customer service. “Some players are attempting to grow at the expense of the customer service,” said Mr Sande. He said in particular, some play- ers have not been honouring claims payment for the policy holders, a matter which entrenches negative perception about insurance among consumers. This perception cuts across the EAC. ganda insurance firms have until October this year to triple 45 EAC-EU t≥ade talks: No deal yet By A CORRESPONDENT The EastAfrican NEGOTIATIONS for a new trade deal between Europe and East Africa have now been referred the Council of Ministers from the two blocs for direction, after technical teams yet again failed to agree on five sticky issues. The Council of Ministers — the top decision-making organ of the European Union (EU) and the East African Community (EAC) — is now expected to give a final word on the long-delayed signing of a preferential economic partnership between the blocs when it meets next month. Nairobi last week hosted tech- nical teams from the EAC and EU for crunch talks during which the two blocs struck a deal on the Rules of Origin (ROO), the Most Favoured Nation (MFN) and policies on support for their respective domestic agricultural sectors. Five sticky issues The parties, however, remained deadlocked on five issues: Export taxes, domestic support and export subsidies, tackling the proliferation of weapons of mass destruction, human rights and corruption as well as good governance. “The next EAC-EU ministerial meeting to guide on the way forward on the outstanding issues is expected to be held by mid May 2014 within the EAC,” the Secretariat said in a statement. The deadlock is a major setback for the EU that had anticipated that the talks would end in time to allow the signing of a final deal on a new Economic Partnership Agreement (EPA) with East Africa when it hosted African heads of State for a summit in Brussels from April 2-3. Kenya and other EAC members are currently trading with the EU under an interim preferential deal signed in 2007 following the expiry of a similar programme by the World Trade Organisation (WTO) in the same year. Powe≥ ta≥i≠s set to ≥ise ove≥ weak shilling, use of the≥mal ene≥gy determinant of end user tariffs. The local unit depreciated 7 per cent between February and March as the market reacted to threats of aid cuts by western donors. The ERA has also instructed the Uganda Electricity Transmission Company Ltd (UETCL) to resume the buying of expensive electricity from thermal plants operated by independent power producers. According to internal documents, ERA included a provision of Ush84.5 billion (($32.7 million) in the calculation of the tariff — Ush25 billion ($9.7 million) to cover energy purchases and Ush59.5 billion ($23.0 million) in capacity charges — to pay the two thermal generators, Jacobsen and Electromax. The generators have 50MW in installed ca- pacity each, but purchases had been stopped after the commissioning of the 250MW Bujagali Hydropower station late 2012 resulted in adequate hydrogeneration, and their machines left dormant. “We shall start buying minimal amounts of thermal power so that each company can have at least one machine running,” said Kenneth Otim the UETCL spokesperson. Although UETCL will start by purchasing small quantities, the volumes will increase over the next three years when the demand for electricity is expected to surpass the current generation capacity. Currently, Uganda has an installed capacity of 801MW but generates 535MW compared with a peak demand of 520MW. “From the load forecast, the power de- mand is increasing at a rate of 5MW per annum implying that within three years, the demand will have surpassed generation,” said Mr Otim. Thermal generation is more expensive costing $0.27 per kilowatt hour if bought from Jacobsen — a government owned plant whereas Electromaxx which is privately owned charges $0.4 per unit. Bujagali Energy Ltd, the hydropower plant charges $0.12 per kilowatt hour while Eskom which operates two old plants charges $0.10.
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