Regulation masterclass

Insurers urged to include regulatory compliance alongside other risks in their corporate strategies, as Gareth Stokes reports Risk managers should be sat at the right hand of CEOS and not hold junior positions, if the company is to remain regulation-compliant and maximise its opportunities. That was among the suggestions from a panel of regulators, past and present, speaking at the Continental Re CEO Summit in Swakopmund, Namibia. Stakeholders in African insurance markets are faced with a raft of complex and pervasive regulations. This requires regulators to have a clear mandate and develop new regulations in collaboration with operators in their sectors, while operators must establish a regulatory compliance strategy as part of their overarching corporate strategy. Sammy Makove, former commissioner of insurance at the Insurance Regulatory Authority in Kenya, shared some of his personal experiences at the Continental Re CEO summit. After 31 years as an insurance regulator, he observed that regulation was here to stay and that a great deal of pressure was being exerted on regulators to take decisive action in their markets. Financial inclusion The requirement to be financially inclusive was singled out as a major driver for regulatory change throughout Africa. “Everyone in Africa is talking about financial inclusion (with insurance inclusion being part of the greater agenda) and entire country markets are now focused on financial inclusion as one of the pillars for economic development and growth,” he said. From an international perspective, the main drivers for regulatory change stem from the need to create the necessary global financial stability to avert a repeat of the systemic collapse of the financial sector in 2008. Africa cannot therefore ignore international measures such as Basel and the IAIS and IFRS standards, among others. One of the accusations levelled at African insurance operators is that they are slow to comply with new regulations. “There has been a lot of animosity between the regulator and companies [in Kenya] because the companies are saying ‘we are not ready’ while the regulator is saying they must comply – bearing in mind the regulator is under pressure from the sources already mentioned,” said Mr Makove. This friction exhibits in regulated financial sectors across Africa. “There is great room for us to improve synergies between regulated entities and the regulator; but there is always tension because we are responsible for different mandates – although we will not always find the perfect middle line, there must be an intention on both parties to come as close to the middle as humanly possible”, said Grace Mohamed, GM, insurance at the Namibian regulator Namfisa. Many of the observed responses to regulation are counterproductive. Mr Makove noted that local operators have been known to ignore the proposed changes; to turn to higher powers to resolve any regulatory impasse; to refuse to comply and choose instead to fight the regulator; to buy time by requesting last-minute extensions; or to simply play catch-up when they realise the only remaining alternatives are to comply or face enforcement action. “There are those who definitely ignore regulations at some point – and there are those who play catch-up; but on the average I think there is a level of improvement in terms of compliance levels,” said Thomas Olorundare, deputy commissioner: technical at Nigerian regulator Naicom. Non-compliance often results from poor consultation between regulators and insurers. “It is important that some level of consultation takes place before guidelines and regulations are put in place,” said Mr Olorundare. He added that the risk in developing and implementing regulation without consultation was that the regulator’s perception of market practices was frequently inaccurate. This means that collaboration and consultation are central to any regulatory strategy that a market may require. While Ms Mohamed agreed that collaboration was essential, she felt that that a ‘divide and conquer’ strategy worked best when the market descended on the regulator with a predetermined outcome in mind. “There is nothing as challenging for the regulator as when the market comes as a team and wants to oppose your policy,” agreed Mr Olorundare. But he preferred resolving such impasses in direct communication with market leaders. Whatever the approach, the buck must stop with the regulator. As Ms Mohamed pointed out: “Sometimes operators believe that the regulator does not listen; but that is not the case – we have to do certain things to achieve our mandate and everybody cannot always walk away happy with the outcome.” The best counter to non-compliance is even-handed and timely enforcement, which presents its own challenges. “If you are in an environment where the regulator fails to enforce, then businesses will go about doing what they need to do to realise the profit margins they desire – in our case if the regulator simply wakes up and shakes the market it appears that there is no compliance,” said Ms Mohamed. In her view non-compliance is often unintentional, a consequence of firms attempting to meet their profit objectives. Focus on sustainability The panellists urged the executives in the audience to consider sustainability rather than profitability when making business and compliance decisions. There is, for example, a growing move towards the adoption of South Africa’s King IV codes for corporate governance, which advocate running a company for the long term. “The issue of profitability should not override issues of compliance,” said Mr Makove, because various surveys show that companies that comply are also the most successful and profitable. Regulators may be hesitant in taking punitive action, but when they do so penalties can be severe. A Namibian insurer was fined NAD$1m ($100,000) in 2016 for non-compliance with solvency requirements, while a recent deregistration resulted in jail time for one of the offending firm’s directors. In that case, the regulator turned to the courts to confirm its legal authority. “We also removed a director just last week,” said Ms Mohamed. “We determined that this person was not fit and proper to be director of an insurance company and we provided reasons for it.” Insurance operators should be encouraged to incorporate regulatory risks as part of the risks they deal with on an everyday basis. “By complying, you are managing the risks that make it difficult for you to achieve the objectives of the firm – you achieve sustainable profit by managing risks, including the risk of regulation, thus ensuring sustainable profits,” said Charles Nakhoze, MD, Zambia State Insurance. “Our proposition is that every prudent insurance company should have a strategy to comply with regulation – because there is no way you can ignore or postpone it – it will come for a certainty, so the prudent thing is to prepare and to plan to comply,” concluded Mr Makove.

Regulation masterclass

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