Introduction
Regulation involves guiding market entities to follow norms set by a regulatory authority, which establishes standards, guidelines, and penalties for non-compliance. The theory of regulation ranges from strict to liberal approaches. Strict regulation strictly adheres to laws, moderate regulation considers market dynamics, and liberal regulation balances rules with equity. In Uganda’s insurance sector, the regulatory framework is strict, applying laws as they are, which is the focus of the research paper to understand the rationale behind this strict approach.
The Regulatory Framework
The regulatory framework of the insurance sector in Uganda is comprised of the laws[1], regulations[2], prudential guidelines, case laws[3], principles of insurance, and market norms of prudent insurance business accepted by insurers.
The regulations and guidelines are prescribed by the Insurance Regulatory Authority of Uganda. These are enacted under the principle of delegated legislation where a government agency is mandated under a statutory law to make rules for the effective and efficient functioning of the industry[4]. Delegated legislation is an exception to the common law principle of delegatus non potest delegare– that is a body to whom authority has been delegated may not delegate that authority. In this aspect the authority delegated to the Parliament of Uganda to legislate is delegated to the Insurance Regulatory Authority to regulate the Insurance industry as provided in statute. The stringency of the insurance regulation is due to the following.
- Consumer Protection.
The consumer is defined as an individual or a person who has used, uses, is using, or contemplates using a product or service provided by a financial services provider[5].
The law ensures that the insurance policy holders of insurers or customers of other licensees are protected[6], the Insurance Regulatory Authority takes appropriate actions against persons carrying on unauthorized insurance businesses to protect the public from fraudulent business persons[7], the authority receives and resolves insurance-related complaints from consumers[8] , as well as promoting awareness, sensitization, and education of the public on the insurance business in Uganda[9].
Consumer protection in the insurance sector is strict and aims at promoting the principles of fairness, reliability, and transparency of the insurance products and services in the insurance market[10]. The principle of fairness forbids deception and aggressive practices of intimidating customers, reliability entails informing customers of any changes in the financial services for instance postal addresses, telephones, and electronic mail and transparency ensures that the information issued to the consumers is authentic and correct whether written, electronic or oral.
The insurance regulation is strict to minimize or rather eliminate the collapse of insurance companies which is prejudicial to consumers of insurance products[11]. The insurance companies which closed business in Uganda include, AIG Uganda, Nova Insurance Company, Rio Insurance Company, and First Insurance Company[12].
- Stability of the Insurance Sector.
The strict regulatory framework aims at promoting and upholding public confidence in the given sector, which is stable, sound, efficient, fair, and transparent among the stakeholders[13].
The Insurance Regulatory Authority licenses persons proposing to carry out insurance business[14], licenses bancassurance businesses[15], and has the mandate of revoking the license where the insurer conducts business without sound principles and practices to protect the stability of the insurance sector[16], as well as ensuring that insurance companies are solvent by conducting insurance business that meets the liabilities as and when due from the parties[17].
The insurance companies are obliged to keep adequate resources to support the insurance business taking into account the nature, scale, complexity, and risk profile of the insurance[18]. This is in addition to a restriction of not reducing the paid-up share capital of the insurance company at any given time without the consent of the Insurance Regulatory Authority[19].
- The Minimization of Moral Hazard, Adverse Selection, and Information Asymmetry Problems.
The law requires licensed insurers to conduct insurance business which is based on sound insurance principles[20]. The application of insurance principles reduces the problems of moral hazard, adverse selection, and information asymmetry which are inherent in the insurance business between the insurer and the insured[21]. The deviation from insurance principles leads to losses and the collapse of the insurance company and adversely affects the sector in general.
The general principles of insurance include legality of the insurance contract, insurable interest, premium, subrogation, utmost good faith, risk, intermediaries, proximate cause, and loss materialization[22].
The Information asymmetry concept denotes a contractual situation where one party to a transaction possesses material knowledge than the other party so that the non-disclosure of such information at contracting leads to an information imbalance making the contract unenforceable at law under insurance due to the lack of utmost good faith in the transaction[23].
The concept of adverse selection means that a party contracts based on incomplete information which is detrimental or adverse to another party and it is both the duty of the insured and insurer to disclose material information at contracting and during the subsistence of the insurance contract and any lapse in material information disclosure makes the insurance contract unenforceable[24].
The doctrine of moral hazard refers to the incentive of increased risk-taking because another party in the contractual relationship bears the risk of loss. Thus, where the insured causes a loss in expectation of indemnity from the insurer claims compensation to be declined due to moral hazard which is ex-post to the insurance contract. The non-enforceability of the insurance contract where a party has caused the peril to materialize into a loss stems from the fact that insurance contracts are contracts of indemnity[25].
- Agency Problems.
The regulatory regime for the insurance business is strict to minimize the agency problem that arises whenever there is a relationship between a principal and an agent in a transaction[26]. The agency problem is featured in corporate bodies having a separation of management and control with shareholders appointing the board of directors to control the activist of management who are involved in the daily operations of the business[27].
The control of the agency problem in the insurance business aims at ensuring that agents in insurance companies carry out their duties as fiduciaries by exercising due care, professionalism, trust, and confidence forming the basis by which the insured confides in them while insuring their risks[28].
The law requires only corporate bodies to carry out insurance business in Uganda[29].
The directors of companies can act in their self-interests of managerial utility maximization contrary to the strategic direction hence external auditors are used to audit the financial statements prepared by the management to control agency problems by stating the audit opinion[30].
The board of directors of an insurance company or insurance service provider is subject to the fit and proper test to establish their competencies and knowledge of conducting insurance business[31], including the senior manager so that the insurance business is performed efficiently and effectively to the expectation of the stakeholders[32].
The insurer is obliged to establish control functions to minimize operational risks stemming from people, processes, and procedures and these control functions of risk, compliance, actuarial, and audit are used to control the agency’s problem[33].
The insurance and reinsurance brokers being a corporate body aim to minimize the agency problem[34], coupled with subjecting the insurance brokers to the fit and proper criteria by the Insurance Regulatory Authority as persons competent to perform insurance business[35].
- Accountability to Stakeholders.
Accountability means reporting one’s activities to another person by showing the extent to which the responsibilities entrusted with have been achieved in a given period using the defined resources[36].
The reporting obligation mandates insurance service providers to keep sufficient records which form the basis for the preparation of financial statements[37], as well as enablers in the conducting of external auditing by the appointed external auditors of the insurance service providers[38].
The financial records and other records of the insurance business must be kept for ten years or else a fine of 1000 currency points for non-compliance with the record-keeping rule[39].
The preparation of financial statements on an annual basis is strict and must be prepared by every insurer, insurance broker, health membership organization, loss adjuster, risk adviser, loss assessor[40], and these financial statements must comply with the accounting standards adopted by the Institute of Certified Public Accountants of Uganda[41].
The insured, investors, and other stakeholders can establish the going concern status of the insurer by analyzing the financial statements prepared per the international accounting standards and accounting principles which improves confidence in the insurance industry[42].
The external auditors are independent of the insurance service providers to promote the issuance of independent audit reports and management letters showing weaknesses in the internal controls which are rectified by management[43].
- Risk Management and Business Sustainability
Risk is the probability of an event occurring that impacts the financial position either adversely or beneficially in terms of increasing cash flows in the profit and loss statements which are used for capitalization of the entity after discharging the operational expenses and taxes[44].
Insurance is a business of making profits by the insurer through risk-taking and this is possible whenever calculative risk-taking is undertaken[45]. The prudent underwriting of policies involves the analysis of risks before insurance contracts are made leading to desirable business performance and sustainability.
The insurance businesses are regulated on a risk-sensitive basis by the Insurance Regulatory Authority[46]. This means that proactive steps are undertaken in the insurance supervision before risks materialize into losses using the risk management processes involving the identification, assessment, control, monitoring, review, and reporting of risks at defined intervals.
The risk sensitivity involves the inspection of insurance service providers at least once every three years under a statutory compliance risk management[47], and the risk profile of interest to the regulator includes strategic, operational, credit, liquidity, and market risk respectively.
The risk-sensitive approach entailed in the regulatory framework protects the public interest as the insurers can be inspected at any time whenever there is suspicion that the interests of policyholders, shareholders, and members of the public are prejudiced[48].
The risk management of insurance companies under the regulatory framework also aims at minimizing the materialization of contagion risk. This is a risk of an entity collapsing and having spillovers to the entire industry. This information disclosure is critical in the insurance business and insurers are obliged to disclose information to the regulatory authority to deter the insurance businesses from being used as conduits for criminal activities involving fraud, terrorism, money laundering, and other financial crimes[49].
- Financial Inclusion, Intermediation, Outreach and Resilience.
Financial inclusion means individuals and businesses have access to useful and affordable financial services to meet their needs[50]. The financial strategy for Uganda is to increase financial inclusion as a solution to poverty eradication by using digital financial services and financial literacy[51].
The Insurance Regulatory Authority has one its cardinal objectives of promoting effective competition in the insurance sector in the interests of consumers, the growth and development of the insurance sector, and the development of an inclusive insurance sector. This connotes financial inclusion, outreach, and financial outreach embedded in the regulatory framework[52].
Financial resilience involves the ability to cope with financial shocks or recover from financial difficulties caused by the internal and market forces affecting an entity. The Insurance Regulatory Authority takes action on individual licensees that are insolvent or likely to be insolvent so that they document and implement a recovery plan to deter liquidation[53].
The financial intermediation involves insurance service providers collecting funds from surplus parties as savers and investing such funds in risk-free instruments as well as lending to some of the policyholders in the form of insurance loans. The insurance license provides for this activity.
The Flaws of Regulatory Strictness.
(a). Allocative Inefficiency. The strict regulation results in allocative inefficiency which involves the production of goods and services below the optimal point of the production possibility frontier. This means that the regulation curtails the maximum production of resources[54].
The minimum paid share capital required before being licensed to conduct an insurance business can be used to provide insurance products and services to customers rather than being tied up in money terms invested in government securities[55]. This limits financial outreach and financial breadth in terms of providing a variety of insurance products hence the need for a relaxed or liberal regulatory framework with little or no paid-up capital.
(b). Bounded Rationality. This is the human decision-making process in which individuals satisfy rather than optimize the solution to a defined problem. The decision that is good enough is chosen rather than the best possible decision in the circumstances[56]. This limitation on human nature to make the best decision alternatives is caused by time constraints, incomplete information, and cognitive limitations. The insurer can provide insurance services to customers for convenience rather than in the best interest of customers as prescribed by the regulatory framework. Thus a liberal regulatory regime can solve these limitations by providing for satisfactory outcomes than the perfect ones.
Conclusion.
The regulatory framework for the insurance sector is strict in Uganda, unlike sectors like trade and commerce, tourism, and transport which are liberal without capital requirements. The optimal solution is to set the regulatory requirements which are stakeholder-based based than regulatory so that different interest groups can benefit from the success of the sector.
References.
Katto Japheth, Simeon Wanyama, Miriam Musaali (2014). Corporate Governance in Uganda: An Introduction to Concepts and Principles. Fountain Publishers, Kampala, Uganda.
Kirubi, C (2018). Why Strict Corporate Governance in the Regulated Sectors. Evans Publishers, Nairobi, Kenya.
Kwikiriza, Benson, A (2020). Developments in the Insurance Regulatory Framework in Uganda. Presentation to Uganda Law Society Members, Sponsored by the Insurance Regulatory Authority of Uganda.
SSekana, M (2017). Public Law and
[1] The Insurance Act 2017, The Marine Insurance Act 2002,
[2] The Regulations and Prudential guidelines are made by the Insurance Regulatory Authority of Uganda,
[3] The Case Law is applied under the doctrine of Judicial precedent of Uganda as a common law country.
[4] SSekana, M (2017). Public Law and Practice in Uganda. Events Publishers, Kampala, Uganda.
[5] Bank of Uganda (2011). Financial Consumer Protection Guidelines 2011.
[6] The Insurance Act 2017, Section 10(1)(c),
[7] The Insurance Act 2017, Section 12(1)(d),
[8] The Insurance Act 2017, Section12(j),
[9] The Insurance Act 2017, Section12(o),
[10] Odde, L (2019). The Principles of Insurance Regulation in the Insurance Industry. Journal of Business Management 4(3) 50-120.
[11] Benson, X (2019). Basic Principles and Concepts of Insurance. New Jersey Insurance Law Journal. 200-700.
[12] Kadunabi, M (2020). Insurance Business in Uganda from 2000 to 2020. Presentation to the Board of Directors of the Insurance Regulatory Authority.
[13] Kirubi, C (2018). Why Strict Corporate Governance in the Regulated Sectors. Evans Publishers, Nairobi, Kenya.
[14] The Insurance Act 2017, Section 41(1),
[15] The Insurance Act 2017, Section 96(1),
[16] The Insurance Act 2017, Section 45(1),
[17] The Insurance Act 2017, Section 51(a),
[18] The Insurance Act 2017, Section 48(1)(a),
[19] The Insurance Act 2017, Section 52,
[20] The Insurance Act 2017, Section 51(c),
[21] Odde, L (2019). The Principles of Insurance Regulation in the Insurance Industry. Journal of Business Management 4(3) 50-120.
[22] Moller, H (2019). Modern Trends in the Theory of International Insurance Law. Deutchs Journal of Insurance 150-180.
[23] Regent Insurance Company Limited V Kings Property Development(PTY) Limited South Africa Supreme Court 50014, it was held that non-disclosure of material information by the insured made the insurance contract unenforceable because insurance contracts are special contracts of indemnity.
[24] Hajji Kavuma Haroon V First Insurance Company Limited. High Court Civil Suit 442 of 2013, the insured had changed the engine of the car but did not disclose this material fact to the insurer making the indemnity declined due to the lack of utmost good faith.
[25] Castellain V Prestone (1883) 11, Q.B.D 380, it was held that indemnity in insurance means putting a party in a position he or she was in before the occurrence of the risk which caused the loss.
[26] Kirubi, C (2018). Why Strict Corporate Governance in the Regulated Sectors. Evans Publishers, Nairobi, Kenya.
[27] Japheth Katto, Simeon Wanyama, Miriam Musaali (2014). Corporate Governance in Uganda: An Introduction to Concepts and Principles. Fountain Publishers, Kampala, Uganda.
[28] Uganda V Patricia Ojangole High Court Anti-Corruption Division Number 1 0f 2014, it was held that a Fiduciary has a duty of care, trust and confidence under a principal agent relationship.
[29] The Insurance Act 2017, Section 7(1), only Companies under the Companies Act 2012, and Co-Operative Societies under the Co-Operative Societies Act can be licensed for Insurance Business in Uganda.
[30] The Insurance Act 2017, Section 109(4).
[31] The Insurance Act 2017, Section 59(2)(a).
[32] The Insurance Act 2017, Section 60(1),
[33] The Insurance Act 2017, Section 61(1),
[34] The Insurance Act 2017, Section 84,
[35] The Insurance Act 2017, Section 85(3),
[36] Oxford Dictionary of Advanced Learners (2019).
[37] The Insurance Act 2017, Section 106(1)(a),
[38] The Insurance Act 2017, Section 106(1)(d),
[39] The Insurance Act 2017, Section 106(1)(2)(4),
[40] The Insurance Act 2017, Section 107(1)
[41] The Insurance Act 2017, Section 107(3)
[42] Nkajja, D (2022). Auditing the Insurance Sector in Uganda: The Stakeholder Approach. Journal of Business Management 6(2) 30-110.
[43] The Insurance Act 2017, Section 108(a) and 109(4).
[44] International Organization for Standardization. ISO-31000 Risk Management.
[45] Kirubi, C (2018). Why Strict Corporate Governance in the Regulated Sectors. Evans Publishers, Nairobi, Kenya.
[46] The Insurance Act 2017, Section 11(d),
[47] The Insurance Act 2017, Section 115(1),
[48] The Insurance Act 2017, Section 115(3)(a).
[49] The Insurance Act 2017, Section 116(1) and (2).
[50] World Bank (2023). Financial Inclusion and Poverty Eradication on the Planet.
[51] The National Financial Inclusion Strategy 2023-2028 of the Ministry of Finance, Planning and Economic Development 2023, Objective Number One, is to reduce exclusion and access to barriers of formal financial services.
[52] The Insurance Act 2017, Section 11(1)(e),
[53] The Insurance Act 2017, Section 12(1)(g),
[54] Todaro, D (2006). Development Economics: Principles and Practice. Macmillan Publishers, London UK.
[55] The Insurance (Capital Adequacy and Prudential) Regulations 2020, Regulation 4(1), the minimum paid up capital of an insurer in Non-life insurance business is UGX 6 Billion, Life Insurance business is UGX 4.5, Health Membership organization is UGX 1 Billion and Reinsurer is UGX 9 Billion.
[56] Kahneman, D (2011). The Economics of Decision Making by Individuals. Journal of Industrial Psychology 3(2) 270-410.