EFSA Decision Regulating Microinsur

EFSA Decision No. 902 of 2016 defines Microinsurance and identifies the regulations necessary for the issuance and distribution of electronic insurance policies (“Decision 902”).[1] Decision 902 was issued on 2 November 2016 and published in the Egyptian Gazette on 15 November 2016. Another decision, EFSA’s Board of Directors’ Decision No. 121 of 2016 (“Decision 121”)[2] was concomitantly issued instilling corresponding amendments to the issuance and distribution of electronic insurance policies.

Background

The insurance industry is one of eight main types of non-banking financial sectors that are regulated by the Egyptian Financial Supervisory Authority (“EFSA”). The sector acts as a conduit for the collection of national savings and subsequently employs them in financing national investment and development plans, which in turn helps sustain the economy. The insurance sector is regulated by Law No. 10 of 1981. There are 5 main types of companies operating in the Egyptian insurance market, namely (a) insurance and reinsurance companies (b) cooperative insurance associations (c) private insurance funds (d) government insurance funds and (e) insurance pools.[3] Insurance can be categorized according to the field in which it specializes. There are two main types: insurance on persons and property insurance. The former type includes life insurance, personal accidents insurance and capital. The latter type includes insurances against fire and transportation dangers, insurance against ships, planes and cars, engineering insurance, petroleum insurance, accident insurance. [4] In 2005, the Egyptian government had intended to initiate major reforms in the insurance sector. The reform plan was divided into two main phases.[5] Phase I (2005-2008) aimed to restructure state-owned insurance companies, strengthen the legislative structure of insurance, and increase the insurance sector’s contribution to economic activity. Phase II (2009-2012) aimed to promote SMEs, insurance and Microinsurance, encourage innovation and new product development, as well as develop the supervision and performance standards. These plans were, however, delayed with the advent of the revolution. Nonetheless, Egypt’s insurance market is now being characterized as a rapidly growing market exhibiting great “untapped potential”. In fact, it has been pegged as the second largest insurance market in North Africa, tailing Morocco.[6] The insurance sector has actually been one of the few sectors that have flourished in the aftermath of the 2011 revolution.[7] There was a simultaneous increase in people’s awareness of the need to offset potential risk in an increasingly unstable economic environment as well as increased confidence in insurers as they satisfactorily delivered on their insurance policies. As such, insurers have recognized Egypt as a particularly appealing venue to invest in.[8] It is relevant to note, however, that as of 2015, few licenses were being issued for insurance companies, and most new arrivals entered the market by acquiring existing companies.[9] Notwithstanding the aforementioned optimism, the insurance sector is facing a number of challenges that it needs to overcome if it is to meet the projected growth. These include low insurance penetration, lack of financial literacy on insurance products, and perhaps most critically, overall limited financial inclusion. Financial inclusion refers to the ability to responsibly and sustainably access affordable financial products and services that satisfy the recipients’ needs.[10] Micro and Small and Medium Enterprises (“MSMEs”) often lack this access. The most common reason cited is restricted ability to access transaction accounts, which is considered the first step towards achieving broader financial inclusion. This restriction is, in turn, associated with lack of collateral and credit history as well as the commonplace adherence to informal business models. This was particularly true of Egypt where micro and small enterprises are estimated to account for more than 98% of enterprises.[11] With that in mind, the Egyptian government has started taking steps towards expanding its financial inclusion reach. It did so primarily by providing a comprehensive regulatory framework for its Microfinance sector. These efforts commenced with the issuance of Egypt’s first Microfinance Law No. 141 of 2014 which, among other things, accentuated the distinction between two main types of microfinance projects financiers, namely, microfinance companies and microfinance NGOs and associations. The Microfinance Law was succeeded by a series of EFSA decisions, most important among them were the following: (a) Decision announcing the licensing rules for microfinance companies[12] (b) Decision announcing rules and regulations for Microfinance NGOs and associations[13] and (c) Decision announcing the licensing rules for microfinance NGOs and associations.[14] These decisions outline a framework through which existent informal MSME financiers can be standardized and prospective MSME financiers can be regulated and supervised by EFSA. In contrast, the outdated Insurance Law of 1981 has still not been changed despite talk of a new comprehensive insurance law that would cover distribution channels, microinsurance, third-party administrators, health insurance, takaful, and governance.[15] Instead, the insurance sector reform initiative has been tackled in a piecemeal fashion, primarily by EFSA. Starting 2013, EFSA issued a total of 17 decisions pertaining to the insurance industry. This included reintroducing bancassurance into the market, this time with stricter regulations to regulating the sale of insurance policies through the Egyptian post,[16] allowing for the issuance and distribution of insurance policies electronically,[17] and permitting insurance companies to outsource management to the fund managers.[18] The Microinsurance decision is the latest of these series of EFSA decisions aimed primarily at broadening financial inclusion. Although the 2014 Microfinance law mentioned insurance as one of the relevant financial sectors with which EFSA has been mandated to regulate, it does not otherwise provide much detail. Similarly, the subsequent EFSA rules on NGO microfinance activities allowed a lending institution to require insurance on the life of the borrower or their project, yet it did not provide any specifics pertaining to such insurance policies leaving a wide margin of freedom for each lending institution to determine its own required insurance policy. The only restriction, however, was that the lending institution was not allowed to impose a specific insurer on the borrower, as long as the borrower fulfilled the prescribed insurance coverage.[19] The Microinsurance decision is thus the first attempt to more closely regulate an instrument typically not readily available to MSMEs, and attempts to facilitate their access to it. Prior to this decision, there was no framework acknowledging and regulating microfinance financiers as potential insurance intermediaries for microfinance projects. In addition, there were burdensome requirements that effectively excluded companies with smaller capital. For example, capital requirement for insurers was EGP 60 million and for intermediaries it was EGP 2 million, if they were corporations.[20] Moreover, investments made by insurance firms were subject to strict limits as delineated in decree 245 of 2008. Such limitations made it hard for microfinance projects to access the insurance market. Subsequently, because they had no means of safeguarding themselves against potential financial losses, microfinance projects tended to cluster around certain low risk sectors, which were often also low productivity sectors.[21] Thus, as a tool enabling broader financial inclusion, EFSA’s Microinsurance decision is projected to improve MSMEs access to finance which is in turn expected to prod on their growth and sectoral diversification.

The Decision

Two Decisions on Microinsurance have recently been issued by EFSA. The first one is the aforementioned Decision 121 and the second is Decision 902. Decision 121 introduced amendments to EFSA Board of Directors Decision No. 122 of 2015 (E-Insurance Decision) which regulates the insurance companies’ issuance and distribution of electronic insurance policies. These amendments add Microinsurance as one of the insurance products that are regulated by the E-insurance Decision and modify the E-insurance Decision to reflect that incorporation.[22] For example, article 3 of the Board of Directors Decision amends article 4 of the E-Insurance Decision, which delineates the mechanisms of premium payments, by adding distribution channels that have been licensed to collect Microinsurance premiums to the list of channels that are allowed to electronically collect insurance premiums. Article 3 also adds the condition of EFSA – issued Microinsurance licensing to the list of conditions that need to be fulfilled for an insurance company to attain EFSA licensing to distribute electronic insurance policies. Finally, article 4 assigns EFSA Chairman the responsibility of defining Microinsurance and specifying the regulations required of Microinsurance companies in order to issue and distribute electronic insurance policies – which has been accomplished in the other EFSA Decision recently issued, Decision 902. Decision 902 is the first attempt to regulate microinsurance in Egypt. It determines the rules that allow the designated entities to issue and distribute microinsurance policies electronically. Article 1 of the abovementioned decision defines microinsurance as every insurance service that targets low income persons in the fields of life and property insurance. Such insurance is provided against payment of premiums the value of which matches with the nature of the insured risk. The value of the insurance policy shall not exceed EGP 100,000. Decision 902 limited the fields covered by microinsurance to (i) all types of life insurance including personal injuries and long term medical insurance, and (ii) property and liability insurance in general. It left out, for obvious reasons, insurance of petroleum, planes, automobiles, ships related insurance as well as insurance of land, river, sea and air transport although a few exceptions were still made. For example, Decision 902 allows issuance of microinsurance policies on automobiles used by distribution projects as well as fishing boats. Decision 902 determines the entities authorized to issue and distribute microinsurance policies. Such entities include those that are in continuous contact with the targeted consumers: companies, societies and associations licensed to undertake microinsurance activities under Groups A and B as per Law No. 141 of 2014 as well as Nasser Social Bank, the Agricultural Development and Credit Bank, Egypt Post, and any people’s association or society that is approved by EFSA. Decision 902 also gave the more traditional entities the right to issue micro-finance insurance policies, namely banks licensed as insurance brokers. It is expected that the entities operating in the field of micro-finance play an important role in distributing these policies due to the wide client base and the proliferation of its branches that extend to cover remote areas in Egypt. Article 3 of Decision 902 determines the conditions and requirements for approving microinsurance policies by EFSA. It includes – but is not limited to – the requirement to notify the insuring company of the materialization of the risk within a maximum period of two weeks from that date, the requirement that the insurance company settles the claim within a period not exceeding 10 working days from the date of submission of the required documents. Decision 902 also requires that the content of the policy be simple and avoid use of jargon that is difficult to understand. Decision 902 sets out additional rules for the policies that are issued and distributed electronically. These include a condition to clarify that the insurance coverage […] and another condition to ensure that the policy includes a statement that it does not require the signature of the beneficiary or the insured. Article 6 of Decision 902 also requires insurance companies to undertake the necessary actions to protect the electronically issued insurance policies against forgery and manipulation. Decision 902 also requires the prior approval of EFSA on the agreement to be executed between the insurance company and the distribution entity. It also requires such contract to provide for the contractual obligations of both parties as well as a covenant to maintain the confidentiality of the insurance information and the financial benefits provided to the distribution entity based on the type of the insurance policy. Finally, Decision 902 obligates insurance companies to set out specific procedures for the evaluation of their client requests within the timelines abovementioned. It also requires the insurance companies to divide the client claims files into settled claims, claims under settlement and rejected claims. Decision 902 also requires insurance companies to provide periodical reports to EFSA and stresses on the liability of these companies to train all brokers and those entrusted with electronic distribution.

Conclusion

The Microinsurance decision comes at the intersection of two critical reform arcs that EFSA had been resolutely pursuing ever since 2013: insurance reform and microfinance development. The decision’s significance lies insofar as it brings Egypt a step closer towards greater financial inclusion. Financial inclusion has, in turn, been identified as an enabler for 7 of the 17 Sustainable Development Goals, which have been incorporated in Egypt’s vision 2030.[23] As such, the Microinsurance decision is yet another commendable example of EFSA’s efforts to increase the availability of financial services to a broader segment of society. Certain measures, however, still need to take place to better ensure its success. These measures include the development of proper consumer protection rules and regulations to help protect this more vulnerable insurance clientele. Also needed are proper training and awareness campaigns to increase market awareness of this new form of financial instrument. Consequently, the success of Microinsurance is very much contingent upon a long-term perspective of at least five to seven years, according to some estimates, and as such preemptive assessment of the regulations effectiveness should not dampen aspirations of its anticipated benefits.[24] In short, such legislative measures are important and necessary for the creation of a more flexible economic ecosystem, yet capacity building is just as critical if this financial instrument is to succeeded in its ultimate goal of financial inclusion.   [1] EFSA's Decision No. 902/2016 on Microinsurance and the Executive Standards for its Issuance and Distribution Electronically, Egyptian Gazette, Issue No. 257, 15 November 2016. [2] EFSA Board of Directors Decision No. 121/2016 Amending Board of Directors Decision No. 122/2015 on E-Insurance, Egyptian Gazette, Issue No. 256, 14 November 2016. [3] Law No. 10/1981 on Insurance Supervision and Control, Official Gazette, Issue No. 10 (cont.) (b), 5 March 1981, Art. 2.; “Regulatory Roles in Insurance”, EFSA’s Website, Available through this link. [4] Law No. 10/1981 on Insurance Supervision, Art.1. [5] “Microinsurance in Egypt: Challenges and Opportunities”, Ghada Waly, 3 May 2010. Available through this link. [6] “Egyptian Insurance Market Displays Untapped Potential Despite Challenge”, MOODY’s INVESTOR SERVICE, 21 October 2015, Available through this link. [7] “Egypt’s Insurance Sector Overcomes External Obstacles”, The Report: Egypt 2016, OXFORD BUSINESS GROUP, Available through this link. [8] Egypt’s Insurance Sector Overcomes External Obstacles, OXFORD BUSINESS GROUP. [9] Egypt’s Insurance Sector Overcomes External Obstacles, OXFORD BUSINESS GROUP. [10] Financial Inclusion Overview, WORLD BANK, 2 October 2016, Available through this link. [11] “Inclusive Regulations for Microfinance Project”, WORLD BANK, 13 January 2016, Available through this link. [12] EFSA’s Board of Directors Decision No. 172/2014 on Licensing Rules for Microfinance Companies, Egyptian Gazette, Issue No. 10, 10 January 2015. [13] EFSA’s Board of Directors Decision No. 31/2015 on Microfinance Rules and Regulations for NGOs and Associations, Egyptian Gazette, Issue No. 74 (cont.), 31 March 2015. [14] EFSA’s Micronfinance Unit Board of Trustees Decision No. 1/2015 on Licensing Rules for Microfinance NGOs and Associations, Egyptian Gazette, Issue No. 137, 15 June 2015. [15] Egypt’s Insurance Sector Overcomes External Obstacles, OXFORD BUSINESS GROUP. [16] EFSA’s Board of Directors Decision No. 18/2014 on Distributing Insurance Products Through Postal Services, Egyptian Gazette, Issue No. 60, 15 March 2014. [17] EFSA’s Board of Directors Decision No. 122/2015 Regulating the Issuance and Distribution of Electronic Insurance policies, Egyptian Gazette, Issue No. 274, 3 December 2015. [18] EFSA’s Board of Directors Decision No. 19/2014 on Insurance and Reinsurance Companies Administering Specialized Investment Portfolios Through Investment Portfolio Companies and Investment Funds, Egyptian Gazette, Issue No. 51, 4 March 2014. [19] EFSA’s Decision No. 31/2015, Art.24. [20] Egypt’s Insurance Sector Overcomes External Obstacles, OXFORD BUSINESS GROUP. [21] Inclusive Regulations for Microfinance Project, WORLD BANK. [22] EFSA’s Board of Directors Decision No. 121/2016, Art.1. [23] Financial Inclusion Overview, WORLD BANK. [24] Microinsurance Learning Sessions Egypt “Paving the way for financial inclusion”, Munich Re Foundation, 30-31 May 2016, Available through this link.