FRA Amends Regulations for Microins

The Board of Directors of the Financial Regulatory Authority (“FRA”) recently issued two decisions – Decision No. 15 of 2019 and Decision No. 17 of 2019 – which require microfinance companies, NGOs, and associations (with microfinance portfolios of at least EGP 10 million) to offer their clients collective insurance policies against death and total and permanent disability (“TPD”) while exempting these policies from FRA service fees related to reviewing and approving insurance policies. Microinsurance on projects and financed assets, however, remain optional.

Decision No. 15 of 2019: Mandatory Microinsurance on Clients[1]

Previously, by virtue of FRA Board decisions No. 173 of 2014 and No. 31 of 2015, it was optional for microfinance companies, NGOs, and associations (“microfinance institutions”) to require insurance on the client’s life, the project, or the financed assets, depending on the case, given that the insurance coverage may be arranged with an FRA-licensed insurance company without imposing on the client a particular insurance company if the client presents an insurance policy with the required coverage. The new Decision No. 15 of 2019, however, makes the provision of insurance coverage on the client’s life obligatory while keeping insurance on the projects and financed assets optional. To elaborate, all microfinance companies and NGOs in addition to categories A and B microfinance associations (with microfinance portfolios of at least EGP 10 million)[2] are now required to offer life insurance and TPD insurance to their clients who receive microfinancing through a collective insurance policy with a licensed insurance company, with an insurance value equivalent to the value of the microfinance loan; in such a case, the microfinance institutions are prohibited from financially profiting from such life and TPD insurance – whether through commissions, fees, or otherwise. As for insuring projects or financed assets, these are still optional for all microfinance institutions (regardless of the categories for associations) without imposing certain insurance companies on the clients.

Decision No. 17 of 2019: Exemption of Collective Microinsurance Policies on Clients from FRA Service Fees[3]

Decision No. 17 of 2019 complements Decision No. 15 of 2019 by exempting the obligatory life and TPD insurance to microfinance clients from FRA service fees related to reviewing and approving new insurance policies and forms. These fees, which came into effect on 1 January 2019, were set at 0.001% of the total direct premiums, and are charged to insurance and reinsurance companies and to cooperative insurance associations.

Conclusion

In a statement published on its website regarding mandatory microinsurance, the FRA clarified that its aim behind mandating collective microinsurance policies against death and TPD is to extend the social safety net in Egypt.[4] FRA’s statement also specified that the required life insurance is to be set at monthly instalments of no more than 30 Egyptian piasters per EGP 1,000 of the total insurance value. This rate is to be annually reviewed through an actuarial study and by virtue of an FRA Chairman decision. It is worth noting that mandatory insurance is the most prevalent form of microinsurance, particularly since it ensures the participation of a broader cross-section of individuals, including lower-risk individuals who may otherwise choose not to participate, thus minimizing adverse selection while maintaining affordability. Similarly, collective (group) microinsurance, as opposed to individual microinsurance, also limits adverse selection and is often comparatively less expensive in its administrative costs and coverage amounts.[5]   [1] FRA Board Decision No. 15/2019 amending Decision No. 173/2014 on the rules for companies to undertake microfinance activities and Decision No. 31/2015 on the rules and standards for associations and NGOs to undertake microfinance activities, available through this link (in Arabic). [2] FRA Board Decision No. 31/2015 classifies microfinance associations and NGOs into three categories: (1) category A, with microfinance portfolios of at least EGP 50 million; (2) category B, with microfinance portfolios between EGP 10 million and EGP 50 million; and (3) category C, with microfinance portfolios of less than EGP 10 million. [3] FRA Board Decision No. 17/2019 exempting microinsurance contracts and microfinance clients from service fees related to reviewing and approving new insurance forms and policies as previously decided in Decision No. 152/2018, Egyptian Gazette, Issue No. 39, 28 February 2019. [4] Financial Regulatory Authority, “The FRA initiative on mandatory insurance on microfinance clients’ lives enters into force”, 12 February 2019, available through this link (in Arabic). [5] The World Bank, Chapter 11 “Insurance”, Craig Churchill, in “The New Microfinance Handbook: A Financial Market System Perspective”, 2013, edited by Joanna Ledgerwood, Julie Earne, and Candace Nelson, available through this link.