I. Introduction

1. AFE has been assisting IRA since 2013 in its multi-year effort to move from compliance-based to risk-based supervision and regulation of insurers. IRA has adopted a progressive approach to moving to risk-based supervision. In mid-2014, it commenced implementing the CARAMELS assessment methodology, which has been adopted by the East African Insurance Supervisors Association and is currently used by a number of regulators in the region.

2. This Technical Assistance (TA) was to support the IRA in (i) building capacity in analyzing and assessing reinsurance (both life and non-life) from both the primary insurer’s and a reinsurer’s perspectives; (ii) coaching a team of IRA supervisors on-site at Uganda Reinsurance Company in assessing a reinsurer; (iii) participating in a workshop for the industry on risk-based supervision and discussing implications of IRA’s move towards risk-based supervision for the IRA and the industry; and (iv) discussing with the IRA Board essential elements for success in implementing risk-based supervision and the recommendations resulting from July 2015 TA report. The entire supervision staff of IRA attended the two days reinsurance training. The on-site coaching of the IRA team at Uganda Reinsurance Company was focused on training in assessing areas that are different in a reinsurer from that of a direct writer (business assumed by type, retrocessions and the technical provisions). The one day industry workshop was attended by about 75 participants. The mission was concluded with about half a day meeting with the IRA Board.

II. Insurance Industry

3. The insurance industry in Uganda is in its early stages of development. Non-life insurance represents 90 percent of the business and life insurance 10 percent. The level of penetration is gradually increasing. It has increased from 0.65 percent in 2010 to 0.86 percent in 2014. Insurance density is also gradually increasing. It has increased from USD 3.16 in 2010 to USD 5.30 in 2014.

4. Total premiums have grown from UGX 240 billion in 2010 to UGX 504 billion in 2014, an average annual growth rate of 20.22 percent over the period. Non-life premiums grew from UGX 216 billion in 2010 to UGX 384 billion in 2014, an average annual growth rate of 16.25 percent. Life insurance premiums grew from UGX 24 billion in 2010 to UGX 74 billion in 2014, an average annual growth rate of 30.0 percent.

5. Under the revised insurance legislation, IRA will be requiring non-life insurers to provide certification for adequacy of technical provisions by an actuary as is currently required for life insurers. When the requirement comes into effect, it will be necessary for it to be supported by guidance from IRA in terms of its expectations for the actuarial reports to be filed. This will ensure consistency in reporting to the IRA and that the reports will provide the information needed by the IRA for supervisory purposes. As discussed below under Uganda Reinsurance Company, the company had retained an actuary for reporting on its technical provisions (both life and non-life), but the reports were lacking in a number of respects. Examples of guidelines to the actuaries (both life and non-life) were provided to IRA and are incorporated in a separate Technical Appendix.

III. Reinsurance

6. Being a developing market, the Uganda insurance market relies heavily on reinsurance for capacity and expertise. As indicated in the table below, its cessions for non-life insurance from 2011 to 2014 have ranged from 42–45 percent. Cessions for life insurance have been lower and have ranged from 12–22 percent over the same period. Most of the reinsurance for non-life business is based on quota share and surplus treaties and for life business on yearly renewable term basis.

Table 2.

Non-Life Insurance – Gross, Ceded and Net Premiums

Table 2.

Non-Life Insurance – Gross, Ceded and Net Premiums

Gross, Ceded and Net Premiums (UGX Billions) (IRA Annual Market Reports)	2014	2013	2012	2011
Gross Premiums Written	383.7	351.4	313.1	262.2
Premiums Ceded	162.6	152.5	141.4	111.8
Net Premiums Written	221.1	198.9	171.7	190.4
	Percent	Percent	Percent	Percent
Gross Premiums Written	100.0	100.0	100.0	100.0
Premiums Ceded	42.3	43.4	45.2	42.6
Net Premiums Written	57.7	56.6	54.8	57.4

View Table

Table 2.

Non-Life Insurance – Gross, Ceded and Net Premiums

Gross, Ceded and Net Premiums (UGX Billions) (IRA Annual Market Reports)	2014	2013	2012	2011
Gross Premiums Written	383.7	351.4	313.1	262.2
Premiums Ceded	162.6	152.5	141.4	111.8
Net Premiums Written	221.1	198.9	171.7	190.4
	Percent	Percent	Percent	Percent
Gross Premiums Written	100.0	100.0	100.0	100.0
Premiums Ceded	42.3	43.4	45.2	42.6
Net Premiums Written	57.7	56.6	54.8	57.4

Table 3.

Cessions of Non-Life Insurance

Table 3.

Cessions of Non-Life Insurance

Lines of Business (IRA Annual Market Reports)	2014 Percent	2013 Percent	2012 Percent	2011 Percent
Motor	10.0	11.1	9.7	8.0
Fire (Property)	72.2	79.8	74.7	75.5
Medical	31.1	39.0
Personal Accident	41.4	31.9	46.6	23.2
Marine/Aviation	66.9	66.8	66.6	65.8
Engineering	75.8	80.1	81.2	75.8
Workmen Compensation	37.1	32.1	25.0	27.0
Public Liability	59.8	73.1	65.5	72.2
Burglary	25.0	27.0	14.2	22.0
Bonds	67.5	50.7	57.0	53.8
Miscellaneous	59.2	46.3	52.4	61.9
Total	42.4	43.4	45.2	42.6

View Table

Table 3.

Cessions of Non-Life Insurance

Lines of Business (IRA Annual Market Reports)	2014 Percent	2013 Percent	2012 Percent	2011 Percent
Motor	10.0	11.1	9.7	8.0
Fire (Property)	72.2	79.8	74.7	75.5
Medical	31.1	39.0
Personal Accident	41.4	31.9	46.6	23.2
Marine/Aviation	66.9	66.8	66.6	65.8
Engineering	75.8	80.1	81.2	75.8
Workmen Compensation	37.1	32.1	25.0	27.0
Public Liability	59.8	73.1	65.5	72.2
Burglary	25.0	27.0	14.2	22.0
Bonds	67.5	50.7	57.0	53.8
Miscellaneous	59.2	46.3	52.4	61.9
Total	42.4	43.4	45.2	42.6

7. In most cases motor insurance, which represents about 28 percent of the business written, is retained by the insurers for their net account, with other lines (particularly fire, engineering, public liability and bonds) being ceded at varying rates as indicated in the table above.

Table 4.

Life Insurance – Gross, Ceded and Net Premiums

Table 4.

Life Insurance – Gross, Ceded and Net Premiums

Gross, Ceded and Net Premiums (UGX Billions) (IRA Annual Market Reports )	2014	2013	2012	2011
Gross Premiums Written	74.0	55.4	39.3	34.6
Premiums Ceded	10.8	12.2	5.5	4.2
Net Premiums Written	63.2	43.2	33.8	30.4
	Percent	Percent	Percent	Percent
Gross Premiums Written	100.0	100.0	100.0	100.0
Premiums Ceded	14.6	22.0	14.0	12.1
Net Premiums Written	85.4	78.0	86.0	87.9

View Table

Table 4.

Life Insurance – Gross, Ceded and Net Premiums

Gross, Ceded and Net Premiums (UGX Billions) (IRA Annual Market Reports )	2014	2013	2012	2011
Gross Premiums Written	74.0	55.4	39.3	34.6
Premiums Ceded	10.8	12.2	5.5	4.2
Net Premiums Written	63.2	43.2	33.8	30.4
	Percent	Percent	Percent	Percent
Gross Premiums Written	100.0	100.0	100.0	100.0
Premiums Ceded	14.6	22.0	14.0	12.1
Net Premiums Written	85.4	78.0	86.0	87.9

Table 5.

Cessions of Life Insurance

Table 5.

Cessions of Life Insurance

Lines of Business (IRA Annual Market Reports)	2014 Percent	2013 Percent	2012 Percent	2011 Percent
Individual Life	2.1	2.2	2.1	13.5
Group Life	16.7	24.8	20.2	14.4
Medical	41.2	84.8
DAP
Total	14.6	22.0	14.1	12.1

View Table

Table 5.

Cessions of Life Insurance

Lines of Business (IRA Annual Market Reports)	2014 Percent	2013 Percent	2012 Percent	2011 Percent
Individual Life	2.1	2.2	2.1	13.5
Group Life	16.7	24.8	20.2	14.4
Medical	41.2	84.8
DAP
Total	14.6	22.0	14.1	12.1

8. The business ceded has been profitable for the reinsurers. Net loss ratios for non-life were just below 40 percent in 2013 and 2014, while the loss ratios for life varied between 28 and 34 percent during the same period (see Tables 6 to 9 below).

Table 6.

Loss Ratios on Non-life Insurance Ceded for 2014

Table 6.

Loss Ratios on Non-life Insurance Ceded for 2014

Gross, Ceded and Net Premiums (UGX Billions) (IRA Annual Market Reports)	Gross	Ceded	Net
Premiums Earned	368.0	164.4	203.6
Claims Incurred	132.5	51.6	80.9
Loss Ratios	36.00 Percent	31.38 Percent	39.73 Percent

View Table

Table 6.

Loss Ratios on Non-life Insurance Ceded for 2014

Gross, Ceded and Net Premiums (UGX Billions) (IRA Annual Market Reports)	Gross	Ceded	Net
Premiums Earned	368.0	164.4	203.6
Claims Incurred	132.5	51.6	80.9
Loss Ratios	36.00 Percent	31.38 Percent	39.73 Percent

Table 7.

Loss Ratios on Non-life Insurance Ceded for 2013

Table 7.

Loss Ratios on Non-life Insurance Ceded for 2013

Gross, Ceded and Net Premiums (UGX Billions) (IRA Annual Market Reports)	Gross	Ceded	Net
Premiums Earned	329.9	146.8	183.1
Claims Incurred	123.0	50.1	72.9
Loss Ratios	37.28 Percent	34.12 Percent	39.81 Percent

View Table

Table 7.

Loss Ratios on Non-life Insurance Ceded for 2013

Gross, Ceded and Net Premiums (UGX Billions) (IRA Annual Market Reports)	Gross	Ceded	Net
Premiums Earned	329.9	146.8	183.1
Claims Incurred	123.0	50.1	72.9
Loss Ratios	37.28 Percent	34.12 Percent	39.81 Percent

Table 8.

Loss Ratios on Life Insurance Ceded for 2014

Table 8.

Loss Ratios on Life Insurance Ceded for 2014

Gross, Ceded and Net Premiums (UGX Billions) (IRA Annual Market Reports)	Gross	Ceded	Net
Premiums Earned	71.9	8.6	63.3
Claims Incurred	27.0	5.2	21.8
Loss Ratios	37.55 Percent	60.46 Percent	34.43 Percent

View Table

Table 8.

Loss Ratios on Life Insurance Ceded for 2014

Gross, Ceded and Net Premiums (UGX Billions) (IRA Annual Market Reports)	Gross	Ceded	Net
Premiums Earned	71.9	8.6	63.3
Claims Incurred	27.0	5.2	21.8
Loss Ratios	37.55 Percent	60.46 Percent	34.43 Percent

Table 9.

Loss Ratios on Life Insurance Ceded for 2013

Table 9.

Loss Ratios on Life Insurance Ceded for 2013

Gross, Ceded and Net Premiums (UGX Billions) (IRA Annual Report 2013 and 2012)	Gross	Ceded	Net
Premiums Earned	57.0	13.8	43.8
Claims Incurred	17.4	4.9	12.5
Loss Ratios	30.52 Percent	35.50 Percent	28.93 Percent

View Table

Table 9.

Loss Ratios on Life Insurance Ceded for 2013

Gross, Ceded and Net Premiums (UGX Billions) (IRA Annual Report 2013 and 2012)	Gross	Ceded	Net
Premiums Earned	57.0	13.8	43.8
Claims Incurred	17.4	4.9	12.5
Loss Ratios	30.52 Percent	35.50 Percent	28.93 Percent

9. Companies in the industry do not seem to buy catastrophe protection. As recommended during the last mission, IRA, in conjunction with the industry association, need to evaluate the need for such a protection in the country and give guidance to the industry. It is interesting to note that Uganda Reinsurance Company has considered it necessary and has arranged for catastrophe protection.

IV. Training on Assessing Reinsurance

10. Comprehensive training on analyzing and assessing reinsurance (both life and non-life) from both a direct writer’s and a reinsurer’s perspectives was provided over two full days to the entire IRA supervisory staff. The key topics covered in the training are listed below and the presentation used is incorporated in a separate Technical Appendix. The presentation material was developed to provide on-going reference to IRA staff in supervision of reinsurance.

i.	What is reinsurance?
ii.	Purpose of reinsurance.
iii.	How reinsurance works.
iv.	Reinsurance vs. Co-insurance.
v.	Types and methods of reinsurance arrangements.
vi.	Parties to reinsurance.
vii.	Net retentions.
viii.	Clauses in reinsurance contracts
ix.	Reinsurance attachments and accounting.
x.	Insurance Core Principle 13 (Reinsurance).
xi.	Global reinsurance.
xii.	Reinsurance in Uganda.
xiii.	Applicability of financial stability indicators.
xiv.	Analyzing and assessing reinsurance.
xv.	Uganda Reinsurance Company.
xvi.	Case study on reinsurance.
xvii.	Terms used in reinsurance.
xviii.	Questions and challenges in assessing reinsurance.

View Table

i.	What is reinsurance?
ii.	Purpose of reinsurance.
iii.	How reinsurance works.
iv.	Reinsurance vs. Co-insurance.
v.	Types and methods of reinsurance arrangements.
vi.	Parties to reinsurance.
vii.	Net retentions.
viii.	Clauses in reinsurance contracts
ix.	Reinsurance attachments and accounting.
x.	Insurance Core Principle 13 (Reinsurance).
xi.	Global reinsurance.
xii.	Reinsurance in Uganda.
xiii.	Applicability of financial stability indicators.
xiv.	Analyzing and assessing reinsurance.
xv.	Uganda Reinsurance Company.
xvi.	Case study on reinsurance.
xvii.	Terms used in reinsurance.
xviii.	Questions and challenges in assessing reinsurance.

V. Industry Workshop on Risk-Based Supervision

11. IRA had requested assistance from AFE in preparing for the industry workshop and making a presentation on supervisory methodologies to the industry and discussing implications of IRA’s move towards risk-based supervision for the IRA and the industry. The one-day workshop was well attended by the industry. Based on the active participation of the industry members, the workshop was well received by the participants. A copy of the agenda for the workshop, the presentations on supervisory methodologies delivered by the Consultant, and two presentations on the CARAMELS methodology currently being implemented by the IRA are incorporated in a separate Technical Appendix. The latter two presentations were done by IRA supervision managers.

12. To engage the industry early in IRA’s move towards risk-based supervision was an excellent initiative on the part of the IRA. As IRA progresses towards more advanced risk-based supervisory methodologies, it will need to issue guidance to the industry on various topics such as its expectations on corporate governance, risk management, etc. These are best developed in consultation with the industry; hence, engaging the industry at this early stage was an excellent initiative on the part of IRA.

VI. Meeting with the IRA Board of Directors

13. To engage the industry IRA Board had requested a meeting with the mission. The objectives of the meeting were to discuss (1) implications of IRA’s move towards risk-based supervision and how IRA can ensure success and (2) recommendations resulting from the May 2015 mission. A copy of the presentation made to the Board is attached to the report as Annex 8.

14. Besides a suitable supervisory methodology, a number of elements were highlighted that are essential for successful implementation of risk-based supervision by the IRA. The elements discussed with the Board included the following:

• Risk-based Supervisory Methodology

• Organization Structure and Accountabilities

• Resources and Staffing Strategies

• Supervisory Tools

• Knowledge Development and Sharing

• Quality Assurance (Line Management)

• Internal Audit

• Leadership and Change Management

15. At the meeting, the Board indicated a desire to be more involved in overseeing the initiative to move towards risk-based supervision. This is essential for the overall success of the project. In addition, approvals by the Board will be required at the various stages of the process. An increased level of Board oversight will ensure that the Board is in a position to provide the required approvals on a timely basis.

16. As an initial step, the Board has asked management to provide an action plan to address the recommendations resulting from the July 2015 TA report. There were numerous recommendations made during the last mission and, although some of the recommendations were of a longer term nature, most of the recommendations remain to be addressed. The Board’s involvement in ensuring these are addressed on a timely basis is an important initiative by the Board. It should also review implementation of the plan on a periodic basis to make sure it remains on track.

17. Progress made by the two managers in building a deeper understanding to the application of the CARAMELS methodology was clear through their industry presentations. In order to build on the progress to-date, it will be important for the IRA to use the knowledge of these two managers to coach other supervisors in the application of the methodology. This will require that the two managers be given enough time to provide coaching to other supervisors. This should occur during the on-site phase as well as through subsequent review of supervisory documentation and reports.