26 May 2020


By Marcos Erim – Research Officer, IRA Uganda

When asked, “what does insurance do?” many people are likely to say that “it provides cover against financial risks such as, Fire, explosion, burglary, housebreaking, capsizing in case of a ship, cargo loss, machinery breakdown, motor accidents including death and bodily injuries, industrial accidents, premature death, injury, loss of property, legal liability or other unexpected expenses”. Which of course is undeniably true.

However, the contribution of the insurance industry towards the investment eco-system goes beyond that. Insurance has a spiral effect on investment and the economy at large through;

Financial sector linkages. This is perhaps the most detailed way the insurance industry directly influences investment in Uganda. The 2017 Insurance Act explicitly lists ways how insurance companies can invest their income whilst protecting the interests of the policyholders.

The Act lists various ways insurance companies can invest their assets, including at least 10% of the paid-up capital in security deposits with commercial banks. These deposits are further used by banks to provide capital in form of credit to various sectors of the economy; not more than 35% is invested in land and buildings within a municipality, city or town with a focus on generating incomes befitting of the location of the assets and 20% investment in government securities including treasury bills, promissory notes and other financial instruments issued by the government of Uganda. This implies that the insurance industry is an important stakeholder in executing the central bank’s monetary policy thereby controlling the amount of money in circulation in the economy at a particular time.

Investment in financial instruments through capital markets and stock exchange.  The domestic stock market capitalization in Uganda in 2018 stood at 5.27% of GDP compared to 26.52% in Kenya which points to the existing unexploited potential Uganda has in this sector. The insurance industry is a perfect fix to this given its contribution in the form of investments in the capital markets. The changes on the stock exchange in the capital markets in turn influence the prevailing interest rates on the market, and given the fact that Uganda operates a floating exchange rate regime. The interest rate in turn influences a number of factors such as the central bank rate, and the lending rate which are relied on by commercial banks in determining the cost of capital and the rate at which banks give credit.

Employment creation. The Ugandan insurance industry is composed of thirty two insurance companies, two reinsurers, five Health Membership Organizations, thirty nine insurance brokers, two re-insurance brokers, and twenty eight Loss Assessors/Adjusters. In addition nineteen banks and one credit institution have been licensed as bank assurance agents coupled with over 2500 insurance agents. All these institutions provide a livelihood directly or indirectly to a big portion of Uganda’s population.

Contribution towards taxes. All premiums collected by the insurance industry are subject to value-added tax (VAT) except life and medical. In addition, insurance companies pay corporate tax which is 30% of profits registered in a given period, pay as you earn (P.A.Y.E), withholding tax paid on commissions to agents ranging from 6%-15%, stamp duty which is 35,000 shillings per policy and capital gains tax which is charged on income earned as profit from the sale of shares. According to the 2018 IRA insurance market report premiums collected for that period ending December 2018 were ugx 856 billion and are projected to hit the ugx 1 trillion mark for the period ending December 2019. With such a projection more tax will be generated from the insurance industry.

Capital protection and quick financial response. The insurance industry acts as a shock absorber to businesses in case they are hit by an uncertainty. Insurance reimburses businesses for losses that even the government may not have the immediate capacity to cover. For example in 2018 the insurance industry paid claims of ugx 327 billion shillings. This implies that in 2018 the economy could potentially have lost UGX 327 billion had it not been for insurance. This quick response, therefore, ensures continuity of businesses during times of calamities.

Corporate social responsibility. Insurance companies regularly give back a portion of their profits to the public inform of corporate social responsibility activities such as support to schools, hospitals, churches, and mosques which in a way promotes social development.

Provision of loans on life policies. Some companies do extend policy loans which can act as capital for investment to individuals holding life policies and this puts money back into the economy.

In conclusion therefore the insurance industry under the guidance and watch of the Insurance Regulatory Authority of Uganda (IRAU) plays a pivotal role in inducing investment both directly and indirectly. With the onset of the exploration of oil and gas, insurance is seen as an important stakeholder in guiding investment decisions of the oil multinationals setting up at the moment. The development of oil and gas insurance regulations is evidence of the IRA’s commitment to ensure that Insurance Plays a critical role in the economy by ensuring that the right protection is given at the right premiums and that adequate premiums are retained within the economy.