The changing business dynamics demand a review of the current capital base of insurance companies in the country in a bid to ensure that local underwriters have the necessary capacity to effectively underwrite risks in oil and gas, aviation and marine industries. To respond to this, the National Insurance Commission(NAICOM), is now set to adopt a Risk-Based Supervision (RBS), process of recapitalisation, that would see to a non-uniform capital base. ZAKA KHALIQ writes.
Insurance was not in place when the world started, but at some point in the world history, the need to mitigate risks emerging from industrialisation of the 20th Century brought about the term ‘Insurance’. Since then, it has evolved to become a field of specialisation that nurtures practitioners who offer insurance services to the people.
From time to time, the changing business landscape has always called for a review of capital base of insurance companies by sector’s regulator in each country.
The major form of recapitalisation exercise in insurance industry, which was carried out by the National Insurance Commission (NAICOM), took place between 2006 and 2007, when companies were asked to upgrade their capital base or cease to operate.
Before then, insurance licence was issued at a cheap price of N150million for life business, N200 million for non-life and N350 million for composite underwriting. This simple capital base gave rise to mostly, substandard insurance firms, which were incapacitated to carry out the business.
Because of their weak capacity, most of them were biting more than they can chew and when claims arose, they were unable to pay. The companies equally had weak corporate governance, as most of them were owned by individuals, who are not ready to succumb to the dictates of good corporate governance.
But thanks to the recapitalisation exercise, insurance companies in Nigeria increased their capital base from N150million for Life Insurance License to N2billion, with Non-life Licence moving from N200million capital base to N3billion, while composite insurance licence which was being issued for N350million before recapitalization, shoot up to N5billion. Four reinsurance firms were equally asked to recapitalise from N350million to N10billion during the exercise.
It was a move that saw some close shop, some listed and raised funds on the floor of Nigerian Stock Exchange(NSE), through public offers, while others had to embrace mergers and acquisition to stay afloat.
Thereafter, there were new entrants into the industry, as the era of universal banking licence served as a floodgate for most Nigerian banks to dabble into insurance. The likes of Oceanic Bank, Zenith Bank, UBA, First Bank, among others floated insurance subsidiaries, but had to offer them for sale after the Lamido Sanusi Lamido-led Central Bank of Nigeria (CBN) put an end to universal banking licence.
That commendable act of recapitalisation, at least, enhanced the capacity of insurance companies in the country to absorb risks and fufil their obligations, whenever there is any genuine claim.
However, as the world and the business environment continue to witness a surge in risks as a result of rapid industrialisation, the need for another round of recapitalisation becomes imperative, nine years after the last exercise, with the current capital base not reflective of the current business reality.
So, it was not surprising when insurance industry regulator, NAICOM, announced that it was set to quit compliant-based supervision and embrace a new supervision template, known as Risk Based Supervision (RBS), as according to it, this is the latest supervision model.
This comes with its own sacrifice and cost, especially on the part of insurance operators who are expected to adhere to this new model. Apart from the fact that consolidation is imminent, there will also be an embargo placed on some illiquid firms to underwrite certain businesses, a development that will not go down well with some.
Currently, the commission has now started a sensitisation campaign on RBS to ensure that both operators and regulator are operating on the same page.
The new supervision template would translate to business specialisation where some underwriters are going to be restricted to a particular line of business in accordance with their capital base, while some insurers would be asked to upgrade their capital base, if they want to play in a particular market, such as; aviation, marine and oil and gas.
Apart from the fact that there is no longer uniform capital base among operators, there are strong indications that some illiquid operators may adopt mergers and acquisition to continue to operate in insurance industry.
LEADERSHIP Sunday enquiries about the preparedness of insurers to this development, showed that some are already operating within their capital base, while trying to avoid taking businesses they have no capacity, as spelt out in the RBS, to underwrite. While some are ready for the new supervision template. Others advised that the RBS should not be used to limit some operators from certain businesses, as this would be inimical to the growth of insurance sector in the country.
Speaking on the reasons for this change, the commissioner for Insurance, Mr. Mohammed Kari, said supervisory approaches in the earliest days tended to be ‘compliance-based’, aimed mainly at ensuring compliance with the rules laid down for financial soundness and the conduct of business.
The risks associated with compliance-based approaches, according to him, are that they may lead to excessive focus on observed non-compliance and to insufficient understanding of key business drivers and flaws in risk management practices of insurers.
“The provision of insurance service, over the years, has developed to sophistication level beyond the imagination of the early practitioners. Coupled with other external risks and incidences, the profession has had to evolve as fast to continue to survive and be relevant,” he noted.
Explaining how the risk-based supervision works, Kari said operators and regulators have their respective roles to play.
“In risk based supervision, we had, in one of our meetings at the Insurers Committee, emphasised on the responsibilities and expectations from insurance companies. We had told them what they need to do to ensure the risk based supervision succeed and what we as regulators would be able to do. Unconsciously, the regulator has gone ahead to implement risk based supervision, because the expectation of the regulator is, first of all, to set up guidelines,” he stated.
Pointing out that the commission is to strengthen corporate governance in the companies, he added that this was because the responsibility of selecting the kind of insurances one gets into and how one capitalises the company are all the responsibility of the board and that is what the corporate governance is.
The next phase, he said, would be the financials, which is what would lead the industry into consolidation. According to him, “Consolidation is inevitable. We have many players in the industry that do not add value to the services they provide, both in the intermediary and insurance sectors. Consolidation does not mean just an additional capital; it could be redefining and identifying the type of insurance business you want to operate.
“For instance, if you did not have as much capital as company B, you would operate within the confines of your capital. Today, we have capital as the only bases for operation and if you meet the minimum capital, you can operate.”
The current legislation, he said, had structured the industry into Life, General and Miscellaneous and that if one is licenced to do general business, it means that with N3 billion, such firm can attempt to insure petroleum refinery or can claim the right to insure an airline, which, he said, was not right, looking at the foundation of insurance.
“This is because, to be able to hold a risk, you must have enough asset base to cover the risk. So, risk based is being able to identify what is your financial capability. If your financial capability does not guarantee you to insure oil refinery or airline, you will not be allowed to do so. Your financial ability may be to insure a Keke NAPEP, then, you will be a specialist in Keke NAPEP insurance. That is what risk based is going to be,” he stressed.
The commissioner of Insurance pointed out that the new supervision model would require a review of the minimum capital requirement to measure its adequacy. To him, “If not, we would require additional capital to meet that minimum. But if it is okay, we would just require the classification of companies’ assets plus the extra needed to get into the class of business one wants to undertake.”
Moreover, the minister of Finance, Mrs. Kemi Adeosun, while speaking in Abuja recently said the insurance sector was due for another round of recapitalisation following the need to reposition it. Adeosun noted that there was no alternative to recapitalisation of the sector.
According to her, “the first top three banks in the country have over N30billion capital base each while the top three insurance companies’ capital base is lesser.”
Continuing, the minister said, the principal objective of the reform was to have emergence of bigger and stronger players in the industry with enhanced capacity.
The Nigeria insurers in time past had operated on marginal scale and that accounted for why the market had not benefited much, especially from oil and energy business. She said: “The principal objective of the reform is to have emergence of bigger and stronger players with enhanced capacity, restoration of confidence of the public, enhance the international competitiveness of local operators.”
Insurance Expert, Dr. Nike Fajemirokun, who justified the movement away from rules-based supervision to risk-based supervision by NAICOM, said under the former regime, questions were asked and assessments made by the inspectors who later issued reports based on their subjective findings.
“It is not quantifiable. For example, when you the assessors say satisfactory, good, etc, it does not state what should be improved upon and comparisons are not possible,” she stressed.
Fajemirokun also stated that unlike what obtains in rules-based supervision, in risk-based supervision, all regulatory factors are appropriately scored and an overall score is awarded.
She noted that most importantly, all companies are not supervised or graded using the same parameters, adding that there would be a three-tier supervisory framework based on the impact of individual operators on NAICOM’s regulatory activities.
Speaking on how his company will operate under RBS, group managing director, Royal Exchange Plc, Alhaji Auwalu Muktari, said his firm would be an active player in the area of risk-based structure, saying, the company is only waiting for the final directive from the regulatory body. We have to examine our shareholders’ funds and the areas we have been playing so well because the risk-based will affect all aspects of our businesses, he stated.
According to him, “We are waiting for the commission to come up with the guidelines so that we can look at it effectively and come up with policy of where Royal Exchange wants to play. As of today in Royal Exchange, we are looking at increasing our shareholders’ fund to enable us play at the top and actively position the company to be among the first players in the insurance industry in Nigeria and Africa.”
On his part, managing director, Anchor Insurance Limited, Mr. Mayowa Adeduro, believes risk- based supervision is the right way to go because there are some companies, supposedly with big capital but based on the risk they have underwritten, are undercapitalised. So also, he said, some companies, supposedly called small players but with the volume of their business, are over-capitalised.
He pointed out that risk based supervision is expected to place a company in the right direction, saying, that is a welcome development that will reposition the industry players.
However, he did not subscribe to NAICOM’s idea of stopping some companies from doing a particular type of underwriting because of this new supervision template.
To him, “Underwriting is about experience, how you arrange your reinsurance and your capacity to undertake risks. So, the commission should not say, because a company is operating with N3billion capital base, it cannot underwrite oil and gas, aviation, among other businesses. No, what matters is the experience of the underwriter and the type of reinsurance the company has on ground.”
Stating that, that is the position of Anchor Insurance, he said his company is well positioned for it and that it is strategising to ensure that it plays effectively in that area.
“We are restricting our company from certain businesses to ensure that our portfolio is in good shape, even though, what matters is the kind of reinsurance arrangement one has on the class of business it is underwriting, your experience about the risk being taken and how much of capital is exposed to this class of business,” he pointed out.
Kari, who earlier stressed that the industry is already looking at recapitalization through RBS, added that when policy statement is made, it is up to the regulator and the market players to fine-tune such policies, noting that the proposed recapitalisation can be by direct injection of funds; improving on the minimum capital recapitalisation or assessments against risk.
On his part, deputy managing director of Industrial General Insurance (IGI), Sina Elusakin, while speaking on how insurance companies can work together with the regulator to quickly key into the risk based supervision model, charged the new NIA chairman, Mr. Eddie Efekoha, to properly midwife the process leading the industry from capital based supervision to risk based supervision.