Nigerian insurance sector is a funny industry where conventional rules or doctrines don‘t apply. It is for this reason that so many sectors which came far behind the industry have developed faster the insurance sector.
While it is easier to implement policies in other industry, insurance sector operators seem to have developed thick skin to reject policies that can grow the industry.
Suffice to say the entire assets of the whole insurance industry is not even up to the asset of First Bank. That is the level the industry is and the reason is not farfetched.
Anytime the issue of recapitalisation comes up in the industry, it is met with either outright or partial rejection.
In most cases, those who fuel this rejection are usually smaller players whose managing directors are intoxicated with the small cake they have rather than bake a bigger cake. They cherish the tag and razzmatazz that come with the MD/CEO designation, hence, would not want to sacrifice that selfish interest for the growth of the industry.
Findings show that those concerned would rather hide their faces under some camouflaged groups who will be doing the bidding on their behalf and twice when the issue of recapitalisation surfaced in this industry, these groups always excelled.
The last recapitalisation of the industry, which was done in 2007, is now 16 years old, when a lot have changed within over the years to make the current minimum capital look like transport fare.
Within those period, the banking sector and especially, the microfinance sub-sectors have undergone two recapitalisation phases.
However, the most obvious thing to everybody is that, the industry needs to recapitalise as a matter of urgency, despite previous rejections. The value of local insurers are gradually diminishing in the face of forex volatility that has made foreign investors cash in on this and buy them for peanuts when dollarised.
Previous Failed Recapitalisation Exercise
NAICOM had in July 2018 announced that the Tier-based recapitalisation exercise will fully take off on January 1st, 2019, before it was later shifted to October 2018.
Termed Tier-Based Minimum Solvency Capital (TBMSC), this regulatory model was designed for the application of proportionate solvency capital that support the nature, scale, complexity and risk profile of the business conducted by insurers.
The model divided the industry into three tiers. Tier One are the highly capitalised insurers, followed by Tier Two operators, with Tier Three insurers the least capitalised.
Under the TBMSC, composite insurance companies who are now interested to play in the Tier 1 category are expected to increase their capitalisation from N5 billion to N15 billion, while those interested in the same Tier but operating Life business are mandated to upgrade their capital base from N2 billion to N6 billion, even as non-Life Insurers planning to play in this Tier are expected to increase their capitalisation from N3 billion to N9 billion.
While Composite Insurers willing to operate in Tier 2 are expected to increase their capitalisation to N7.5 billion, non-life operators are mandated to increase their capital base to N4.5 billion, while Life Operators under Tier 2 category are expected to increase capitalisation to N3 billion.
LEADERSHIP findings revealed that, this could have been the best to have happened to the industry as there would be no cancelation of license, although, there would be business specialisation. However, litigation, arising from the controversy on the shortness of the recapitalisation deadline and selfish interest of some vested parties killed the initiative under the then commissioner for insurance, Mohammed Kari.
The second recapitalisation exercise was aborted in 2021 through litigation as the concerned parties took NAICOM to court, stating that, the timing for the exercise, which coincided with Covid-19 pandemic, was wrong.
The regulatory body had earlier stipulated 31st of December, 2020 as the deadline for underwriters to raise 50 per cent of the new capital while the remaining 50 per cent would be expected by September, 2021.
The recapitalisation rules required life insurance firms to meet a minimum paid-up capital of N8 billion, up from N2 billion previously.
In the same vein, general insurance companies are required to raise their minimum paid-up capital to N10 billion from N3 billion previously.
The regulatory capital for composite insurance firm was raised to N18 billion from N5 billion previously while reinsurance businesses are now required to have a minimum capital of N20 billion from a previous N10 billion.
Meanwhile, as insurance firms battled to raise capital, some took the regulator to court and obtained a court order suspending the recapitalisation requirement.
Risk-Based Capital, the Next Exercise
With the expectation of commencement of risk-based recapitalisation in insurance industry, probably, on or before 2024, it is worthy to understand what the template means.
Risk-based capital(RBC) is a method developed by the regulator to determine the minimum amount of capital required of an insurer to support its operations and write coverage.
The risk-based capitalisation exercise, which may commence next year, is to ensure that underwriters upgrade their capital base in alliance with its risk appetite.
While this model will not prescribe any uniform capital, low capitalised insurers will face business restriction when the exercise commences.
Similarly, it was learnt that, high capitalised underwriters would be the only ones writing businesses in highly risked sectors, such as, Oil and Gas, aviation and maritime, even as the low capitalised ones would be restricted low risk businesses.
LEADERSHIP learnt that this initiative will enhance soundness and profitability of insurers through optimal capitalisation, even as it introduces proportionate capital that supports the nature of insurance business. The complexity of the businesses being conducted by insurers means the industry must undergo risk-based recapitalisation.
In this instance, it is expected that there will be no cancellation of license, but operators will be subjected to solvency control levels and little or no mandatory injection of fresh capital by insurers.
Although, there will be minimum capital to operate certain class of business, the current capital of N2billion, N3billion, N5billion, N10billion for life,non- life and composite companies respectively could still be maintained for those who want to play the lower end of the market, preferably the retail market, microinsurance and so,on.
While the last aborted recapitalisation exercise recognised share capital as the base of the exercise, there are indications that the current one may recognise Shareholders Fund as the capital under the exercise, thus, making the new exercise seamless and easier for the big players.
Stakeholders‘ Reactions
Understanding the need to recapitalise, the commissioner for Insurance, Sunday Thomas, in an interview with journalists recently in Abuja, said, NAICOM, would this year, be closing on the implementation of risk-based recapitalisation that will enable each insurance company underwrites risks based on their capital.
„He believes before he finishes his first tenure in 2024, the initiative would be operational. NAICOM, he said, started the pilot scheme on risk-based capital last year, stressing that, some companies have tasted what it means to have risk-based supervision environment.
“It has been quite revealing about the operations of these institutions. We are taking it to a new level, risk-based capital. If you know the history of capital in this country, it has been an issue and we want to remove that. You can trade, for instance, as a motor third party insurance company, based on your capital.
“Then, if you want to trade in the highly volatile business environment of oil and gas, you also must provide the needed capital to be able to run at that level. That is where we are going now. The one cap fits all, will no longer be the case.
“This year, we will be closing on that and before I finish the first tenure, it will be operational. We are in partnership with the multilateral institutions in our quest to evolve, this risk-based capital. Our staff members have gone through a lot of training in this area and it’s been quite helpful,” he pointed out.
Earlier, experts have hinged the growth of the industry on recapitalisation that will lead to increased capacity to absorb large risks, thereby, increasing the profitability of the industry.
The managing director/CEO of Boff & Co Insurance Brokers Limited, Chief Babatunde Agbeja had called for increased capacity, regular staff training, investment in information and technology and regular engagement with stakeholders.
According to him, there is need for increased capacity in the Nigerian insurance industry, even though, the capacity of the industry has increased over time.
“The issues surrounding the previous recapitalisation exercise is just too unfortunate because it did a disservice to the industry.
“Although the industry is doing well, we only need to be better. We need to be sincere, be professional, and ensure that capacity increases continuously. Before now, from any international business that comes to Nigeria, only two per cent is retained locally but today, it has increased to 15 per cent.
“My advice to the industry is continuous capacity improvement, it is a need, It is a must for the industry to succeed. There must be regular engagement between regulators and the players to recapitalise the industry,“ he pointed out.
Similarly, the founder of B.Adedipe and Associates, Dr. Biodun Adedipe, while reviewing insurance industry and what the industry should do going forward to drive growth said: “we have done a lot of work to ensure the growth of insurance industry in Nigeria. In the last ten years we have done memos to the presidency about three times on behalf of insurance industry.
He expects the industry to improve its prowess through incursion of capital and technical skills that will make the sector competitive for international risk businesses.
Meanwhile, Pan-African credit rating agency, Agusto & Co Limited has anticipated a resumption of insurance industry recapitalisation exercise in the short term.
It also noted that the persistent naira devaluation has reduced the financial strength of the industry’s capital since the last recapitalisation exercise in 2007.
The rating agency said: “although some insurers have strengthened their capital base through earnings retention, the ability of most industry operators to solely underwrite large ticket transactions has dwindled based on the lower value of capital in USD terms.
“Therefore, Agusto & Co. believed that the recapitalisation exercise could be a watershed in the Industry. In addition to the benefits accruing from a larger capital base from a risk underwriting perspective, improved investment management practices will be upheld by a larger investment portfolio as insurers strive to generate adequate returns.”
Conclusion
A chartered Insurer and Actuarist, Dr. Pius Apere, in an interview with LEADERSHIP said, the industry is overripe for another round of recapitalisation 16 years after the last successful one, urging the regulator to consult widely and agree on a template that would be acceptable by all.
He said, other sectors have done recapitlisation exercise seamlessly without much noise, especially, the pension industry which did its own last year, calling for cooperation of relevant stakeholders to grow the industry through recapitalisation exercise that will not only bring in the money, but technical skills that will allow Nigerian underwriters compete for huge risk businesses in maritime, oil and gas, and aviation sectors who have pay huge premium that can improve the bottomline of the underwriting firms in the country.
Though, more risk appetite too could be deadly, but improved technical skills arising from such recapitalisation exercise and risk-based capital will ensure each player cut its coat according to its cloth.
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