Solvency 2 Regime: Insurers Focus on Building Reserves


By Ebere Nwoji

The introduction of the Solvency 2 regime in the regulation of insurance industry is compelling insurers to concentrate more effort on building strong reserves than dishing out returns on investment.

The Solvency II  regulatory and supervisory regime,  is an EU  initiative but  a world-leading standard  of regulation that requires insurers to focus on managing all of the risks facing their organisation.  It  adopts a more dynamic risk-based approach and implements a non-zero failure regime.

Here in Nigeria, the Solvency 2 principle, serves as a guiding principle to the insurance industry regulatory body, the National Insurance Commission( NAICOM) in the introduction  of its Risk based supervision model, which is  currently  at its early  stage of introduction in Nigeria.

The risk-based supervision, according to the World Bank, is a supervision approach that considers each of the risks that companies face and through a structured process, identifies the risks that are most critical to the financial viability of the institution.

Under the model, the supervisory on-site review process, looks at the management of the key risk areas of a company and focuses attention on the critical net risk exposures.

The introduction of the model in insurance industry is a sharp migration by the NAICOM from the hitherto compliance-based supervision model and is part of its steps to build globally competitive industry.

Unveiling the model to insurers recently, the Commissioner for Insurance, Alhaji Mohammed Kari, had  alerted the insurers that the commission would ride on the principle of Solvency 2 regulation model to implement the Risk based Supervision model and warned that operators may witness a more strict regime from the regulator.

“In doing this, the commission would be guided by the spirit enshrined in the principles laid down in the Solvency II framework companies and  this would see the commission administering more strictly, fit and proper test in the appointment of company officials at all levels, Kari  forewarned.

Against this warning, and in realisation of what lies ahead under its regime, management of insurance firms in Nigeria, said they want to pay more attention to building  stronger reserve than payment of  dividend to shareholders.

Some insurance firms have already informed  their shareholders .

At the 2015 annual  General Meeting  of Nem  Insurance Plc, held in Lagos, the group Managing Director Mr. Tope Smart, informed the shareholders of this, saying in the face of the solvency 2 implementation , the company would put more effort in building reserves.

He appealed to the shareholders to show some level of understanding on this.

A close  observation of dividend paid by insurance  firms  for 2015 business year, showed that many firms paid very low dividend while others  did not pay at all.

Solvency 2 initiated by the EU insurance industry  is not only on the radar of insurance companies in the EU, but also on those across the globe.

Insurance and investment experts said Solvency II is very much a living process and continues to evolve through valuable consultation, feedback, and cooperation between the insurance industry and regulatory bodies.

“As the process unfolds, unforeseen challenges and opportunities encourage progress and enable adjustments toward achieving the EU’s goals for the insurance industry. The framework will follow the Basel Accord approach, with a three-pillar structure, which will bring insurance and reinsurance regulation more in line with regulation applied to the banking community. Therefore, it is not surprising that the insurance industry is diligently preparing for Solvency II and learning along the way by following a more comprehensive, communicative, and structured path towards implementation”, the experts said.