Attaining Global Best Practices Status via RBS Model


Insurance industry regulator, the National Insurance Commission, said it will from the second quarter of this year set out roadmap for implementation of the newly adopted Risk Base Supervision (RBS). Ebere Nwoji takes a look at the steps taken so far by the commission in this regard

Irked by the poor performance of the insurance sector over the years, which has climaxed in negative attitude of Nigerians towards patronage of the sector and its minimal contribution to the gross domestic product of the economy, the National Insurance Commission( NAICOM), two years ago, decided to adopt a world class supervisory initiative tagged: Risk Base Supervision( RBS).

The insurance industry regulator had said it would from July, 2016, commence the experiment the model in Nigerian insurance industry. This had put insurers on their toes as underwriters are now more careful in the way they run their individual firms.

RBS, an European Insurance market supervisory initiative, according to the World Bank, is a supervisory 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.

NAICOM, said in introducing the model, which is expected to place Nigerian insurance industry on global best practices pedestal, it will ride on the van of Solvency 2 supervisory principle in regulating the activities of Nigerian insurance industry operators.

The Commission, at a media retreat held at Abeokuta, Ogun State, earlier in the year, said it will release the modalities for the new supervisory regime from the second quarter of 2016.

What this means is that, the model, when fully operational, will see the insurance sector in Nigeria completely transiting from compliance based supervision which it was operating before to the risk-based supervision era, just as the commission has successfully transited the industry from Nigerian account reporting standard system of finance reporting to International Finance Reporting Standard ( IFRS).

When the commission fully institutes the model, it will automatically revise capitalisation model in the insurance industry from compliance based to risk-based solvency supervision model, which means that an insurance company intending to insure business in the peak risk portfolio such as oil, aviation and marine underwriting, must have sufficient financial resources to meet its obligations with respect to the insured.

NAICOM, however, explained that this has not changed the minimum capital base in the industry adding that it remains unchanged in the order of N2billion for insurance companies underwriting life business, N3billion for non-life operators, N5billion for composite insurance companies, while N10 billion is for re-insurance companies.

According to the commission, the objective of the regulation is to achieve solvency in the industry and to ensure that insurers have sufficient financial resources to meet their obligations with respect to the insured. To strengthen the risk management systems of insurers; to carry out preventive control; to have a more flexible regulation emphasising on principles; to have a supervision system in financial sector assessment programme and to evaluate the strength of the financial systems in the country.

From all indications, the idea of Risk base supervision model came into the mind of various sector regulators after the 2008 meltdown on global financial system. One of the lessons from the global financial crisis was that regulators realised that it is always vital to have sufficient knowledge about significant financial services firms because they have a greater capacity to affect the economy adversely. Risk based supervision starts with the premise that not all firms are equally important and that a regulator can deliver most value through focusing its energies on the ones which are most significant and on the risks that pose the greatest threat to financial stability and consumers.

According to finance experts, a risk based methodology provides a systematic and structured means of assessing different types of risk, ensuring that idiosyncratic approaches to firm supervision are avoided and that potential risks are analysed for the higher impact firms using a common framework.

The RBS, accepts the premise that resources are finite, that there is no unlimited pool of public or industry funding on which to draw and that every regulator has to make choices about what it will do and what it will not do. It makes no prior judgement on what the right level of resources should be but seeks to deploy the available resources in the most efficient fashion.

The commission’s resolve to adopt the model was borne by the fact that abysmal performance of the industry over the years was mainly blamed on poor management and supervisory problem. Operators employ all manner of unprofessional practices that presents the industry in bad lite before the public it serves. They jostle for government businesses they have little or no capacity to underwrite and in a bid to win such businesses by all means charge ridiculous premium rates they know will not enablement them pay claims when it occurs.

They buy such government businesses at very high cost from government’s insurance agents, while neglecting retail insurance segment which will not only deepen insurance penetration in the country also grow their premium .

Also operators cue in for other high tech businesses they know they lacked financial and technical capacities to underwrite .This, over the years, deprived the industry the opportunity of participating in the underwriting of oil sector insurance, as multinational oil firms in the country insisted that despite the local content law, indigenous firms lacked financial muscle to underwrite their businesses.

The commission, having beefed up the financial base of the industry in a bid to overcome the low financial muscle problem, now wishes to employ the RBS model of supervision to classify the industry into levels that will make each firm settle on only the businesses it has the financial strength to carry and be in position to conveniently pay claims on such businesses when it arises.

By the RBS guidelines rolled out by the Commission, the model will require the classification of assets of insurance companies to ascertain their capabilities to underwrite various risk portfolios in the industry. The Commissioner for Insurance, Mohammed Kari, while speaking at the recent industry committee meeting, said “from now on, our programme would be on risk-based supervision, consolidation exercise has become necessary.” He said the commission has launched the sensitisation exercise to educate operators on the need for a switch from rule-based regime to risk-based supervision for insurance to play effective role in the economy. According to him, consolidation does not mean just an additional capital, it may be redefined as the type of insurance business the companies want to operate.

“Today, we have capital as the only basis for operation and if you meet the minimum capital, you can operate. For instance, underwriters take any cover without consideration to the obligation to stakeholders and that is why we have infractions in the industry, the explains why we have many players in the industry that do not add value to the services they provide, both in the intermediary and insurance sectors.”

He stressed that for companies to underwrite risk, they must have enough assets to cover the risks being underwritten. “So, risk-based is being able to identify what is your financial capability. If your financial capability does not guarantee you to insure oil because of the huge capital layout involved in terms of obligations, you will not be allowed to insure the risks.” He added that Insurance companies are to become specialised underwriting firms to add value to the services operators provide for their customers, especially in meeting obligations to stakeholders in the industry.

The Director-General of the Nigerian Insurers Association (NIA), Sunday Thomas, in his remark, n the model said that an industry committee in conjunction with the commission has been working, as the commission is just commencing the implementation of the framework. “It has started the sensitisation of the operators on the risk-based supervision. This is quite necessary to educate and inform the market on what is coming. It means by the time the commission starts at different levels, companies will know the levels they are. It means that if you want to underwrite the jumbo level, you have to meet the requirements of being there. If you want to operate at the small level, you choose the level you want to belong, that is the essence of the whole exercise.”

Also, an industry operator, who lauded the new supervisory model, said that from the audited financial reports of a number of insurance companies, solvency gaps are recurring features of the activities for as much as three years.

“The near total absence of risk management practice and appropriate product pricing are among other issues plaguing the industry. The consequence is massive loss of premium and wealth to stakeholders. No doubt therefore, the price of listed insurance companies rarely record market gain, while shareholders have not received dividends in the past five years from 80 per cent of insurance companies in the system, ” he lamented.

Kari, while announcing the introduction of the RBS in Nigeria to operators said the model, will ride on the Solvency 2 supervisory principle in regulating the industry operators’ activities.
The commission also said it will expose the operators to a blue print of the model from July, 2016.
Kari, however, alerted the insurers that they 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 firm managements 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 regulator’ goals for the insurance industry.

According to the experts, the solvency 2 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.

According to the insurers, when fully in operation, its advantages is that the RBS will provide alignment of economic and regulatory capital including giving appropriate recognition to diversification benefits within companies and between subsidiaries.

It will provide freedom for companies to choose their own risk profile and match it with an appropriate level of capital.
It will give an early warning system for deterioration in solvency by active capital management.

Through better alignment of risk and capital management, and will encourage an improvement in the identification of risks and their mitigation.
It will also streamline the way that insurance groups are supervised and recognises the economic reality of how groups operate.

Kari during a courtesy visit to THISDAY Newspapers in Lagos, had said the introduction of the RBS model will serve as a way of sanitising and repositioning the insurance industry for optimum performance.
“The RBS really looks at the individual liability of companies via- a-vis their capital and asset provision.We don’t want to line them up and say because you have paid N 3 billion minimum capital, you can do all businesses. No N3 billion capital will not give you the ability to insure a refinery or an aircraft. So if you want to do that class, you have to push up your capital and asset base. If you have small capital and small asset base, may be you convert to micro insurance.
If you don’t have big capital to insure an aircraft, may be you specialise in keke Napep,” he stated.

He said even micro insurance operators would be classified into four levels of local, state, regional and national classes adding that each will have its own minimum capital to be determined by the commission depending on the level of business it handles.

Also, the Deputy Commissioner for Insurance Finance and Admin George Onekhena speaking on the implementation of the Risk Based Supervision said already, some of the work on it have actually been done.

According to him, “We have the corporate governance which the commission has already implemented,, we have the risk management frame work, Market conduct guideline which has been issued what we have to do now is a kind of coming up with road map on implementation plan. We will identify the role of all parties. So the date for implementation of all aspects has been set stretching from education and awareness development of the risk based transition framework, impact assessment, pilot testing and implementation arrangement.

While the entire industry is currently waiting for the full implementation of the regime, insurance underwriters and Reinsurers who are the prime target are jittery about what the full implementation will bring to bear on the way they conduct their business.