The National Insurance Commission recently announced a new capital regime for operators of insurance sector. Ebere Nwoji in this report looks at the likely impact on the industry

Eleven years after the recapitalisation exercise that nearly tore the insurance industry and climaxed in removal and jailing of the former Commissioner for insurance, Mr. Emmanuel Chukwulozie, the National Insurance Commission (NAICOM), recently embarked on a fresh recapitalisation exercise.
This new recapitalisation exercise classifies insurance firms into different levels of underwriting, based on their financial capacity.

But the major difference between the former exercise and the recapitalisation directive is that whereas the previous one was compliance-based, the present exercise is based on risk-based supervision (RBS) model.
This 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 that will meet its obligations with respect to the insured.

This becomes effective from January 1, 2019.
The 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 would ride on the solvency supervisory principle in regulating the activities of Nigerian insurance industry operators

According to the commission, the objective of the regulation is to achieve solvency in the industry and to ensure that insurers have enough financial resources to meet their obligations with respect to the insured.
It is also expected 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 RBS with the tier-based minimum solvency capital was adopted in Nigeria after the 2008 global financial meltdown.
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.

RBS 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 risk that pose the greatest threat to financial stability and consumer
The new recapitalisation exercise for the sector classified minimum capital requirement of operating firms in the country ranging from N15 billion, N9billion, N7.5 billion, N6 billion to N4.5 billion, depending on the grade of insurance business each operating firm wants to engage in.

Specifically, under the new capital regime, insurance companies were classified into three tier groups namely- tier-three, tier-two and tier-one operators.
Before now, NAICOM could be said to have prepared the minds of the operators enough to stabilise themselves for the introduction of the recapitalisation.

That is the announcement by the regulator has been greeted with mixed feelings by operators in the industry.
Whereas the big operators who already have adequate financial muscle to play in the hi-tech and capital intensive classes of business like oil and gas and aviation insurance have welcomed the development, the small firms have been uncomfortable with the impending reform.

According to the Director of Supervision, NAICOM, Thompson Barneka, who spoke on behalf of the commissioner for Insurance Alhaji Mohammed Kari, under the new capitalisation system, operators of life insurance whose current minimum required capital is N2 billion and who want to underwrite life insurance business that fall under tier-1 would have to shore up their capital to N6 billion.

Similarly, life underwriters who want to underwrite businesses which fall under tier-2 would have to shore up their capital from the present level of N2 billion to N3 billion, while those who want to underwrite businesses that fall under tier three would need no stress of shoring up capital rather will retain the existing N2 billion.
For non-life operators whose existing minimum capital is currently N3 billion, operators who want to underwrite businesses that fall within tier 1 level which include oil and gas and oil related projects, explorations and production and aviation would have to shore up their capital from the present level of N3 billion to N9 billion.

Those that would underwrite businesses that fall within tier-2, which includes engineering , marine, and bonds credits guarantee and suretyship insurances would have to upgrade their capital from the present level of N3 billion to N4.5 billion while those that wish to underwrite businesses that fall within the tier-three level which include fire, motor, engineering, general accident and Agric policies would remain within the minimum N3 billion capital.

For composite insurance firms consisting of insurance firms underwriting both life and non life businesses, those under tier one level will have to increase their capital from the present level of N5 billion to N15 billion, those in tier two level will move up from N5 billion to N7.5 billion, those on tier three would remain on N5 billion capital.
The commission said the essence of the new capital classification was to encourage insurance firms specialise on businesses and risks level they have the capital capacity to underwrite and leave those businesses they do not have the financial capacity to underwrite.

The commission said in spelling out the new minimum capital, it has not called for raising of capital from the capital market by insurance companies rather it expects firms to limit themselves to risks they have the financial muscle to carry and for mergers among the operating firms.
Commenting on the development, the Managing Director Leadway Assurance, Mr. Oye Hassan- Odukale, commended NAICOM for the exercise, saying it would help to restructure the market in a way that insurers can choose which part of the consumer segment is best served based on the capital they have.

Hassan-Odukale, who is also the Chairman of the Sub-Committee on Publicity and Communication of the industry’s Insurers’ Committee, stated that with the exercise, restructuring, insurers do not have to be compelled to increase capital to underwrite risks that stress their capital without delivering commensurate returns to capital providers/shareholders.
He added that the restriction would foster the emergence of players with capacity to become retail specialists or become specialist underwriters of big-ticket risks in critical sectors of the economy, such as the aviation and oil & gas, whilst accelerating the growth of the industry and its contributions to the Gross Domestic Product (GDP) of the country.

Hassan-Odukale added, “I am confident that it is an initiative with potential upside for the industry to grow and take its rightful position as a formidable contributor to our national economic activities, growth and development as it is in developed economies.”
Industry watchers said for the insuring public, the capital classification is for good as it will reduce instances of unpaid claims and ensure financial inclusiveness in insurance as more Nigerians will be accommodated in insurance service delivery.

Most importantly, they believe there was every likelihood that it would improve claims payment by insurance companies.
Apparently, insurance companies will now be limited to underwrite only the risks they have the financial muscle to bear and when claims arise from such risks, they will be very much on ground to indemnify the insuring public.
Currently, some of the claims being repudiated by insurance firms are due to lack of adequate funds to carry such risks as such when claim comes the insurance firm will find a way not to pay the claim.

Industry analysts also believed the tier-based capital would compel insurance underwriters to remodel their tools to meet their customer desires. It would also deepen insurance penetration as underwriting firms who will not be able to meet capital that will enable them play in the corporate and public sector business arena will come down to the level of retail and micro insurance which the regulator has been crusading for.

The implication is that licences for micro insurance which the regulator has been waiting for subscribers to pick up will now be scrambled for by underwriting firms with less capital.
These set of underwriters will be able to penetrate the grass root with low cost insurance products that will suit the needs of the masses.

Over the years, insurance operators have concentrated their marketing efforts in the cities and towns, leaving the rural dwellers who need insurance most to bear their risks ignorantly.
The new capital requirement would compel insurers to locate these rural dwellers with cheap insurance products that will address their needs.

In addition, the new capital regime would inspire insurers to double insurance awareness creation efforts as retail insurance distributors would be compelled to stage enlightenment campaign to sensitise the public on the benefit of insurance in their day to day living.

This would increase patronage of the industry and increase the sector’s contribution to the GDP of the economy.
It is now onerous on NAICOM to ensure that no insurance firm falls by the wayside rather those with lesser capital should be encouraged or where possible be compelled to switch over to micro insurance level and help to popularise insurance in Nigeria so that the industry would move from the present level of 0.6 per cent contribution to the GDP to at least three percent as projected by a former Commissioner for insurance Mr. Fola Daniel.