Redefining Insurance Industry Growth Pattern through Tier-based Solvency Capital

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The tier-based minimum solvency capital increase recently introduced by the National Insurance Commission (NAICOM) is deemed on ideal regulatory instrument to improve poor performance and low level of growth and development of insurance industry, writes Ebere Nwoji

The tier base minimum solvency capital for insurance industry in Nigeria announced by the National Insurance Commission(NAICOM) on July 25, 2018, has at the initial stage of its pronouncement set the industry on edge as operators reacted differently to it, especially the sudden change in its implementation deadline.

But the latest information and explanations from the regulator seems to have proved that the much ado about the initiative is borne out of misconception and urge to resist change which both the regulator and economy analysts said is inevitable if the industry must surpass its current level of growth and development.

NAICOM had in July 25 announced the upgrading of minimum solvency capital of insurance companies from minimum of N2billion, N3billion for life and non-life companies respectively to a new levels according to the weight of risk each operating firm has decided to bear.

The commission had said in line with the tier base capital system, life underwriting firms that want to be on tier one should upgrade their capital to N6 billion from the current level of N2billion while those that want to be in tier two should upgrade to N3 billion, those on tier three should remain at N2 billion.

For non life firms, those on tier one should provide N9 billion while those on tier two should provide N4.5 billion and those on tier three should provide N3 billion.

For composite firms, those on tier one should provide N15 billion, tier two N7.5 billion while tier three should remain at N5 billion.

The Commissioner for Insurance, Mohammed Kari,in his explanations on the tier base capital initiative at both recent media retreat organised in Abuja by NAICOM and insurance professionals’ forum organised in Abeokuta by the Chartered Insurance Institute of Nigeria had succeeded in making the operators see the need for the exercise.

Before the above two fora, though NAICOM had since over a year ago been preparing the operators’ minds on the capital increase, which it has time without number told them that it will be part of the globally accepted Risk Base supervision model of regulation it introduced against the compliance based model, the operators have since the announcement, been in a very big state of dilemma due to fear of being unable to meet the minimum capital.

Their fears mainly centered on the classification of their firms according to available capital especially tier three firms who presumed that the exercise would see their end as no one would want to do business with them any more.

But just recently, NAICOM has come up with a clear explanation on its latest minimum operating capital policy, which currently leaves no body in doubt on the fact that the initiative is for the good of both the operators, the insuring public and Nigeria as a country.

Amidst agitation for extension of the deadline for the implementation and perhaps change of the tier-based system by some operators,Kari at the media retreat took time to explain the fact that increase in capital base of insurance industry in Nigeria is overdue, if the industry must scale up from its current position as poor cousin of bank to a more productive industry.

At the professionals’ forum, he also took the operators down memory lane on the history of insurance industry and recapitalisation exercises.

He reminded them that in the early 80s, insurance companies owned about three banks in Nigeria, but while the insurers were busy parading the corridors of various courts in protest of capital base increases effected by the regulator at that time, the banking industry quietly and peacefully carried out a major increase in capital base that today saw even the weakest bank in Nigeria having minimum of N25 billion whereas insurance operators still maintained N2 billion and N3billion minimum capital base for life and nonlife operators respectively.

He recalled that when the industry’s capital,

base was increased to the present level in 2005 from the hitherto N200million and N300 million levels for life and non life respectively, operators instituted legal action that held the industry to a stagnant position for two years precisely from 2005 to 2007.

Insisting that the global financial system and the world itself is running faster, Kari insisted that the industry needed to move forward to be able to meet others globally.

He said part of this forward movement required that there must be change in the old ways of doing things.

He said the effort to ensure that such change was not meant to see death of operators,the regulator had come up with the tier base minimum capital increase so that instead of going out of business or defrauding the public by carrying risks they are not strong enough to carry,operators should restrict themselves to only the risks they have the financial capacity to carry and leave the big ones to big and financially viable operators that have the capacity to do them.

The end result is for the operators to be in better position to pay genuine claims when they arise.

Kari said the tier-based minimum solvency capital had been structured in such a way that it will engender even distribution of insurance services to Nigerians at all levels.

He said the tier-based system will decentralise the activities of insurance operators, which has 90 percent concentration on cities and absence in other parts of the country.

He said with the tier-based system, the regulators will ensure that every insurance company has branches in various states of the country.

He said it will be structured in such a way that for an insurance company to get business from any state, it must have a branch in that state.

This, he said, was to promote retail insurance which is the engine of growth of every sector, make Nigerians patronise the industry,put more money in operators’ pockets and ensure that the sector contributes significantly to the GDP of the economy.

Currently, insurance contributions to the GDP is less than one percent, the gross premium of the industry as at last year is less than N400 billion against the N1trillion target set by the regulator five years back.

Indeed, Nigeria is one of the few African countries, whose insurance sector suffer law patronage by its citizens.

From observers’ point of view, insurance sector in Nigeria has not been doing well due mainly to a number of factors among which obviously is low financial capacity to handle big ticket businesses.

THISDAY, recently, reported that as a result of the operators’ low financial capacity, foreign insurers are cornering big ticket businesses to themselves especially in hi-tech and capital intensive businesses like oil and gas and aviation insurances.

This therefore positioned insurance sector as a major source of outflow for foreign exchange.

The CEO of Aero Contractors, Captain Ado Sanusi, recently told THISDAY in an interview that one of the reasons Nigerian airlines prefer to insure their aircraft with foreign companies was because of capacity.

He explained that the local insurance companies did not have the capacity and that was why it took a bit longer time to pay claims when they come.

According to Sanusi, the local market is not ripe to wholly and fully insure aircraft, saying there is no reason for indigenous insurance operators to attempt carrying risks they cannot handle.

According to him, this explains why the local insurance companies re-insure risks with international companies so that the foreign companies that have the capacity could support them in carrying the risks.

“You cannot insure your aircraft locally when you know that the local market does not have the capacity to carry the risk.

“For example, if you buy your aircraft for $100 million and you have three aircraft acquired at that price, which is $300 million, and you want to insure them locally, can the market carry the risk?

“This is why airlines insure with international companies, not because we don’t want to insure with local insurers. If you insure outside, you are exposed to the Asian market, the European market and the US market and the risk is shared with re-insurers and when there is compensation, it would be easy to pay claims.

This is a shared risk,” Sanusi said.

Those in the oil and gas business sound the same tune raising the question on how long will the industry continue to meddle with this low capital syndrome .

Worried by this, the new Chairman, Nigeria Insurers Association(NIA), Mr Tope Smart, recently lamented the backwardness of insurance industry among other sub-sectors of Nigerian Finance services sector.

Therefore, he vowed to raise the banner of the industry during his tenure as NIA Chairman.

“The Nigerian Insurance Industry is a key component and an important member of the Nigerian financial services sector. Insurance as we all know is the bedrock of any economy. In Nigeria, it is rather sad to note that not all have embraced this concept. This is why the penetration rate still remains about 0.5 per cent as against some other African Countries such as Kenya and South Africa with penetration levels of 2.9 per cent and 14 per cent respectively,” he stated.

The Managing Director/Chief Executive Officer, Leadway Assurance Company Limited, Mr. Oye Hassan-Odukale, said the tier-based capital increase was good for the industry.

Hassan-Odukale, who is also the Chairman of the Sub-Committee on Publicity and Communication of the insurance industry’s Insurers’ Committee, said he believed the introduction of the risk-based capital in Nigeria will help to restructure the market

He said with the regime, insurers could choose which part of the consumer segment (retail, commercial or industrial) is best served based on the capital fund that is available to it.

He stated that with the new development,insurers did not have to be compelled to increase capital to underwrite risks adding that the restructuring will 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.

The Leadway Assurance boss also expressed his confidence in the initiative stating; “The news of NAICOM’s introduction of TBMSR is a positive one. 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.

“It is high time we move beyond the 0.3 per cent contribution to GDP and improve our ranking within the comity of African insurers (heavily dominated by South Africa) as measured by the African Insurance Barometer.

Overall, we should expect an improvement in the capacity and reputation of the industry on the back of unwavering market discipline, improved claims settlement, stronger local retention, increased prudence and promotion of appropriate pricing,” he added.