Why Insurance Sector Recapitalisation Failed


Ebere Nwoji writes on factors that led to the cancellation of the recapitalisation exercise initiated by the National Insurance Commission earlier this year

The National Insurance Commission (NAICOM) on July 25th 2018, rose from its bi-monthly insurers’ committee meeting and announced a new capital base for operators in the sector.
The new capital was then hinged on the magnitude of risks involved in the business each firm wants to underwrite as the commission in the capitalisation system which was risk-based, in place of the compliance base capital system.

Initially, the regulator had given a January 1, 2019, deadline for implementation of the new capital system but later changed the deadline to October 1, 2018.
The change in the implementation date had marked the beginning of trouble as some chief executives who were working towards the January 2019 deadline were thrown them off balance.

Moreso, the use of their financial report for 2017 in measuring each firm’s performance did not go down well with the operators.
The industry employees were gripped by fear of losing their jobs to the extent that even the management staff of firms that fall within tier three level were reportedly making secret move to accept lower positions in bigger companies that measured up to tier two and tier one.

On their part, brokers and members of the insuring public were said to have started withdrawing their policies from small scale insurance firms with lower capital to place them with bigger companies that they feel will make tier one list.
In addition, the shareholders of insurance companies who were irked by the policy, dragged the commission to court to stop NAICOM from implementing the October deadline.

Indeed, the commission was compelled to put the exercise on hold until the final judgement was delivered, which compelled NAICOM to shelve the policy.
However, NAICOM had explained that the policy thrust of the exercise was to enhance the stability of the financial system, introduce proportionate capital that supports the nature of business conduct of insurers and to specify the capital requirement for each tier level based on risk classification for each tier.
It had said there, “will be no mandatory injection of fresh capital by insurers, no cancellation of licences of any operator is anticipated but that it will be subject to solvency control level.”

The commission had also stressed that the exercise was meant, “to open up licencing window to interested investors at higher tier level as well as restructuring of capital resources for improved liquidity and claims settlement in the industry.”
The commission was much disgusted by the court action taken by the shareholder recalling that recapitalisation exercise in the sector has always been characterised by litigations.

The Commissioner for Insurance, Alhaji Mohammed Kari, had noted that this was what kept the industry at its low financial ebb, unlike the banking sector.
He had said the industry needs the exercise at this time to scale up its fortunes.
The Chairman, Progressive Shareholders Association of Nigeria, Mr. Boniface Okezie, agreed with this saying the industry needs to upgrade its capital.
He, however, faulted the timing of the policy.

According to him, the way the commission went about it was wrong as it kept many operators at a cross road.
He also said the policy should not have been implemented now, considering the upcoming elections and the fact that the political environment was not stable to attract foreign investors who would have invested in some of the companies to enable them meet the new capital requirement.

The insecurity situation in the country according to him was another discouraging factor, saying that the fact that many insurance stocks are not attractive, it was not expected that at a time like this, investors would want to stake their funds in the sector.

With this, he described the exercise as a right policy put forward at the wrong time.
Some other shareholders who spoke to THISDAY on the failure of the exercise reasoned similar.
While the debates were ongoing, NAICOM announced the cancellation of the policy.

The commission in a circular titled “Withdrawal of circular on Tier Based Solvency Capital policy for Insurance Companies in Nigeria,” the commission had stated, “Pursuant to the powers conferred by the enabling laws, the commission hereby withdraws and cancels the circular dated August 27, 2018 with reference number NAICOM/DAPCIR/14/2018 and titled Tier Based Solvency Capital Policy for Insurance Companies in Nigeria. This withdrawal and cancellation takes immediate effect.”

This to some chief executive officers was a cheering news and an opportunity for them to put their house in order before the recapitalisation bell rings again.
But in the mist of their joy, insurance firms whose clients withdrew businesses from and taken to bigger firms said the damage has been done as efforts to bring such clients back did not work.

The development call for operators to be embark on self-regulation as long as capital base is concerned.
It also serves as a warning note to the regulator on the need to come up with balanced idea on how to execute the recapitalisation exercise next time.