Insurance Sector Recapitalisation and Dilemma of Building Virile Industry

Commissioner for Insurance, Alhaji Mohammed Kari.

Recent events trailing the proposed increase in the minimum paid-up share capital for the insurance sector, especially with the National Insurance Commission (NAICOM), the regulator, and the operators, continually in disagreement, may set the industry backward, reports Ebere Nwoji

The National Insurance Commission (NAICOM), on May 20th, 2019, announced 400 per cent increase in the minimum paid-up share capital of insurance and reinsurance firms.

The development is coming 10 months after it announced its failed tier base minimum solvency capital increase. The commission, unlike in the tier base capital increase, gave the operators one-year time frame to comply with the new capital regime.

It, however, said for new entrants into the business, the increase is with immediate effect.

Since the announcement, industry operators, stake holders and industry watchers have not ceased to comment and express their feelings on the development.

Shareholders of the industry were the first to express their ill -feelings on the development. In their usual way of attacking and accusing the regulator of wanting to strangle the industry to death using its regulatory instruments, the shareholders, at the annual general meeting of one of the insurance firms held in Lagos  rained abuses on NAICOM’s management questioning where the commission thinks the firms would raise the money from since it is obvious that Nigerian investors are not interested in investing in insurance stocks.

The shareholders accused NAICOM of a plot to sell the entire industry to foreign investors and wipe out local investors.

They challenged operators to confront the regulator and make it clear that they will not be able to raise the stated capital.

Going by the new capital regime,  Life Insurance underwriters  with  minimum paid up share capital of  N2billion, will hence forth shore up to N8billion. General Business underwriters, will shore up their existing N3billion to N10 billion.

Composite insurance firms, that is, firms underwriting both Life and General business will increase from the current N5billion level to N18 billion, while reinsurance firms, will move from N10billion to N20billion.

The commission said the new capital regime takes effect from June 30, 2020 for existing insurance and reinsurance firms but with immediate effect for new firms entering into the business.

As earlier stated, the capital increase has, since its announcement, kept the industry operators unease mainly due to the high margin of the increase.

Employees of the industry are afraid that they will lose their jobs ,  most operators are jittery that  since their companies cannot stand alone, they will lose their identity,  if their companies go into merger with a stronger  company, just as shareholders have expressed fears that their money will go down the drain should anything happen to their companies on account of the exercise.

But on its part, NAICOM is much more interested in building a virile and robust insurance sector that is capable of  underwriting higher risk and paying claims when  those risks crystalise .

Indeed, NAICOM wants a shift from the present situation in which most risks are taken abroad due to lack of capacity by local firms .

Over the years, NAICOM has been struggling to build a world class insurance industry that is strong enough to underwrite most capital intensive businesses that  have over the years been taken abroad due to lack of capacity by the local insurers. The commission is also interested in scaling up the status of insurance sector from its present level  of less than N500billion annual premium generation, less than 1 per cent contribution to the GDP of the economy as well as less that 0.4 per cent penetration. This is  despite the industry target, set in the past one decade, of transforming  to a trillion naira market that contributes at least three per cent to the GDP with  four per cent level of penetration, while creating at least 50,000 jobs for the economy.

The commission actually set this target since 2009 through its medium-term Market Development and Restructuring initiative(MDRI) plan.

NAICOM, from recent comments by the Commissioner for Insurance, Alhaji Mohammed Kari, is no longer comfortable with the situation whereby inflation rate has increased cost of most properties the sector insures, but there is no corresponding increase in the capital base of operators  and their pricing system.

He lamented that the industry last witnessed increase in their operating capital 12 years ago, arguing that inflation rate in the past 12 years in the country has more than tripled  and no single good in the country is today sold at the same price it was sold in the past 12 years.

Kari also regretted that each attempt to increase operating capital of insurance operators in the country had always been greeted with court litigations and resistance from operators whereas banking industry operators had effected recapitalisation up to five times since then.

This, according to him, has been responsible for the industry’s retarded growth.

“Their resistance to change is what has kept the industry where it is today and if it continues, the industry will not catch up with other sectors of the economy. Insurance has remained the only growth area in the economy. Whereas others have grown, insurance sector, vis-a vis population is not making the expected impact to the economy. There is no way, but to grow,” he said.

Kari explained that the present capital base of operators compared to the level of risk they bear has exposed most operators to overtrading, adding that, this, last year, compelled the commission  to stop some companies from doing certain classes of businesses because they were over-trading.

“Anytime we discovered that any company is exceeding its capacity, we stop him. We have been doing it, we only made it public this time,” Kari said.

Recently, the president of Nigerian Council of Registered Insurance Brokers, Mr. Shola Tinubu ,painted a picture of financial status of the industry in relation to inflation rate in the country and increase in prices of goods and properties they insure as well as the consequences to the industry saying, “during and after the naira devaluation three years back, precisely June 2016, while  business operators in other sectors of the economy up-scaled their price rates to be in tune with naira value, insurance operators for fear of losing businesses due to hardship experienced by the Nigerian business community coupled with the fact that by its position as the last item in the  scale of preference of consumers  that could easily be scrapped out in time of scarcity of resources, failed to effect necessary upward changes in the premium rates.” According to him, some underwriters, rather than increasing their rates, decreased to dance to their customers’ tune and  retain such customers.

Tinubu said now that risks from such businesses were crystallising and the underwriters were expected to pay claims at the prevailing rate of value of naira, most insurers had been left struggling to pay claims. He said this was part of the reason  Nigerian insurers seem not to match their counterparts in other climes.

The NCRIB president, however, said insurers were to be held accountable for the situation  because they supposed to set their pricing right while customers should adapt to such prices.

Obviously, the current situation in the industry has spelt the need for two actions to be taken in the industry .

First is the obvious need for increase in the capital of the sector as the regulator has done so that the present situation in which, according  to statistics, the industry loses average of N2.8 trillion annually to foreign insurers due to lack of financial capacity to handle high technical and capital intensive businesses will stop and such huge fund channeled to indigenous operators’ coffers.

But industry analysts said in doing this, the regulator should exercise caution not to use the capital increase instrument to regulate many firms out of business or transform the entire industry to foreign-based industry where indigenous investors will have no base.

According to them, with the present geometric system of capital increase announced by the commission, what is likely going to happen, if not reconsidered is that foreign investors from Asian countries will highjack the industry and as is their business culture, capital flight will be the order of the day in the industry.

This, in their views, has spelt the need for the operators and the regulator to meet over the capital increase and arrive at an agreeable level.

The analysts suggested that contrary to the present margin of 400 per cent capital increase, 200 per cent increase would suffice while in the next three to five years, the operator would be going for a fresh round of increase.

According to them, what often generates controversy in capital base increase in the industry is obviously high margin of increase and short period often given by the regulator for implementation.

The regulator, according to the analysts, should realise the fact that any policy that does not encourage job creation rather induces job loss should be reconsidered in most appropriate way that will reduce the rate of job loss at least in the interim especially in developing economies like Nigeria, to avoid sporadic increase in social vices.

They therefore insisted that NAICOM should do well to constitute a meeting with the industry operators on the reduction on the level of increase .

They said on their part, the operators should help themselves by accepting mergers and acquisitions in order to allow greater number of firms remain in business.

The operators, they said should henceforth build a progressive industry through appropriate pricing by restricting themselves to charging of official premium rates instead of the present situation in which some operators in their voracious quest for business give rate as low as one per cent against the 10 per cent official rate so that they will be in better position to pay claims on  such businesses when the claims crystalise.

The brokers they said should endeavor to help in this aspect because they are the ones pressing hard for the unprofessional rates in order to please their clients and at the same time, they want to get quick and appropriate claims from the underwriters from such low-priced policies.

The industry, on its part, should intensify efforts on  its ongoing insurance rebranding project to popularise insurance and tap the opportunities in the retail insurance segment.

Shortly after the announcement, the Managing Director of Consolidated Hallmark Insurance plc, ,Mr Eddie Efekoha, who is also the immediate past chairman,  Nigeria Insurers Association(NIA), the umbrella body of insurance underwriters, had said the industry would constitute a meeting with the regulator to plead for  reduction on the margin of  increase since the operators could not fight the regulator as requested by the shareholders. THISDAY gathered that the regulator and some operators  did not turn up .

Going by the present financial status of the operating firms, if the regulator vehemently decides to go ahead with the present level of 400 per cent increase, not more than 10 insurance firms will make the list of existing firms. The option left for the industry now is to embrace mergers, acquisitions and dilution of ownership structure through foreign capital injection.

But the problem in mergers and acquisition according to a management staff of one of the insurance firms is that one year is too short to consummate such marriages. Direct foreign investors take over of the industry is the remaining option, but again there is the problem of its accompanied capital flight which will  apparently drain the economy.