Journey Towards Insurance Sector Recapitalisation

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Obinna Chima writes that ongoing efforts to beef up the capital base of firms in the insurance sector is a step in the right direction

With about eight months to the June 2020 recapitalisation deadline stipulated by the National Insurance Commission (NAICOM), operators in the sector have been making efforts to scale the hurdle.

The Nigerian insurance sector has been largely described as one of the weakest links in the country’s financial sector.

This has been mostly attributed to the low capital base of operators in the sector. That is why analysts have expressed optimism that the directive by the industry regulator would enhance performance, bring about efficiency, innovation, stability and make firms more profitable.

They also opined that it would result to an increased contribution by the insurance sector to the nation’s Gross Domestic Product (GDP) and make them handle big ticket transactions.

Earlier in May, NAICOM had re-introduced its recapitalisation plans following suspension of an earlier plan communicated last year.
The new capital requirements stipulates that life insurance to firms have a minimum paid up capital of N8 billion, from N2 billion previously; while firms who engage in general insurance business would now have a new minimum paid up capital of N10 billion, from N3 billion previously.

In addition, composite insurance firms would now have a new regulatory capital of N18 billion, from N5 billion previously, while reinsurance businesses are now required to have a minimum capital of N20 billion, from N10 billion previously. The new capital requirements apply to all insurance and reinsurance firms in Nigeria other than takaful operators and micro-insurance companies.

According to data from NAICOM, there are 59 registered insurance companies in Nigeria with 24 of them listed on the Nigerian Stock Exchange.

Despite various reforms and two phases of recapitalisation in previous years aimed at increasing penetration, the insurance industry in Nigeria can still be considered nascent, with Insurance penetration of just 0.3 per cent and contributing a paltry 0.54 per cent to total GDP as at the second quarter of 2019.

Analysts at Lagos-based CSL Stockbrokers Limited, noted that reasons for the poor development of insurance in Nigeria include low capital base, resulting in multinationals insuring their assets offshore as the capital base of local insurance companies are inadequate to carry their risks; cultural factors, a high level of illiteracy, a high rate of unemployment and inability of some insurance firms to meet claims engendering a lack of trust from the public.

Journey So Far

A recent report disclosed that NAICOM has approved the recapitalisation plans of 26 insurance companies in a bid to meet the deadline.
Announcing the result of its review of the work plans, the commission stated that out of a total of 57 insurance firms and two reinsurance firms in the country, 47 insurance firms and two reinsurance firms had submitted their plans. It also stated that out of the 57 insurance firms, 26 insurance firms got it right and could go ahead with their recapitalisation plans.

However, it stated that 17 insurance firms with defective work plans were corrected and advised to re-submit new plans using paid-up capital and not shareholders’ funds in recapitalising. Four insurance firms did not have the requisite 2018 financial statements and were advised to review their plans of using initial public offer (IPO) to raise funds.

One insurance firm, however, has litigation issues and has been advised to resolve them as soon as possible to enable it to progress in the exercise; while one company’s submission was noted to have met the necessary requirements.

NAICOM added that two companies’ submissions were still undergoing review, while three firms were yet to submit their recapitalisation plans.
Another three companies were under receivership, while the two reinsurance companies have submitted their reports which are also under review.
Speaking on behalf of the Acting Commissioner for Insurance, Mr. Sunday Thomas, NAICOM’s Head Commissioner for Insurance Directorate, Rasaaq Salami, said in keeping with the recapitalisation roadmap, the commission had concluded the review of the submissions and had communicated individual companies on their positions.
He stressed that NAICOM’s resolve to adhere to the recapitalisation roadmap towards achieving its desired objectives in the best interest of all stakeholders

“Further to the circular issued by NAICOM on May 20, 2019 increasing the paid-up share capital of insurers and reinsurers in Nigeria and, the subsequent directives to companies to submit their recapitalisation plans by August 20, 2019, the commission hereby notifies all insurance stakeholders that it received plans of 47 insurers and two reinsurers,” he added.

Analysts’ Prediction
A report by Coronation Merchant Bank Limited (CMB) has predicted that the ongoing recapitalisation in the insurance sector will reduce the current number of companies operating in the industry from 59 to about 25.
The bank stated this in its latest report on the Nigerian insurance industry titled: “From the Lagoon to the Ocean.”

“They are likely to reduce, in our view, the number of Nigerian insurance companies from 59 to a figure around 25.
“Higher capitalisation increases underwriting capacity and the potential exists to roll-out a much bigger industry than currently exists.
“So far, Nigeria’s insurance industry has lagged its other financial services. Conditions have not been helpful for growth. Experience from other markets, particularly in Asia, suggests three remedies,” it stated.
The bank, which did a comparison between the ongoing recapitalisation in the sector with what took place in the banking sector in 2004, noted the close parallels with the then banking reform.

“The banking industry grew rapidly after that, so the question is how the insurance industry can grow after 2020. In the meantime, there will be capital raising and mergers and acquisitions (M&A),” it stated.
According to the report, Nigeria’s insurance sector presents perhaps the most remarkable investment case of any industry in Nigeria.
It noted that insurance penetration, at 0.31 per cent, was extremely low, even compared with countries with similar Gross Domestic Product per capita.

“For example, India’s insurance penetration is at 3.69 per cent. Experience in other countries shows that in the right conditions, insurance can be rolled out to India’s level in eight to 10 years.

“So, Nigeria could go from 0.31 per cent penetration to 3.69 per cent penetration in 10 years.
“Is this far-fetched? Note that our investment case does not require Nigeria to become any richer. A 10-fold increase in real terms over 10 years means a real-term compound annual growth rate (CAGR) of 25.9 per cent. Nigeria has seen this happen before.

“This is the same CAGR achieved in gross customer loans by Nigeria’s banks (actually, 27.9 per cent) in the five years after the banking reform of 2004.
“To take a more modest and recent example, the real-term CAGR for total assets under management in Nigeria’s pension funds was 9.8 per cent 2008-18, or 155 per cent growth in real terms over 10 years.

“Nigeria is no stranger to financial services development,” it stated.
The report added that the banking reforms of 2004 imposed steep new capital requirements and reduced the number of banks from 89 to 25.
Therefore, it predicted that insurance reforms in 2019, and due for implementation by June 2020, also imposes steep new capital requirements.

Shedding more light on the report, Head, Coronation Research, Guy Czartoryski, said the Nigeria’s insurance industry had not shared in the growth experienced by other Nigerian financial services, notably banks, pension funds and mutual funds.
He stressed that the sector has hardly grown in real terms over 10 years, adding that without scale, the industry suffers from poor returns on equity.

“Yet its smallness is also its opportunity.
If it were to grow to the level reached by countries with similar GDP per capita, it might grow by a factor of 10 times in real terms in eight-to-10 years.

“The technological infrastructure and data necessary for expansion are largely available.
“Lessons learned in Asian markets, and also in West Africa, show how insurance can be rolled out to tens of millions of customers. Cooperation between regulators is critical, as are distribution partnerships with banks and telecom companies.

“Fresh capital is necessary for development, but a fresh strategic approach is required to reach the industry’s potential,” Czartoryski added.
Commenting on development in the industry, the President, Nigeria Council of Registered Insurance Brokers (NCRIB), Mr. Shola Tinubu, advised operators to embrace mergers, and bring up new ideas and solutions to their operations. According to Tinubu, not more than 50 per cent of the existing firms would scale the reform.

According to him, already, discussions on mergers were ongoing among the firms for possible mergers.
“Some of them do not want their merger talks to leak now so that it will not fail,” he added.

Tinubu, stressed that any company that does not meet the new capital requirement would lose its licence.
On their part, analysts at CSL Stockbrokers, stated that meeting the new capital requirements means, “that we will begin to see a wave of mergers and acquisitions and capital raising efforts among players in the industry.

“If these new capital levels will result in significant growth in the industry however remains to be seen.”
Generally, it is believed that the exercise would be positive and lead to a strong, competitive and responsible insurance sector.