Quest for Insurance Sector Recapitalisation

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James Emejo writes that the recapitalisation of insurance sector will be in the overall interest of the economy

The campaign to deepen penetration of insurance services in the country had been on for several years and only became intense with improve regulatory oversight of operators by the National Insurance Commission (NAICOM), the industry regulatory body.
Elsewhere in the world, insurance contributes significantly to GDP and is a major employment generator.

Perhaps one of the challenges of deepening insurance in the country is the eroding confidence in the sector – partly due to non-adherence to good corporate governance by players, their inability to honour contracts and pay adequate and regular claims by some of the operators.

Also, lack of adequate awareness and enlightenment among others posed serious limitations to insurance acceptability in the country. Also, the dearth of attractive and innovative insurance products had remained obstacles.
However, the contribution of the sector to economic growth – currently below one per cent – remains a source of concern to the regulatory body which hope to boost its contribution going forward.

According to the National Bureau of Statistics (NBS), growth of the insurance sector contracted by –16.54 per cent year on year in nominal terms in the third quarter of 2020.
Insurance which is grouped alongside Finance accounted for only about 11.11 per cent of the sector compared to the latter’s 88.89 per cent in real terms in Q3.

According to the third quarter GDP estimates, in real terms however, insurance contracted by 18.67 per cent in Q3.
Finance and Insurance both contributed 2.46 per cent to overall nominal GDP in the quarter under review, lower than the contribution of 3.76 per cent recorded in the preceding quarter.

It has been established among other things that one of the hindrances to the optimal performance of insurance firms is their low capital base which had been eroded over the years considering negative developments in the macroeconomy, lax corporate governance, insider abuses among others – without efforts for additional capital injection.

This situation had resulted in the inability of insurance companies in the country to fund big ticket transactions – and often resulted into insurance refinancing.
It is no news that several big ticket transactions are handled by offshore companies which are better capitalised rather than those operating in the country.

Coupled with the impact of the COVID-19 pandemic which had ravaged businesses and further eroded capital, it was only logical that insurers are encouraged to boost their capital base in their own interest as well as the economy.
The journey towards the recapitalisation of the industry began in January 2017, when NAICOM indicated it would verify the capital resources of all insurance companies operating in the country during the first quarter of the year.

It had explained that the probe became necessary in view of the fact that the business environment and risk profile of the companies had changed since 2007 when the last recapitalisation exercise was conducted.
The apex industry regulator had further explained that the move would further ensure protection of policyholders and beneficiaries of insurance contact against unexpected losses.

In January 2020, the Commissioner for Insurance/Chief Executive, NAICOM, Mr. Sunday Thomas, while announcing the liquidation of two firms, had warned that operators faced stricter supervision in 2020.
He said the commission would enhance its supervisory roles through the strict implementation of rules, the introduction of new reforms and initiatives that are in line with international best practice.

He added that the recapitalisation programme introduced was to boost the development of the sector, stressing that it was “aimed at repositioning the sector for self-actualisation in terms of growth and development. I wouldn’t want to dwell much on this as the paper presenters will be giving us update on this initiative.

“But let me state in clear terms that the recapitalisation process is up and running in line with the roadmap and the commission will see to its logical conclusion.”
NAICOM had in a circular in May 2019, directed insurers to increase in the minimum paid-up capital for insurance and reinsurance companies.

According to the circular, life insurance firms are required to meet a minimum paid-up capital of N8 billion, from the previous N2 billion, while general insurance companies are required to raise their minimum paid-up capital to N10 billion from N3 billion.

NAICOM also raised the regulatory capital for composite insurance from N5 billion to N18 billion, while it increased the minimum capital of reinsurance businesses from N10 billion to N20 billion.
The firms were however, directed to comply with the new directive not later than December 31, 2020 and September 30, 2021 respectively.

However, the commission had in June 2020, approved an extension on the deadline issued to insurance companies to raise their minimum paid-up capital to September 2021.
The recapitalisation deadline had earlier been fixed for December 31, 2020, which became not feasible following the economic disruptions caused by COVID-19.

Insurers were given up till September 30, 2021, to fully recapitalise in a two-phased plan.
NAICOM, had in a circular signed by the Director, Policy and Regulation, Mr. Pius Agboola, extended and segmented the recapitalisation process into two phases.

With this, insurance companies were requested to meet 50 per cent of their minimum paid-up capital for insurance and fully comply with the remaining 50 per cent approved minimum paid-up capital not later than September 30, 2021.

The implication is that instead of insurance and reinsurance firms compulsorily meeting the new capital requirement by December 31, 2020, as stated earlier, the firms were required to provide 50 per cent of the required capital by December 31, while balancing the remaining 50 per cent by September 30, 2021.

However, reinsurance firms were by the new requirement mandated to provide 60 per cent of the new capital by December 2020 and make up the remaining 40 per cent by September 30, 2021.
The commission had also warned that operators that failed to satisfy the required recapitalisation thresholds by the December 31 deadline may be restricted on the scope of business to transact.

But, in a twist to the recapitalisation plan which was expected to revolutionise insurance and put the sector on increased growth pedestal, the Lagos Division of the Federal High Court, on December 21, 2020, restrained NAICOM from taking any further steps in implementing its deadline date for insurance and reinsurance companies to recapitalise.
Justice C. J. Aneke made the order while delivering ruling in an ex-parte application brought before the court by the Incorporated Trustees of the Pragmatic Shareholders’ Association of Nigeria.

The applicant prayed the court for an order of interim injunction restraining the defendant and its agents from taking further steps in the recapitalisation process in the insurance industry pending the hearing and determination of its motion on notice before the court.

The association had argued that in view of the global pandemic, the economic recession and the destruction of public and private property during the #EndSARS protests and the impact these factors had on the businesses of insurance companies, the refusal of NAICOM to rescind the recapitalisation deadlines was an abuse of power and an unreasonable exercise of regulatory powers pursuant to the Insurance Act and the NAICOM Act.

Following the court order, NAICOM had last Friday resolved as a responsible institution, to comply with the court directive by suspending the recapitalisation exercise pending the outcome of the legal proceedings.
The development came at a period when President Muhammadu Buhari had approved policies to modernise insurance practice in the country as well as sanitise the system to boost public confidence.

Thomas had predicted that with the presidential approval will usher in a new era of insurance adding that over time, the commission had been able to achieve some measure of stability and industrial harmony which had threatened its smooth operation prior to his assumption of office as chief executive of the commission.

According to the NAICOM boss: “Nigeria is not by accident the largest economy in Africa, it is not by accident that we have this population and I have been saying this that the population we have in Nigeria is not for nothing, we must take advantage of this population to the benefits of the insurance sector.

“There are lots of initiatives that we are looking at that we believe can fast-track the process and deepen our market. “Of course, it is clear to us today that the digital world will be the driver of business not just business in terms of operation but the digital world will drive insurance regulation and that’s why I started from the fact that our portal is ready.”
If anything, the proposed capital injection will also help insurance firms to deploy technological capabilities to further drive insurance penetration to the nooks and crannies of the society.

According to the commission, insurance penetration currently stood at less than 1 per cent, arguing that with the country’s high population of over 200 million and developing industrial and commercial sector, the potential for insurance business remained significantly high – thus the need for urgent reforms.

It added however, that, “The liquidity position of some of the underwriters is very bad. This is because, heavy investment are made on fixed assets like building, land etc which are impacting on their ability to meet current obligations as they fall due. The capital increase will thus make the company liquid to meet their obligations.”

NAICOM also believed that, “The capital base of an underwriter is of great important. A large proportion of the local risks are presently ceded outside because of low retention capacity. Hence, the increase in capital base would definitely increase retention capacity of the underwriters.”