Need for Uninterrupted Recapitalisation Exercise in Insurance Sector

There has not been any successful recapitalisation exercise in the insurance industry over the years. Past attempts to have such a comprehensive process were fraught with controversy. Ebere Nwoji writes that successful recapitalisation will boost the capacity of the sector.

Past and present moves by insurance industry regulatory authority, the National Insurance Commission (NAICOM) to upscale the minimum operating capital of insurance firms for the purpose of building a stronger and virile insurance sector have severally been marred by resistance and opposition from the industry operators. The resistance, often emanate from operators whose firms lacked the wherewithal to meet the new capital regime. This development has happened many times under different regimes in the Commission. Indeed, recapitalisation exercise in Nigerian insurance sector has always been greeted with controversies that often end in court injunction that eventually put the exercise on hold. The result of lack of successful recapitalization exercise is that the insurance industry has small firms with weak financial base and lack the ability to pay claims. Past recapitalisation initiatives started way back in 1997, during the regime of the late Oladipo Bailey, as the Commissioner for Insurance. Industry stakeholders opined that the recapitalisation exercise embarked upon by NAICOM at that time met the worst and most pronounced resistance to the extent that the entire insurance industry was enmeshed in several court cases.

Legal Tussle

These legal tussles were instituted by various arms of the industry against the regulator under the Nigeria Insurers Association (NIA) as the umbrella body of Insurance underwriters, the Nigerian Council of Registered Insurance Brokers (NCRIB), then known as Nigeria Council of Insurance Brokers, the Institute of Loss Adjusters of Nigeria (ILAN), the Chartered Insurance Institute of Nigeria (CIIN), which is the educational arm of the industry. These bodies filed one case or another against the regulator. In recent times, the resistance has shifted from the umbrella bodies to individual companies.

This negative trend has continued even up to the present time, raising the question on whether the industry cannot afford to have a peaceful, smooth and controversy-free recapitalization exercise that is devoid of opposition and litigation. Industry analysts, on account of this, described the insurance sector as the most unserious industry that prefers to maintain its age-old position as poor cousin of banking sector.

Capital Flight

Industry analysts also argued that this was why the sector has continued to suffer capital flight and noted that most high -tech and capital-intensive risks from key sectors like oil and gas as well as aviation sectors are insured abroad despite the local content law of the federal government because of low capitalisation of most insurance firms. Industry observers have remarked that the prevailing low capital of most firms cannot allow operators of these capital-intensive businesses to willingly place their core businesses with local insurers.

They prefer to take them abroad at even higher costs.

Efforts of the Regulator

Against this backdrop, every regime in NAICOM has made efforts to make the industry overcome the low capital syndrome of many of the insurance companies, but till date opposition still mounts and has insisted that the low capital status quo must remain. Records show that after the 1997 exercise led by Chief Bailey, which reduced the number of insurance firms in the country from 129 operating firms to about 79, came the sec¬ond wave of re¬cap¬i¬tal¬i¬sa¬tion in 2003, un¬der the regime of late Chief Em¬manuel Chuk-wu¬lozie as Com¬mis¬sioner for In¬sur¬ance. He in¬creased the cap¬i¬tal base of in¬sur¬ance firms from N70 mil¬lion to N200 mil¬lion and N150 mil¬lion for gen-eral and life un¬der¬writ¬ers re¬spec¬tively. The ex¬er¬cise then led to his sus¬pen-sion and re¬moval and he later ended be¬hind prison bars due to se¬ries of al¬le¬ga¬tions. Then came Mr. Fola Daniel who con¬cluded the ex¬er¬cise and later su¬per¬vised a fol¬low up ex¬er¬cise that saw the in¬dus¬try’s min¬i¬mum cap¬i-tal in¬creased to N2 bil¬lion for life un¬der¬writ¬ers, N3 bil¬lion for gen¬eral busi-ness and N5 bil¬lion for com¬pos¬ite firms as well as N10 billion for reinsurers and that was in 2007. The exercise reduced the number of operating firms to 57 insurance companies and two reinsurance firms making them 59 firms.

Since then, NAICOM, as a reg¬u¬la¬tor through the com¬mis¬sion¬ers for in¬sur¬ance has been try¬ing to raise the in¬dus¬try’s cap¬i¬tal to match inflation trends and the level of risks com¬ing the way of operators but to no avail.
Industry observers also said that each attempt had witnessed strong op¬po-si¬tion from the op¬er¬a¬tors and the share¬hold¬ers and this ob¬vi¬ously was one of the rea¬sons the im¬me¬di¬ate past Com¬mis¬sioner for In¬sur¬ance, Al¬haji Mo-hammed Kari, lost his chance of hav¬ing his ten¬ure re¬newed.

Tier Base Capital

Kari, who was the for¬mer Man¬ag¬ing Direc¬tor and Chief Ex¬ec¬u¬tive of¬fi¬cer of the hith¬erto fed¬eral gov¬ern¬ment owned NICON In¬sur¬ance Cor¬po¬ra¬tion knew the dan¬ger of small firms with low cap¬i¬tal op¬er¬at¬ing in the sys¬tem and un-der¬writ¬ing huge busi¬ness tick¬ets which claims they can¬not pay.

He there¬fore came up with the Tier Base Cap¬i¬tal in­crease, through which he clas¬si¬fied the op¬er¬a¬tors in terms of cap¬i¬tal base into tier one, tier two and tier three.

But this was along the line kicked against by some op¬er¬a¬tors who allegedly in¬sti¬gated their share¬hold¬ers to head to court. Once more, this saw the sus-pen¬sion of the ini¬tia¬tive.

With the tier base capital model, each operating firm was to concentrate on underwriting of only the businesses it has the financial muscle and human capital to underwrite and be in position to easily pay claims emanating from such class of business when the risk crystalises but this was again resisted by the operators.

Industry insiders said part of their reasons for opposing the tier base capital model was that companies which fall within tier three will be regarded by the insuring public as poor operators and that since NAICOM did not set bounds on tier one and tier two operators on their limit of operations in terms of classes of businesses to underwrite and those they should not venture into, they will stand as predators to tier three firms and will as such chase them out of business.

With this reason, some operators were said to have colluded with their shareholders and got court injunction to compel the regulator to suspend the exercise.

Share Capital Increase

After this, Kari, in ap¬par¬ent move to weed out those small op¬er¬a¬tors whose in¬ter¬est he tried to pro¬tect by com¬ing up with the tier base model, later instituted the in¬crease in share cap¬i¬tal model which saw over 300 per cent in¬crease in op¬er¬at¬ing cap¬i¬tal of firms.

Thus the increase in share capital model upgraded minimum capital of general business underwriters from N3 billion to N10 billion, life underwriters from N2 billion to N8 billion, composite underwriters, that is those underwriting both life and general business from N5 billion to N18 billion and reinsurers from N10 billion to N25 billion.

This brought an up¬roar among the op¬er¬a¬tors and their share¬hold¬ers who again headed to court and in the process, Kari’s first ten¬ure elapsed and be¬cause of sev¬eral neg¬a¬tive re¬ports by op¬er¬a¬tors on his high¬hand¬ed¬ness, his ten¬ure could not be re¬newed, a de¬vel¬op¬ment that led to his exit.

Industry observers said that if the share capital model were allowed to stand, the number of operating firms would have been reduced from 57 to 20.

Currently there are a total of 65 insurance and reinsurance companies in the country. They exist in the following order: 31 General business underwriting firms, 17 life insurance underwriting firms, 10 composite firms, four Takaful firms and three Reinsurance firms. But there are indications that not all of them are healthy today.

When the present Com¬mis¬sioner for in¬sur¬ance, Mr. Sun¬day Thomas came on board, there was much ju¬bi¬la¬tion among in¬dus¬try op¬er¬a¬tors who saw him as a home breed that is fa¬mil¬iar with the ter¬rain, hav¬ing been the Direc¬tor Gen¬eral of the umbrella body of underwriters the Nigeria Insurers Association (NIA).

Thomas tried to live up to their ex¬pec¬ta¬tion by shift¬ing the dead¬line for the pend¬ing re¬cap¬i¬tal¬i¬sa¬tion ex¬er¬cise from June 30, 2020 to De¬cem¬ber 31, 2020.

After the out¬break of COVID-19, he di¬vided the ex¬er¬cises into two phases, say¬ing firms should pro¬vide 50 per cent of the re¬quired cap¬i¬tal by De¬cem¬ber 31,2020, while mak¬ing up the bal¬ance of 50 per¬cent by De¬cem¬ber 31st 2021.

Sur¬pris¬ingly, some op¬er¬a¬tors and their share¬hold¬ers still went to court to ob¬tain in¬junc¬tion stop¬ping the De¬cem¬ber 31, dead¬line for com¬ple¬tion of first phase of the re¬cap¬i¬tal¬i¬sa¬tion and sus¬pend¬ing the ex¬er¬cise.

Their ma¬jor rea¬sons were that NAICOM should al¬low ad¬mis¬si¬ble cap¬i¬tal in form of fixed as¬sets to count as part of the cap¬i¬tal. They also said the Com-mis¬sion should take into con¬sid¬er¬a¬tion, the ef¬fect of the pan¬demic and the #ENDSARS protest.

Managing the Situation

Informed source disclosed that be¬fore now, NAICOM, had been man¬ag¬ing the sit¬u¬a¬tion un¬der¬ground to see if the op¬er¬a¬tors would show sense of un-der¬stand¬ing on the need to grow the in¬dus¬try through ad¬e¬quate cap¬i¬tal¬i¬sa-tion but in the process, there was an¬other court or¬der on De¬cem¬ber 30, 2020 re¬strain¬ing the Com¬mis¬sion from up¬hold¬ing the De¬cem¬ber 31 dead¬line.

A source close to NAICOM, told THISDAY that the main prob¬lem with in¬sur-ance in¬dus¬try re¬cap¬i¬tal¬i¬sa¬tion over the years is that whereas NAICOM has been keen to build a strong and formidable in­sur­ance in¬dus¬try that can match other firms in the global in¬sur¬ance mar¬ket, many in¬sur¬ers have re-mained as con¬ser¬va¬tive as ever, pre¬fer¬ring to re¬main and die as small en¬ti-ties.

Speak¬ing about the na¬ture of in¬sur¬ance in¬dus¬try he wants to see in Nige¬ria, Thomas said, “The ex¬er¬cise aims to strengthen the fi¬nan¬cial po¬si¬tion of op-er¬at¬ing firms, re¬duce risk of in¬sol¬vency in the sec¬tor and pro¬tect pol¬icy hold-ers.”

He had said the re¬cap¬i¬tal¬i¬sa¬tion ex¬er¬cise was aimed at re¬po¬si¬tion¬ing the sec¬tor for self-ac¬tu¬al¬i¬sa¬tion in terms of growth and de¬vel¬op¬ment.

“But let me state in clear terms that the re¬cap¬i¬tal¬i¬sa¬tion process is up and run¬ning in line with the roadmap and the Com¬mis¬sion will see to its log¬i¬cal con¬clu¬sion,” Thomas had added. Con¬trary to this, in¬dus¬try op¬er¬a¬tors said the in¬dus¬try does not need huge cap¬i¬tal.

Chair¬man, Mu¬tual Ben¬e¬fit As¬sur¬ance Plc., Dr Akin Ogun¬biyi, had de¬scribed the re¬cap¬i¬tal¬i¬sa¬tion idea as a great dis¬ser¬vice to the op¬er¬at¬ing firms and the in¬dus¬try, say¬ing the ex¬er¬cise has cre¬ated con¬fi¬dence prob¬lem in the in-dus¬try as it could kill the in¬dus¬try if it is not re¬versed or given a longer-term pe¬riod as dead¬line.

“In fact, some¬thing dras¬tic needs to be done to re¬verse this new cap¬i¬tal ex-er¬cise. It has cre¬ated a lot of con¬fi¬dence problem. Even the peo¬ple do¬ing in-sur¬ance don’t know what will hap¬pen. If an in¬dus¬try is work¬ing with N5 billion and they are not able to use it for prof¬itabil¬ity, and you say in¬crease it to N18 billion, what are we in¬sur¬ing?” he queried.

He said he did not agree with the pur¬pose of the NAICOM’s re¬cap¬i¬tal¬i¬sa¬tion ini¬tia¬tive, in¬sist¬ing there was no rea¬son for the re¬quire¬ment of the new cap¬i¬tal base.

Ac¬cord¬ing to him, the cur¬rent cap¬i¬tal base of the in¬sur¬ance sec¬tor is the big-gest in Africa de¬spite not hav¬ing the same level of pen¬e¬tra¬tion with some coun¬tries in Africa.

Ar¬gu¬ing fur¬ther, he said, “The in¬sur¬ance in¬dus¬try cur¬rently em¬ploys about three mil¬lion peo¬ple. If you have one in¬sur¬ance com¬pany that is able to re-cap¬i¬talise, will that take the place of the 10 that will go out of op¬er¬a¬tion? No.

“This re¬cap¬i¬tal¬i¬sa¬tion pol¬icy will kill the in¬dus¬try if the pol¬i¬cy¬mak¬ers, the fed¬eral gov¬ern¬ment, Min¬istry of Fi¬nance don’t quickly wake up and see that this is a ret¬ro¬gres¬sive move, “Ogun¬biyi in¬sisted.

He also stated that cap¬i¬tal base is not the only way to make in¬sur¬ance cre-ate value and be more rel¬e¬vant in the na¬tion.

Ac¬cord¬ing to him, the in¬sur¬ance com¬pa¬nies have other prob¬lems that needed to be ad¬dressed, remarking that if in¬sur¬ance com¬pa¬nies were un-able to use their cap¬i¬tal for prof¬itabil¬ity, in¬creas¬ing the cap¬i¬tal base would have no im¬pact.

However, in¬dus¬try ob¬servers have frowned at this, ques¬tion¬ing how the op-er¬a¬tors hope to meet their coun¬ter¬parts in other climes with their pre¬vail¬ing low cap¬i¬tal.

They also ques¬tioned how they want the in¬sur¬ing pub¬lic to have con¬fi¬dence in them with their pre¬vail¬ing at¬ti¬tude of re¬pu¬di¬at¬ing claims, a de¬vel¬op¬ment which has been stalling the suc¬cess of their much or¬ches¬trated deep¬en¬ing in¬sur¬ance pen¬e¬tra¬tion in the coun¬try.

Presently, most in¬sur¬ance firms do ev¬ery¬thing pos¬si¬ble to deny claims even when it is ob¬vi¬ous to them that the claims were gen¬uine and this has robbed the industry the much needed pub¬lic con¬fi¬dence and pa¬tron¬age.

Call for Recapitalisation

Efeomo Olotu of Ge¬orge Etimi & Part¬ners, an in¬vest¬ment an¬a¬lyst was of the opin¬ion that the in¬tro¬duc¬tion of the new min¬i¬mum cap¬i¬tal re¬quire¬ment is a wel¬come de¬vel¬op¬ment that would help im¬prove the in¬sur¬ance sec¬tor, just as sim¬i¬lar laws in the bank¬ing in¬dus¬try in 2005 helped shape the fu¬ture and de¬vel¬op¬ment of the Nige¬rian bank¬ing in¬dus¬try.

Ac¬cord¬ing to her, cur¬rently, Nige¬ria’s in¬sur¬ance sec¬tor is still one of the most un¬der¬de¬vel¬oped com¬pared to its peers.
“With a pop¬u¬la¬tion es¬ti¬mated at 200 mil¬lion peo¬ple, a grow¬ing mid¬dle class and in¬creased life ex¬pectancy rate for Nige¬ri¬ans (55.2 years av¬er¬age for men and 54.5 for women), the po¬ten¬tial for growth in the sec¬tor is sig¬nif-i¬cant. How¬ever, at 0.3 per cent, Nige¬ria has the low¬est in¬sur¬ance pen¬e¬tra-tion level amongst no¬table African coun¬tries. Cur¬rently, South Africa is at 14.7 per­cent, Kenya at 2.8 per­cent, An¬gola at 0.8 per¬ cent and Egypt at 0.6 per¬ cent. Sim¬i¬larly, the sec¬tor’s in¬sur¬ance den¬sity is still one of the low¬est when com¬pared to its peers”, she said.

Olotu noted that in the pre¬vi¬ous years, Nige¬rian in¬sur¬ers have op¬er¬ated on mar¬ginal scales, adding that this might be cited as a rea¬son why the mar¬ket had not ben¬e¬fited much from the sec¬tor.

She remarked that the prin¬ci¬pal ob¬jec¬tive of the re¬form is to have an emer-gence of big¬ger and stronger play¬ers in the in¬dus¬try with en¬hanced ca¬pac¬ity to reach and cover the ma¬jor¬ity of the Nige¬rian pop¬u¬lace.

Capacity

Stakeholders have acknowledged that presently most in¬sur¬ance firms can-not han¬dle cap¬i¬tal in¬ten¬sive busi¬nesses in some classes such as oil and gas, avi¬a¬tion in¬sur¬ances. What Nige¬rian un¬der¬writ¬ers do in such busi-nesses is to act as in¬sur¬ance agents and bro¬kers for their for¬eign coun¬ter-parts due to low cap¬i¬tal.

In¬vest¬ment an¬a¬lysts said the present level of cap¬i¬talisation in the in¬dus¬try is ridicu¬lously low com¬pared to in¬crease in in¬fla¬tion level be¬tween 2007 when the last re¬cap¬i¬tal¬i¬sa¬tion ex¬er¬cise was car¬ried out and the present time, as well as the magnitude of risks both from natural disasters and social unrests coming the way of insurers in recent times. This according to them has reinforced the need for fresh recapitalisation in the industry.

Way forward

In¬dus¬try ob¬servers said for this to hap¬pen both the op¬er¬a¬tors and the reg¬u-la¬tor should come to a round ta¬ble and discuss the need for cap¬i¬tal in-crease and op¬er¬a¬tors who feel they can¬not make it on stand¬-alone basis should em¬brace merg¬ing, in¬stead of cre¬at¬ing con¬fu¬sion us¬ing their share-hold¬ers.

But while these operators who oppose recapitalisation continue to maintain their status quo on capital level in the sector, industry analysts point to the need for them to realise that the world is not waiting for them and for the insurance sector to remain relevant in the scheme of things in the finance services sector of the Nigerian economy and by extension the global economy, these opposition leaders must step aside for the industry to move forward.

A close look at these operators who are averse to increase in capital shows that some are operators whose firms were hitherto among the industry leaders but because of their involvement in politics in their quest to win elections, either as state governors or senators, squandered their company’s capital in political campaigns but failed to win the elections.

Industry analysts said that because of their inability to recover the money they spent in politics, their companies became financially weak and in their bid to remain alive in business while consolidating on their positions as company owners, they resorted to frustrating every move to increase the sector’s capital, fearing that their companies might fall by the way side or they go into merger and lose their position as the chairman of the companies.

Reacting to the prevailing situation in the industry, lawmakers in the National Assembly in the 2020 consolidated insurance bill said that the industry should maintain a position that allows periodic upward review of capital base of the sector that would not be questioned or appealed against in any court.

On their part, present and upcoming regimes in NAICOM should borrow a leaf from what the late Chief Oladipo Bailey did during the 1997 exercise. Through counter court appeals, he maintained his ground and performed his duty as regulator by supervising a successful recapitalisation exercise that brought a major turn around to the fortunes of the insurance sector.

The NIA as a body should realise that the world is not waiting for Nigerian insurance industry. The association should detest the present 0.3 percent contribution of insurance to the GDP of the economy and 0.06 insurance penetration level.

The NIA should be worried that out of total $6.3 trillion global insurance premium in 2019, Nigerian insurance sector contributed only 0.03 percent ranking the 63rd country out of 88 countries profiled by a global insurer in its research tagged Sigma research 2019.
Reacting to this rating, industry observers said it was disheartening when compared with Nigeria’s Sub-Saharan peers. Whereas Nigeria insurance penetration is 0.3 per cent, South Africa is 13.4 percent, Morocco 3.9per cent, and Kenya 2.3 per cent.

Similarly, they said the sector grapples with low insurance density (GPW per capita) of $8.0 compared with South Africa $803.0, Morocco $127.0, and Kenya $43.0.

As a result of the abysmal performance of the industry and low capital in the industry today, claims payment, which is basis of insurance contract is reduced to the barest minimum; although every year, insurance companies keep quoting billions of Naira claims they paid annually.

Members of the insuring public have a lot of gory stories to tell about insurance companies that gave them cover even as NAICOM and other regulators keep on changing directors of insurance firms because of weak financial base and low solvency margin. The latest in the series were NICON Insurance and Nigeria Reinsurance whose managements were recently taken over by AMCON.