Urgent Need to Save Insurance Industry
James Emejo writes that the stalled attempt to drive the recapitalisation of insurance companies must be renewed in the interest of the nation’s economy
Late last month, the country’s apex insurance industry regulator, the National Insurance Commission (NAICOM), again wielded the big stick by annulling the operating licenses of two leading insurance companies – Standard Alliance Insurance Plc and Niger Insurance Plc.
The revocation became effective from June 21, 2022, according to a statement issued by the commission’s Head, Corporate Communications and Market Development, Mr. Rasaaq Salami.
Almost immediately, the commission further appointed Sanya, Ogunkuade Esq as the Receiver/Liquidator for Niger Insurance as well as Kehinde Aina Esq as the Receiver/Liquidator for Standard Alliance Insurance – both to effectively commence the process of winding down both entities.
NAICOM, however, assured all stakeholders of the safety and protection of their interests, advising all stakeholders to forward their inquiries to the respective Receiver/Liquidator for each company for their necessary action.
No immediate reason was given by the regulator for descending on both insurance firms, but THISDAY however learned that NAICOM had written to Niger Insurance on March 31, 2022, allowing the company a 30-day period to convince the Commission and the Ministry of Finance that it could resolve its operational challenges.
The management had also failed to salvage the company’s fortunes, which further nosedived in 2021, after previously recording a N2.09 billion loss in 2020, when the COVID-19 pandemic ravaged the industry. The company’s financial performance also worsened in 2021 with a deficit of N2.63 billion.
In addition, its gross premium recorded in 2021 also dwindled by half to N515.8 million, which was significantly below the N1.03 billion reported during the corresponding period of 2020. Its weak financials reportedly prevented it from paying insurance claims, which had been due to clients.
The rather unfortunate development came amidst recent efforts by the regulator to reposition the industry to meet the operational challenges of the post-COVID-19 era following the devastating impact of the pandemic on the industry and the economy at large.
To be fair, the regulator had been on its toes ensuring that operators abide by good corporate governance and best practices as well as providing guidance and mentorship to as many as needed in order to revive and maintain the integrity of the industry which had been smeared in the past by inability to pay claims among other unwholesome practices.
It took the most recent administrations the courage and purpose to rid insurance practice of bad habits as well as restore the public confidence needed to deepen penetration through an array of new products and services including micro insurance and takaful – all geared towards deepening financial inclusion efforts of the federal government.
No doubt the current development whereby some insurance firms are being unable to meet basic financial obligations is not unconnected with their shallow capital base, which the regulator had made efforts in recent times to raise without success.
Some industry operators had rebuffed the recapitalisation drive that would have strengthened them to withstand the storm ahead after their capital base was eroded by the fallout of the pandemic among other risk factors.
However, analysts believed that the financial turbulence currently faced by operators is mostly self-inflicted having rejected the NAICOM’s directive to recapitalize.
Journey to consolidation
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 the 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, warned that operators faced stricter supervision in 2020 and beyond.
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 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 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 are 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 might be restricted on the scope of business to transact.
Spanner in the works
In a twist to the laudable recapitalisation objectives by the regulators, which was expected to revolutionise insurance and put the sector on an 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 the presidential approval would 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 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.
NAICOM boss had said, “The liquidity position of some of the underwriters is very bad. This is because, heavy investments are made on fixed assets like buildings, land, etc which are impacting 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 importance. 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.”
Inevitability of capital injection
Following the latest cancellation of operating licenses of insurance firms, analysts in separate interviews with THISDAY, stressed the need for the commission to conduct a stress test on all insurers operating in the country in order to ascertain the actual number of those that are fit to continue in business.
They pointed out that though the court injunction against recapitalisation at that time was required to limit the effects of numerous companies from possibly losing their licenses amidst the global economic downturn, it is however imperative at this juncture that companies are well-capitalised and able to settle claims in order to ensure that confidence in the sector remained positive.
The analysts also welcomed the punitive measures deployed by the regulator noting that without such sanctions, the default rate of Insurance companies in settling claims would have been high.
Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, said the oversight responsibilities of NAICOM and attendant disciplinary measures are the things that are bringing some sanity into the insurance industry.
He said, “Without such sanctions, the default rate of Insurance companies in settling claims would have been very high. If Niger Insurance Plc and Standard Alliance Insurance could default amidst such established laws, then they were deserving of the action taken against them.
“Insurance companies should eschew investments in non-earning assets. For their continuous existence, they should always bear in mind that the risk for which the insurance policy was taken could always occur at anytime. They should therefore be ready with enough liquidity in current assets to cover the perils when they occur.”
Managing Director/Chief Executive, Credent Investment Managers Limited, Mr. Ibrahim Shelleng, said the recapitalisation exercise remained vital as witnessed in other sectors of the financial services industry to maintain service quality and confidence and ultimately to ensure a healthy industry and economy at large.
He said, “Insurance is a key component of the financial services industry and as such it is vital that companies operating in that sector are adequately capitalised to withstand economic shocks.
He pointed out that the impact of the COVID-19 pandemic would have undoubtedly been huge as numerous claims would have crystallised.
He said, “Perhaps the court injunction against recapitalisation at that time was required to limit the effects of numerous companies possibly losing their licenses amidst the global economic downturn but at this juncture, it is imperative that companies are well capitalised and can settle claims to make sure confidence in the sector remains positive.
“Typically, Nigerians are skeptical about insurance companies and if these companies are unable to settle claims then it may further damage perception.”
On his part, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, said the lack of capital injection into insurance companies was responsible for some of their current predicaments.
He said, “The major test of the solvency of any insurance company is the ability to pay claims promptly and if any insurance company consistently fails in claim settlement then it is showing serious signs of lack of capacity to operate.
“Looking at the calibre of insurance companies involved in the latest sanctions, they are amongst those that can be classified as too big to fail and so there might be a major liquidity problem in the insurance sector which could lead to more companies being affected.
“The insurance sector has vehemently rejected the call by NAICOM to recapitalise on several occasions and the major reason is the lack of capital injection into these companies.”
According to him, the insurance regulator should undertake a stress test on all insurers operating in the country to ascertain those that are fit to continue.