Low-capitalised Insurers Face Business Restriction

 In the new insurance industry recapitalisation regime expected to commence in the third quarter of the year,  low-capitalised insurance companies would be restricted from underwriting certain businesses, LEADERSHIP can now reveal.

Investigation has shown that the industry is opting for Risk-Based Capital (RBC), which means that each insurer can only write businesses its capital can absorb when risk crystalises.

This is to put an end to the issue of unpaid claims by some insurers who had earlier written businesses they had no capacity to absorb, while it is equally believed it will limit the unhealthy competition for the same line of business.

While LEADERSHIP can confirm that the fresh exercise may not actually close down insurance companies, there will be restrictions on risk appetite, especially for those with low capital.

Investigation shows that the National Insurance Commission (NAICOM) would, by the end of April 2022, make public its decision on what should constitute capital for operators in an upcoming exercise which could commence in the third quarter of the current year.

In the new capital regime whose framework will soon be released, the level of capital is going to determine risk appetite. Invariably, low capitalised firms may be limited to underwriting motor, third party policies and group life insurances, among others, while they will be restricted from underwriting risks in aviation, maritime and energy, among others.

The businesses in aviation, energy and maritime industries, it was learnt, would be exclusive to highly capitalised firms.

This is to ensure each insurer has adequate capital to absorb the risks it is taking while it will enhance soundness and profitability of insurers through optimal capitalisation.

Here, the new capitalisation introduces proportionate capital that supports the nature of insurance business, even as the scale and complexity of the business conducted by insurers mean the industry must undergo risk-based recapitalisation.

In this instance, it is expected that there will be no cancellation of licences, but operators will be subjected to solvency control levels and little or no mandatory injection of fresh capital by insurers.

Although, there will be minimum capital to operate certain class of business, the current capital of N2 billion, N3 billion, N5 billion, N10 billion for life, non-life and composite companies respectively could still be maintained  for those who want to play in the lower end of the market, preferably the retail market, microinsurance and so on.

While the last aborted recapitalisation exercise recognised share capital as the base of the exercise, there are indications that the current one may recognise shareholders fund as the capital under the exercise, thus, making the new exercise seamless and easier for the big players.

While there are already wide consultations among the regulator, operators and relevant stakeholders to ensure the new exercise is not obstructed  like the two previous exercises, the regulatory body would borrow its power from the 2020 Consolidated Insurance Bill that is currently at an advanced stage of being passed into law. The bill and the Finance Act have already defined what constitutes a capital and the minimum capital base expected to operate in strictly risk-based operation in the insurance sector.

Corroborating this development at the end of the recently held Insurers’ Committee in Lagos recently, the chairman, Sub-Committee on Publicity and Communications, Insurers Committee, Ebelechukwu Nwachukwu, said at the insurers’ Committee meeting, the commissioner for Insurance/CEO, Sunday Thomas, had hinted the operators that the modalities for the risk-based capital would be released by NAICOM by month end.

Nwachukwu, who is also the managing director, NSIA Insurance Limited, disclosed that insurers were awaiting this document that would give a clear direction on the next line of action for the  capitalisation of the insurance industry.

At a separate event, the chairman, Nigerian Insurers Association (NIA), Ganiyu Musa, said the Consolidated Insurance Bill was already at an advanced stage as relevant stakeholders’ contributions had been included with the final vetting ongoing, with the bill expected to be passed into law soon.

Earlier, experts had hinged the growth on recapitalisation of the industry that will lead to increased capacity to absorb large risks, thereby increasing the profitability of the industry.

The managing director/CEO of Boff & Co Insurance Brokers Limited, Chief Babatunde Agbeja, called for increased capacity, regular staff training, investment in information and technology and regular engagement with stakeholders.

According to him, there is need for increased capacity in the Nigerian insurance industry, even though the capacity of the industry had increased over time.

“When Boff and Co started special risk 25 years ago, we were insuring about 70 per cent of our portfolio abroad but, over time, it reduced from 70 per cent to about 20 per cent and in the last six months, we had problems finding excess capacity to insure abroad.

“I am proud to tell you that as of today, the risk businesses we did in the last three months has been 100 per cent in Nigeria.

“The capacity is growing but we need to back it up with technical know-how, training and retraining of staff. Insurance industry should keep pace with the trend of events globally because the insurance business is an international business.

“The issues surrounding the previous recapitalisation exercise are just too unfortunate because they did a disservice to the industry. Although the industry is doing well, we only need to be better. We need to be sincere, be professional, and ensure that capacity increases continuously. Before now, from any international business that comes to Nigeria, only two per cent is retained locally but today it has increased to 15 per cent.

“My advice to the industry is continuous capacity improvement – it is a need, a must for the industry to succeed. There must be regular engagement between regulators and the players to recapitalise the industry,” he said.

Earlier in his presentation entitled “2021 Review and 2022 Economic Outlook,” in Lagos recently, the founder of B. Adedipe and Associates, Dr. Biodun Adedipe, while reviewing the insurance industry and what the industry should do going forward to drive growth, said: “We have done a lot of work to ensure the growth of insurance industry in Nigeria. In the last ten years we have done memos to the presidency about three times on behalf of the insurance industry.”