Need For Recapitalisation Of Insurance Industry

The insurance industry has been enmeshed in series of crisis for several years. ZAKA KHALIQ writes on the need to recapitalise the industry for enhanced service delivery.

For the second time in three years, the federal government, through the National Insurance Commission (NAICOM), last month end, announced suspension of the ongoing insurance industry recapitalisation exercise, following court order mandating the regulatory body to do so.

Some aggrieved insurance stakeholders had earlier filed suits mandating the court to stop NAICOM from proceeding with the just suspended exercise. The scenario was similar to what happened in 2018, when some aggrieved shareholders took the commission to court to stop the then Tier-based recapitalisation exercise under the then commissioner for insurance, Alhaji Mohammed Kari.

31st of December, 2020, would have been the deadline for underwriters to have raised 50 per cent of the new capital while the remaining 50 per cent would be expected by September, 2021, if the regulatory body had not suspend the exercise.

The last successful recapitalisation done in the industry was the exercise of 2005 and the industry has been operating with same minimum capital base of that time till date, even when economic and risk dynamics have so far changed upward. In 2005, NAICOM increased the capital base from N150 million to N2 billion for operators in the life insurance segment, N200 million to N3 billion for non-life, and composite insurance firms from N350 million to N5 billion, the benchmark insurers are still operating with, till now.

Each time the issue comes up, there is always somebody somewhere ready to truncate the process.

It now seems some operators are hell bent on botching the recapitalisation issue whenever it came up, as they prefer to be in their comfort zone. To this end, these set of operators, LEADERSHIP learnt, have been the same set of people lobbying the shareholders or the legislature or the Supervisong Finance Ministry to suspend the actions. Most of the aggrieved firms, according to findings, were those who felt, if the exercise had continued, they may not be able to recapitalise, so, they use, mainly, the court to buy time.

Although, timing has been the major complaint in the two botched exercises, and maybe the regulator should have given more time for operators to upgrade capital judging by the harsh economic reality, but market observers still believe the industry need recapitalisation, irrespective of the form it’s going to take.

The next phase of recapitalisation, which might commence this year, according to insider source, is Risk-Based recapitalisation exercise, which is expected to be backed by the Insurance bill 2020 , now before the National Assembly. But whether operators are ready for this or not, only time will tell.

Confirming the suspension of the exercise, NAICOM’s spokesperson, Mr. Rasaaq Salami, said: “You are aware that the issue is in court and there is an interim order of the Court. NAICOM, being a responsible and law abiding organisation, will respect the order of the court.”

Earlier in December, the House of Representatives had equally ordered the discontinuation of the recapitalisation exercise and had earlier in the week written a letter to NAICOM in this regard.

Stating that, it was worried about the impact of the latest economic challenges, such as, the COVID-19 pandemic and #EndSARS protest, the House of Representatives recently passed a resolution demanding that the NAICOM suspend its planned December 31, 2020 mandatory deadline for the first phase of 50 per cent– 60 per cent of the minimum paid-up share capital for insurance and reinsurance companies.

According to the House of Representatives, “the suspension is expected to last for six months from January – June 2021 and is necessary to give the insurance operators soft landing, as well as cushion the effects of Covid-19 and other unforeseen circumstances they might have suffered.”

Similarly, two shareholders groups have also risen up against the recapitalisation exercise and had gone to court to challenge the process.

A Federal High Court, sitting in the Lagos Division, had earlier temporarily stopped NAICOM from taking any further steps in effecting its deadline date for insurance and reinsurance companies to recapitalise their financial base.

Justice C. J. Aneke of the court made the order while delivering ruling in an exparte application brought before him by the Incorporated Trustees of the Pragmatic Shareholders’ Association of Nigeria.

The motion marked FHC/L/CS/1797/2020 and filed on December 15, 2020, was moved on behalf of the group by their lawyer, I.C. Ifedora.

The applicant specifically prayed the court for an order of Interim Injunction restraining the defendant and its agents from taking any further steps in the recapitalisation process in the insurance industry, pending the hearing and determination of its motion on notice already filled before the court.

Under the recapitalisation exercise, NAICOM had mandated life insurance firms to meet a minimum paid-up capital of N8 billion, up from N2 billion while general insurance companies are expected to increase their paid-up capital to N10 billion from the earlier N3 billion.

Composite insurance (life and Non-life operators) were asked to recapitalise to the tune of N18 billion as against the pervious amount of N5 billion, while reinsurance businesses are now required to have a minimum capital of N20 billion from N10 billion that obtained in the past.

It would be recalled that in 2018, LEADERSHIP had reported the suspension of the implementation of the tier-based recapitalisation exercise of the insurance Industry.

The suspension then, it was learnt, may not be unconnected to the court case instituted by insurance shareholders under the auspices of the Insurance Shareholders Association of Nigeria (ISAN), stopping NAICOM from commencing the implementation of the Tier-Based Minimum Solvency Capital (TBMSC) model in the insurance sector of the nation’s economy.

A source at the commission confirmed to LEADERSHIP then, that, indeed, the court case had prevented the regulator from implementing the reclassification exercise, at least, for now.

Justice Hassan of the Federal High Court sitting in Lagos had about three weeks ago restrained NAICOM from implementing TBMSC until after the expiration of 30 days pre-action notice shareholders of insurance companies served the commission on September 6, 2018.

The case was filed by Sir Nnamdi Nwosu and seven others Vs the National Insurance Commission while Justice Hassan adjourned hearing on the main action suit marked: FHC/L/CS/ 1483/18, to October 8, 2018.

Under the previous exercise, Tier one has the highest capital base while Tier three has the minimum capital base.

Life insurance firms then have three capitalisation tiers. Tier one companies will be required to have N6 billion as capital. Tier two life insurance firms will be required to have N3 billion, while tier 3 firms will maintain the current requirements of N2 billion.

Non-life insurance firms also have three tiers then. Tier one non-life firms are mandated to have a capital base of N9 billion. Tier two firms in this segment are expected to have a capital base of N4.5 billion, while tier 3 firms will maintain the current capital base of N3 billion.

Insurance companies operating in the composite segment, that is, all classes of insurance, similarly, have three tiers. Companies operating in the tier one will be required to have a capital base of N15 billion. Tier two firms will need to have a capital base of N7.5 billion, while those in tier 3 will maintain the then current capital base of N5 billion.

Following the recent suspension, some segments of shareholders have expressed their satisfaction over the action.

The managing director, Lancelot Ventures Limited, Mr. Adebayo Adeleke, who is also a prominent member of Independent Shareholders Association of Nigeria (ISAN), charged insurance operators not to relent as suspension is not cancellation, stressing that the court case could turn in favour of NAICOM.

He urged operators to continue with their fund drive, adding that, they really need funds to underwrite high tickets risks.

Financial analyst and shareholder, Mr. Nona Awo, said the suspension is in order, stressing that, with the Covid-19 pandemic and #EndSARS protest, this is not the best time to undertake an effective recapitalisation.

He urged NAICOM, insurance operators and other stakeholders to work together to determine the type of capital the industry needs.

Insurance firms’ managers, under the auspices of the Nigerian Insurers Association (NIA) have advocated introduction of Risk Based Capital in the Consolidated Insurance Bill 2020, currently at the National Assembly.

They described this model as the right capital model for the insurance industry in a bid to emulate other developed economies, noting that, adoption of this model signals that the Nigerian Insurance market now operates with the International best practice. This, they believe, will equally reposition the industry for accelerated growth and development.

Making a presentation at the 2-day public hearing on Consolidated Insurance Bill 2020 organised by the house of representatives committee on Insurance and Actuarial matters in Abuja recently, the chairman of the association, Mr. Ganiyu Musa, stated that, in adopting Risk based Capital adequacy template, NIA took cognizance of the need to consider insurance risk, market risk, credit risk, and operational risk as well as the need to apply such capital charges on assets and liabilities, including all capital resources.

He hinged the association’s position on the 2013 IMF Report on the Nigerian Insurance Industry which prescribed the risk based capital model as most suitable for the Nigerian Insurance market.

According to him, the IMF report was duly acknowledged and admitted by the National Insurance Commission (NAICOM) as the right capital framework for the market as it seeks to limit the capital required by operators to the level of risks they can carry.

When the bill is eventually signed into law in line with this proposal, he said, it will lay to rest, the contentious issue of the definition of capital which has been a major point of the association’s engagements with the regulatory body during the ongoing recapitalisation exercise.

“We are convinced that risk based capital adequacy template is the best fit for the insurance industry in Nigeria especially given the fact that the 2013 IMF Report has prescribed it and the commission agreed to it.” he stated.

The director-general of the association, Mrs. Yetunde Ilori, emphasised that risk based capital is the ideal model if the insurance industry is to attract the right investment and increase insurance contribution to the Gross Domestic Product (GDP).

She believes that this model will make the insurance industry in Nigeria attractive to investors and save about N77 billion payout as cost of recapitalisation.

With the way the insurance industry recapitalisation exercise has taken form in the last few years, experts are worried whether the entire insurance industry is ready to favourably compete with their counterparts in other developed and developing economies, judging by the meager capital most operators are operating with when compared with huge risks they are underwriting.

However, another school of thought believes, since insurance business operates in a pool, there is no need for uniform capitalisation, advising each underwriter to recapitlise according to its risk appetite.

But the fact is, the industry is overripe for recapitalisation judging from the emerging risks that may threaten the existence of companies underwriting such risks, especially, when they don’t have adequate backed-up reinsurance cover, which is a function of the strength of your capital.

While there are enough indication that the next phase of recapitalisation could be risk based model, market observers were keeping their fingers crossed, hoping for a new dawn in insurance industry that has shown much promises for the future and the nation’s economy.

Read the Source post on Leadership Newspaper.