Insurance Industry: Hitch Free Recapitalisation Exercise

As the commissioner for Insurance, Olusegun Omosehin, mutes the idea of revisiting the recapitalisation exercise in insurance industry, industry stakeholders insist he must do his home work well to ensure a hitch free exercise, writes Ebere Nwoji

One of the major concerns of the present leadership of the National Insurance Commission (NAICOM) led by Olusegun Omosehin, is to entrench a regime of safe and sound insurance institutions that can firmly stand in competition with operators  in other sectors of the economy.

Omosehin believes that this can only be achieved if the regulator determines to see that all operating firms in the system have strong financial base in order to build a desirable insurance institution.

At a recent insurance professionals forum held in Abeokuta, Ogun State, Omosehin said strong financial base was  key to success of the insurance industry. He noted that the cankerworm of low capital has cost the industry a lot; hence the need for liquidity, capitalisation and increasing the number of experts  working in the industry.

“Remember the words of Benjamin Franklin: “One rotten apple, spoils the barrel”. We are all witnesses to what this has caused us as an industry and are now more determined to rid ourselves of that cankerworm,” he said.

Industry observers interprets the comments to be that a fresh round of recapitalisation for the industry  is inevitable if operators and stakeholders should see insurance industry they desire.

NAICOM’s Expectation

Recently, the commission said it expects that  the insurance industry Gross Premium Income (GPI) would  hit N6 trillion by year 2030, up from the current N1 trillion margin.

This points to the fact that the commission is desirous of seeing a more liquid insurance sector sitting on a strong capital base.

At the professional forum, Omosesehin stated clearly that the adoption of risk based capital has become inevitable, adding that Nigerian insurers must compete with their  counterparts across the globe and remain relevant in the management of risks of its existing and potential customers.

By saying this, the  commissioner has addressed the question on what model of recapitalisation will be acceptable by the industry without the usual controversy and litigations that obviously marred previous attempts to upgrade the industry’s capital base. The commission had in July  2018 under the leadership of Mohammed Kari, introduced the Tier-base  minimum solvency capital model . It was to be a complimentary measure to the risk based supervision.

Tear base Capital model 

The Tear Base Capital Model (TBMSC) is a three- level capital structure which introduces proportionate capital requirement that supports the nature, scale and complexity of the business conducted by insurance companies. NAICOM hoped to do it without the cancellation of the license of any insurance company or requirement for the injection of fresh capital, subject to solvency control levels.

It grouped insurance companies  into three tiers after a detailed assessment of their business and operations had been carried out by the NAICOM Implementation Team. The companies will then be restricted to underwriting specific classes of business based on any of the tier in which they fall into post-assessment. Insurance companies would only be required to inject new capital or take other measures, where they seek to underwrite other classes of business above the tier in which they find themselves after the assessment.

The model saw insurance firms in Nigeria divided into three tiers of tier 1, tier 2 and tier 3  with different level of capital introduced. This could not fly because of negative attitude of a set of operators. But few years  later, the same operators started calling for the risk base capital, which the commission has accepted to reintroduce.

Interrupting the Process

But the big question is have these  set of operators and their shareholders who specialise in approaching the court to obtain injunction against  the progress of every proposed recapitalisation exercise in the industry consented to allow the present exercise muted by the commission under Omosehin’s regime  to stand.

This question has become necessary because if these set of operators and their shareholders did it during the regime of the late Oladipo Bailey, Emmanuel Chukwulozie, Mohammed Kari and lastly the regime of Sunday Thomas, there are fears that they can equally do it during this regime of Omosehin.

This being the case, industry observers said despite the level of inflation in the country which has made the present minimum capital level in the industry meaningless, Omosehin needs to clear his ground well before coming out for the proposed capital upgrading to ensure that it does not meet hitches.

NAICOM statutory power

Though as a regulator section 9(4) of the Insurance Act, 2003, empowers NAICOM to increase, from time to time, the amount of minimum paid-up share capital statutorily prescribed for Nigerian insurers, Omosehin should do his underground work well concerning the proposed capital to ensure that it achieves success.

The insurance industry successfully increased its minimum capital last in 2007 since then several attempts to raise the insurance sector capital often hit the rock.

With the present capital level, life underwriters have minimum of N2 billion, general businessN3 billion, composite firms N5 billion and reinsurance firms N10 billion.

But attempt was made to upgrade this to N8 billion for life firms, N10 billion for general insurance, N18 billion for composite firms and N20 for reinsurers. This was tagged minimum paid- up share capital and was introduced on May 20, 2019 but has remained inconclusive due to litigations against it.

This by implication means that N2 billion for life, N3 billion for general insurance, N5 billion for composite insurers and N10 billion for reinsurers have remain the official minimum capital for the industry which obviously going by the level of inflation in the country is ridiculous hence the need for recapitalisation.

Operators’ view

In his view on how to ensure a hitch free fresh recapitalisation exercise, former Chairman Nigeria Insurers Association and  Principal Consultant Carefirst Consult Limited, Mr Gus Wiggle, shared the  view of the insurance commissioner  on the need for fresh recap, saying “A fresh recapitalisation is indeed crucial for the insurance industry to thrive and remain competitive at this period of our nationhood. By increasing the capital base of insurance companies, they can better absorb risks, enhance their financial stability, and improve their ability to pay claims promptly. This not only boosts the confidence of stakeholders but also helps in attracting more investments and fostering a more robust and competitive market. Today the N3billion  has become inadequate to retain any big risk.”

According to him, any  company that wants to use its  reserves, should do so but distributing it to the shareholders.  He however said he guessed  the commission should have a framework for the exercise. 

Conducting hitch-Free exercise

To have a hitch free exercise, the former NIA Chairman said NAICOM should  have an all-stakeholders meeting and agree on how to walk the journey together. 

“There is no short cut about it. Irrespective of the meeting, a recapitalisation  for the industry is inevitable. Alternatively, the Commission could apply a less painless treatment for recapitalisation through the risk based capitalisation. All the insurance companies need not write the same classes of insurance. The Commission should direct all companies to maintain sufficient capital to support their overall business operations in consideration of their risk profiles provided the Commission have adequate human capital to drive that process otherwise, they can develop it in no time as there are sharp minds out there that can be trained and exposed to the regime of risk based supervision within a short time”, he advised.

Also speaking, the Managing Director Afriglobal Insurance Brokers, Mr Casmir Azubuike,  regretted that each  time the recapitalisation issue  comes up, there is always litigation against it. He asked, “But the question is for how long should  we continue this way. How long are we going to remain the way we are. If you look at the bankers, they are already in another round of recapitalisation. If you check the last time bankers recapitalised,  and last time insurers recapitalised,  you will discover that banks have recapitalised two times yet the underwriters always fight and slug it out with NAICOM each time it comes up with it.”

He however said  NAICOM has made things easier  with options for insurance  companies to meet it because anyhow you look at it there is need for capital injection into the  insurance industry by way of underwriters raising their capital base. 

“Though we have reinsurance that comes in  when risk occurs,  we also must understand that when you talk about capital flight, if your retention level  as an underwriter is low the implication is that the greater proportion of the risk and greater proportion of premium you collect is going out.So it is not a question of saying  we are writing N100 billion, N500 billion how much of these do you retain  here in Nigeria.According to him, most of the premium is going out  of the country by way of reinsurance because of no other reason other that the retention capacity of home companies is low,” he said. 

He noted that against this backdrop, “NAICOM has come up  with tier based recapitalisation,  “or risk based recapitalisation in the sense that they have given underwriters the opportunity to recapitalise find themselves within the capital  range  then make sure the business each of them  is  going to do falls with the range of his  capital.”

“Let those who have the money to recapitalise do so and go after the very big ticket transaction do it and reduce capital flight out of the country. Then let those at the medium category operate within the country and within certain threshold of risk. Then those also who can operate at much lower level can also  operate at regional level just as the banks are doing.You have regional banks now you can define where your risks are coming from and maintain that particular region as your catchment area,” he said.

According to him, another way out is determining what level of risk a individual firms can carry. “For example, you can restrict your transaction within that area. If you are talking about NNPC insurance account and you know your capital base cannot carry it better go for the risks within your capacity. So I think what insurance underwriters need to do is to sit at a round table conference with the commission and establish which area they can comfortably operate and operate to that level court case and litigations  cannot be the way out and no matter how long they drag this matter of recapitalisation it must continue to come up but trying to coarse NAICOM can never be the way out,” he cautioned.