Nigeria

NAICOM, NIA disagree over recapitalisation of insurance firms

The National Insurance Commission, NAICOM, and the Nigerian Insurance Association, NIA, have disagreed over the appropriate recapitalisation model for insurance firms.

While NAICOM has stipulated the general capital requirements for the different categories of the insurance business and mandated that operators must meet the requirements by December 2021, the NIA is canvassing for Risk Based Capital, RBC, arguing that this will make the insurance industry attractive to investors and save about N77 billion payout as cost of recapitalizing.

NAICOM mandated life insurance firms to raise their minimum paid-up capital of N8 billion, up from N2 billion; general insurance companies are to increase their paid-up capital to N10 billion from N3 billion.

Composite insurance (those that operate both general and life insurance) are to increase theirs to N18 billion from N5 billion, while reinsurance businesses are to beef up theirs to N20 billion from N10 billion.

But the NIA is seeking the introduction of Risk Based Capital describing it as the right capital model for the insurance industry.

Risk-based capital requirement refers to a rule that establishes minimum regulatory capital for financial institutions based on the amount of risk they carry.

These requirements ensure that each financial institution has enough capital on hand to sustain operating losses while maintaining a safe and efficient market.

However, fixed-capital standards require all companies to have the same level of capital irrespective of the size of the risk each institution carries.

The argument

While NAICOM argues that the planned recapitalisation will result in the ability of companies to underwrite bigger risks e.g. in oil and gas, improve settlement of claims and sensitise the public through continuous marketing on the need to buy more insurance policies, the NIA, on the other hand, argues that RBC is 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.

While the controversy rages, come December 31, 2020, insurance companies are expected to have raised at least half of their paid-up share capital as directed by NAICOM.

However, according to the Chairman of the NIA, Mr Ganiyu Musa, in adopting Risk Based Capital adequacy template, the Association 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 (all capital resources inclusive).

Making the Association’s presentation at a 2-day Public Hearing on Consolidated Insurance Bill 2020 organized by the House of Representatives Committee on Insurance and Actuarial matters in Abuja, Musa stated: “When the Bill is eventually signed into law in line with this proposal, 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 Commission during the ongoing recapitalization exercise.

“We are convinced that a risk based capital adequacy template is the best fit for the insurance industry in Nigeria especially given the fact that the 2013 International Monetary Fund (IMF) Report has prescribed it and the Commission agreed with it.” he stated.

Musa reiterated that the move will also align the definition of insurance with the various positions such as IAIS recommendations; ICP 17 on Capital Adequacy; European Union Directives On Minimum Capital Requirement; OSSFI (Canada); APRA (Australia Prudential Regulatory Authority); SAM (Solvency Assessment Management) South Africa; Kenyan Model; as well as the Malaysian Model.

He said: “The IMF peer review report on the insurance industry in Nigeria 2013, observed that the Nigeria insurance industry was over-capitalized relative to other developing countries and recommended that the regulator should review the excessive capital requirement when adopting a risk based capital framework.”

Also speaking, Director-General of the Association, Mrs Yetunde Ilori emphasized that risk based capital is the direction to go if the insurance industry is to attract the right investment and increase insurance contribution to the Gross Domestic Product (GDP).

Illori said: “Given the fact that the insurance companies are searching for funds to capitalize their operations, adopting this definition will make the insurance industry in Nigeria attractive to investors and save about N77 billion payout as cost of recapitalizing.”

Meanwhile, Commissioner for Insurance, Mr Sunday Thomas, stressed that operators in the insurance industry must strengthen their human and financial capital for effective participation in big ticket risks and such can only be realisable through recapitalisation.

Thomas said: “It has been observed that the gains of domestication policy of the government as enshrined in the Nigeria Content Development Act 2010 is gradually losing its meaning for the insurance sector. More businesses especially in the oil and gas and the aviation sectors are now being re-insured abroad.

“Of more concern is the declining participation of life companies in the annuity business which is the emerging business for our industry.

“These are the areas where the industry can impose itself on the economy through the control of funds for national development,” he posited.

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