New capital requirements raise concerns for small operators

The new capital base requirements for the insurance industry, officially launched on August 1, 2018, may have sent a warning signal to operators, especially the small ones and increasing the possibility of a new round of mergers, acquisitions or operational scale down.

Due to take off by January 2019, the policy by the National Insurance Commission (NAICOM), tagged a three-tier recapitalisation exercise, however, is generating huge applause from the big operators that have sustained a healthy solvency level, The Guardian has learnt.

Experts, with the knowledge of the development, who spoke to The Guardian over the weekend on condition of anonymity, affirmed that the new Tier-Based Minimum Solvency Capital has already put some companies on their “toes”, because it is now more of threat to their existence.

Specifically, the small companies would need to go extra miles to shore up their solvency level and presently, cannot directly register their worries with the regulator, but using the Nigerian Insurers Association (NIA) to advance their cases before NAICOM.

Meanwhile, the new regulation is coming after 11 years after the sector’s recapitalisation in 2007, which trailed the banking sector consolidation exercise.

Findings show that the major difference between the earlier recapitalisation and the current one is that there is no longer defined uniform capital base as players can operate in either of the three-tiers, according to their respective risks capacities.

For example, the composite insurance companies, which are now interested to play in the Tier 1 category are expected to increase their capitalisation from N5 billion to N15 billion.

Those interested in the same tier, but operating the life business are mandated to upgrade their capital from N2 billion to N6 billion, while non-life insurers planning to play in this tier are expected to raise their capitalisation from N3 billion to N9 billion.

Composite insurers willing to operate in Tier 2 are expected to increase their capital base to N7.5 billion; non-life operators, N4.5 billion; while life operators under Tier 2 category are expected to increase capitalisation to N3 billion.

However, for insurers willing to play in the lowest tier, which is Tier 3, are expected to maintain the current capital base of the insurance industry.

In this instance, non-life insurance companies in Tier 3 are to maintain N3 billion, life operators are to maintain N2 billion, while composite insurers are to maintain N5 billion capitalisation.

Speaking at a media parley in Lagos, to unveil the initiative, last week, the Commissioner for Insurance, Alhaji Mohammed Kari, said the commission was not withdrawing any operational licence, but to ensure each insurer has adequate capital to absorb the risks it was taking.

Kari, who was represented by the director of supervision, National Insurance Commission (NAICOM), Barineka Thompson, explained that the recapitalisation became desirable as inflation and interest rates had soared in the last 10 years, while insurers still operated with the same capital base since 2007.

According to him, “interest rate has gone from single to double digit, inflation has risen over time and with many macroeconomic and institutional factors on the upward trend, yet the industry still maintained the same capitalisation in the last 10 years.

“So, it is desirable for operators to now choose which tier they want to operate in. Some companies are finding it difficult to fulfil obligations to their policyholders and shareholders because they are carrying risks above their limits.”

When The Guardian contacted the chairman, the Nigerian Insurers Association (NIA) Tope Smart, who also the Managing director, NEM Insurance Plc, spoke on the development on the new regulation said that as the umbrella of all insurance companies in Nigeria, we are making our input into the NAICOM’s guideline to ensure that all stakeholders interest are secured in the industry.

The Managing Director and Chief Executive Officer, FBNInsurance Limited, Val Ojumah, told The Guardian that the tier-based minimum solvency capital structure will enhance the financial base of underwriting firms and help the companies to retain more risks in the country.

According to him, the regulation will encourage insurance companies to work together and help to increase their financial strength to absorb more risks and retain more risks in Nigeria,” he said.

Ojumah expressed the hope that under the new development, insurance stock on the Nigerian Stock Exchange will pick up good value with the financial strength and the companies will be in a better position to pay dividend.

While speaking on the financial strength of FBNInsurance, he said the company had secured the backing of FBN holdings Plc and the Sanlam Group, one of the largest financial institutions in South Africa.

The Managing Director and Chief Executive Officer, FBN General Insurance Limited, Bode Opadokun, also said the new policy would breed strong and well secured insurance companies.