Silence overshadows inconclusive insurance industry recapitalisation

• Uncertainty rocks insurance market
• NAICOM caught in political web
• Risk based Vs‭. ‬Recap debate back on‭ ‬

The Nigerian insurance landscape appears to have gone mute on the matter of meeting the industry’s new minimum capital stipulated by the National Insurance Commission (NAICOM) since the court injunction that led to the suspension of the first phase of a recapitalisation programme whose deadline was initially scheduled for 31st December 2020.

While industry watchers fold their arms, awaiting the turn of event, especially as the supposed second phase (scheduled for 30th September 2021) slowly creeps in, uncertainty has clouded the industry leaving stakeholders to eagerly anticipate the next step on the regulator’s recapitalization decision.

The suspension of the recapitalization exercise followed a court injunction directing the regulatory body, NAICOM, to put a hold on the matter as some stakeholders had filed suits asking the court to stop NAICOM from proceeding with the recapitalization exercise few days to the first phase deadline, which required insurers to have met at least 50 percent of the threshold set for the underwriters.

The House of Representatives had, prior to the period, ordered the discontinuation of the recapitalisation exercise and had written to NAICOM in that regard, stating that the impact of challenges such as the COVID-19 pandemic and #EndSARS protests slowed down the performance of insurers and hampered them from meeting the new minimum capitalisation model.

The lower house of the National Assembly had stated, “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.”

The event demonstrated a replay of 2018 when some shareholders disagreed with the decision of NAICOM to stop the execution of the tier based capital, and the previous recapitalisation exercise which was rarely devoid of opposition and litigation, hence, leaving stakeholders to wonder if an actual recapitalisation is possible without political and other interventions.

Taking an in-depth look at the current state of hiatus over the recapitalisation programme, experts in the industry have said that the reason for the long silence may be due to lack of clarification on the first phase of the exercise, making it difficult to dive into issues regarding the second phase.

In a note to Business A.M., Ekerete Ola Gam Ikon, a management consultant on insurance, strategy and entrepreneurship, said, “Except there has been a clarification regarding the suspension announced by NAICOM last January following the court case, there is no basis to discuss the second phase when the first phase was suspended. We are not looking forward to the deadline of the second phase.”

Between risk base and recapitalisation

While the uncertainty continues to bother stakeholders, another topic that has ensued is the possibility of adopting the risk base structure over the recapitalisation model.

NAICOM proposed the general capital requirements for the different categories of the insurance business requiring life insurance firms to raise their minimum paid-up capital to N8 billion, up from N2 billion; general insurance companies to N10 billion from N3 billion; composite insurance to N18 billion from N5 billion; and reinsurance to N20 billion from N10 billion.

According to NAICOM,  the planned recapitalisation will result in the ability of companies to underwrite bigger risks 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 wants the introduction of risk based capital, describing it as the right capital model for the insurance industry as it seeks to limit the capital required by operators to the level of risks they can carry.

Ganiyu Musa, the chairman of NIA, explained that in adopting a risk based capital adequacy template, there is a need to take cognizance  of insurance risk, market risk, credit risk, and operational risk, as well as the need to apply such capital charges on assets and liabilities.

He said, “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.”

Similarly, Yetunde Ilori, director-general of the association, added that risk based capital is the direction to go in order to attract the right investment and increase insurance contribution to the Gross Domestic Product (GDP).

She 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.”

Voicing his opinion on the system that best fits the Nigerian insurance industry, Kunle Aduloju, an associate professor in the department of Actuarial Science and Insurance, University of Lagos, said  recapitalisation is important because it ensures that insurers are strong enough to carry on the risk of big businesses that are usually taken to other countries.

However, he said that capital alone would not increase penetration level, adding that the current level of capital could still help to deepen insurance penetration if adequately utilised in conjunction with other things rather than just hammering on recapitalisation.

According to him, the risk based capital is preferable but it depends on the way the regulatory body wants to go about it.

Gam Ikon proposes that attention be focused more on  the implementation of Solvency II and IFRS 17 as well as the Code of Corporate Governance, so as to develop insurance companies with good quality, notwithstanding their capital, be it tier-based or fixed.

He said, “Happily, NAICOM is paying attention to training and capacity building in critical areas and readying their employees for the task ahead. How many insurance companies can actually afford the cost associated with the full implementation of the new standards?

“What needs to be done requires the insurance industry to open itself to receive innovative solutions, especially in the area of communication, which constitutes about 70 percent of the insurance industry’s problem,” Gam-Ikon said.

The challenge is on. But what should insurers do?

Many insurers are already displaying their financial strength through the positive and consistent growth in their financial statement in the face of economic challenges. But some experts are of the opinion that Nigeria’s greatest resources are still under utilized, as such there is still a wide room for further improvement.

In lieu of this, stakeholders have challenged insurers who are certain of their capital strength to come out and announce their 100 percent capital base as required by the regulator, notwithstanding the suspension, as this would help to put such underwriters in a better position in the industry.

Meanwhile, while some insurers may have to resort to mergers and acquisition, experts say insurers that find themselves along this path would need to carefully do its assignment and assessment of likely benefits before dabbling into the course.

“If the M & A are merely to scale through recapitalization, they are most unlikely to survive as strong entities. Especially, where we have two or three weak companies coming together, the story will not be different from the previous ones. The evidence of the previous ones are still before us. If a big company acquires a small weak one, there will be chances of going quite well but unfortunately, the big ones are not looking for the small ones because they offer no value, since every company is doing the same thing,” Gam-Ikon said.