- Experts canvass more reinsurance firms in Nigeria
Cynthia Ezekwe
In an effort to address the issue of capital flight in Nigeria’s insurance sector, industry experts have proposed the creation of more reinsurance companies in the country. By increasing the number of reinsurers operating within Nigeria, they argue that insurance premiums can be retained domestically, leading to greater industry growth and development.
Nigeria’s insurance industry has long been faced with the challenge of capital flight, a phenomenon where a large portion of the premiums collected from policyholders are sent abroad to reinsurers, reducing the amount of funds circulating within the local economy. This outflow of capital has far-reaching consequences, not only depriving the country of valuable resources for economic growth and development but also inhibiting the growth and expansion of the insurance sector itself.
Reinsurance companies play a vital role in the insurance industry by helping primary insurers manage risk. By transferring a portion of their liabilities to reinsurers, primary insurers can issue policies with higher limits, better manage their cash flow, and maintain lower levels of capital, allowing them to underwrite more policies, invest capital in other areas, and remain financially stable during extreme events. This risk transfer mechanism enables insurers to increase their revenues, take on more risk, and ultimately pay out less to claimants during natural disasters, strengthening the overall resilience of the insurance sector.
Insurance capital flight in Nigeria occurs when insurance companies transfer a portion of the premiums collected from their policyholders to foreign reinsurers, leading to a significant outflow of capital from the country. This practice, which has plagued the Nigerian insurance industry for some time, not only drains valuable resources from the local economy but also stunts the growth and development of the insurance sector in the country.
Due to various factors such as regulatory constraints, limited capacity, and lack of expertise, Nigerian insurers often cede a large portion of their risks to foreign reinsurers. As a result, a substantial amount of premiums collected from Nigerian policyholders is transferred abroad, thus contributing to capital flight.
This trend has far-reaching implications for the Nigerian economy, including reduced investment in local assets, decreased economic growth, and increased dependence on foreign capital. To mitigate this issue, there have been calls for increased local retention of insurance premiums, improved regulatory frameworks, and capacity building for Nigerian insurers.
To address the challenge of insurance capital flight in Nigeria, experts suggest establishing additional reinsurance companies in the country. This would help to keep more insurance premiums within Nigeria, supporting the local economy and promoting economic growth. Furthermore, they noted that it would allow local insurers to develop their capacity, expertise, and competitiveness, enabling them to retain more risks and reduce their reliance on foreign reinsurers.
Sam Onyeka, lead director at Transparent Protection Ltd/Gte (TPL), an insurance NGO in Nigeria, emphasised the need to establish at least five large reinsurance companies in the country over the next decade to effectively counter insurance capital flight.
He noted that the presence of these large reinsurers would provide Nigerian insurers with more options for reinsurance placement, ultimately leading to greater local retention of insurance premiums and increased capital investment within the country.
Onyeka stressed the significance of setting up mega reinsurance companies in Nigeria, which would substantially decrease the vast amounts of reinsurance funds currently flowing to foreign companies. He highlighted the importance of following the recommendations of international financial institutions such as the International Monetary Fund (IMF) and the World Bank, which suggest that Nigeria prioritise the establishment of well-capitalised reinsurance companies rather than imposing excessively high minimum capital requirements.
Kunle Ahmed, newly appointed chairman of the Nigerian Insurers Association (NIA), acknowledged that Nigeria’s capital requirements for insurance companies are reasonably competitive in comparison to other African countries. However, he pointed out that the size of the insurance market in other countries is considerably larger, placing Nigeria at a disadvantage.
Ahmed stated that insurance companies do not require excessive capital to operate, as the insurance business is grounded in the principle of risk sharing. He asserted that having more local reinsurance firms in Nigeria is critical to retaining more of the insurance premiums within the country as these firms can absorb a portion of the risks, allowing primary insurers to retain a larger share of premiums.
The NIA chairman remarked that capital alone does not determine the capacity of an organisation or company, stating, “I agree that it determines your retention, but it’s not the single determinant of your capacity. What we risk is that we’re going to have insurance companies that are not deepening insurance business in Nigeria, but are just sitting down and investing the money that they have in other things. I believe that we should focus a lot more on deepening insurance in Nigeria.”
