Martins Azuwike
Since the advent of insurance business in Nigeria in 1921, the industry has continued to struggle to match the profile of peers. It has considerably lagged the developed markets and among emerging markets, performance has paled and hardly convincing.
Although the industry had been hobbled by a wagon load of niggling factors and glitches over the years, some of them self inflicted by the practitioners, the most disturbing of them all remains the issue of low capitalization.
While low capital levels, which have constituted a blot on the entire industry landscape, insurance penetration in the country has remained low when measured against other African countries with comparable GDP per capita.
For instance, life insurance in Nigeria averaged 0.1 percent from 2008 to 2013, according to data from UNESCO, World Bank, NationMaster and McKinsey analysis. It was 1.1 percent in Kenya and Morocco. Non-life business, which also averaged 0.3 percent in Nigeria over the period, was 2.2 per cent in Kenya, 2.1 per cent in Morocco, and 0.6 per cent in Algeria.
From the regulatory perspective, however, the National Insurance Commission (NAICOM) has risen to the challenge, inspiring a wave of reforms at changing the narrative and building momentum for sustainable growth in the industry.
Among the various policies put in place by the regulatory agency to grow the insurance market is the Market Development and Restructuring Initiative (MDRI). The MDRI seeks to address core issues such as capacity building for its staff and stakeholders in the industry, development of the insurance agency system, building confidence and integrity in the industry, awareness creation and securing the support of government and relevant agencies.
NAICOM has also introduced risk-based and compliance-based regulation as well as the implementation of compulsory insurance, including public compliance with various compulsory insurances requirement of the law.
This, it has done, on the strength of the Insurance Act 2003, which made five classes of insurance – motor vehicle 3rd party, group life assurance, health professional indemnity insurance, builders’ liability insurance, and occupiers’ liability (public building) insurance – compulsory in a bid to protect the interest of 3rd parties. In its firm belief that there is enormous space for growth in the vastly untapped industry, NAICOM also recently introduced the tier-based minimum solvency capital policy for insurance companies in Nigeria.
In its circular No: NAICOM/DAPCIR/14 /2018 dated August 27, 2018, the apex regulatory agency said: “The National Insurance Commission (“The Commission”) in pursuant of its statutory function of protecting insurance policy holders, beneficiaries and other stakeholders, has deemed it necessary to expound upon the minimum capital conditions of insurers, with the aim of providing clarity on the restriction of business activities and scope of operations of insurers to the underwriting of risks commensurate to their solvency capital level.”
The regulator specifically stated that in the exercise of the powers conferred on it under extant laws, it was issuing the circular for the introduction of the tier- based minimum solvency capital requirements, assessment of capital adequacy and solvency control levels of all insurance companies in Nigeria, with effect from October 1, 2018.
“The Circular shall be read in conjunction with the provisions of the insurance act, the NAICOM act as well as other regulations, guidelines, notices and circulars that the Commission have issued or to be issued from time to time. These Circular shall apply to all insurance companies, other than Reinsurers, Takaful operators and micro-insurance companies, and all insurance companies are required to ensure strict compliance with the Circular by formally directing their staff to comply,” it further stated.
Avid followers of developments in the industry maintain that it is apt that the latest policy slant by the agency has been long overdue, considering the fact that the last time the insurance industry witnessed recapitalization was 2005/7. Since then, the operating environment has also been exposed to series of turbulence and uncertainties. The old capital framework was also rulebased, while risk factors of business lines within each insurance segment, which vary significantly, were hardly considered.
The point must not be lost on insurers that there is an urgent need for a swathe of policies for companies to evolve to see the country through the opportunity lens in the contemporary market. In the backdrop of this, there is also a need for a step change in the way business is conducted in the country. Insurers can and should rise to be counted here.
It is also pertinent for insurers in this market to realize that the industry ought to have long recapitalized and readjusted to the realities of significant upward increase in risks arising from macro –economic environment such as inflation rate, interest rate and devaluation of the national currency, and other factors unleashed immediately after the 2005/7 exercise by the 2008 global financial crisis that set in with far reaching effect on the wealth of insurers.
Though these game-changing factors led to increase in current value of insured assets and operating cost of insurers, the same regulatory capital continued to rule while there has been no significant increase in shareholders’ funds of many insurers. With the emerging regime in view, tier-3 life companies would be involved in individual life, health insurance and miscellaneous insurances. Tier-2 insurers would carry all tier-3 risks plus group life assurance, while tier-1 would include all tier-2 risks plus annuity.
On the other hand, tier-3 non-life businesses will include fire, motor, general accident, agriculture, and miscellaneous insurances, just as tier-2 would involve all tier-3 risks plus engineering, marine, bonds credit guarantee and suretyship insurances. Tier-1 would handle all tier-2 risks plus oil & gas (oil related projects, exploration & production), and aviation insurances.
What this means in financial terms is that while tier-1 life companies would need to muster N6 billion as minimum capital (increased by 200 percent), their counterparts in tiers-2 and 3 would require N3 billion and N2 billion respectively going forward.
For non-life, tier-1 companies now need 200 percent increase in capital base to N9 billion just as companies in tiers-2 and 3 need 50 percent capital increase to N4.5 billion and N3 billion respectively.
On the other hand, composite insurance companies in tier-1 need to raise their minimum capital base by 200 percent to N15 billion, while those in tiers 2 and 3 would have 50 percent increase in their capital base to N7.5 billion and N5 billion, respectively.
As a pragmatic regulator, NAICOM made a bold move to ensure that the industry in Nigeria develops the appropriate war chest and shoulders broad enough to handle bigger risks especially in the capital intensive technical aspects of insurance business such as aviation, power, marine, oil and gas.
Although the recapitalisation policy ought to have come much earlier, it is still good and must not be ignored as insurers continue to take too much risk with their little capital. This is coupled with the twin risks arising from impairment of certain assets and inappropriate pricing of insured risks, leading to increasing inability of many insurers to neither honour contractual commitments to the insured and the shareholders nor contribute significantly to strides by government to diversify the economic base of the country.
Having observed underlying trends in the industry on its radar over time, NAICOM deserves commendation for its prescription of tier-based minimum solvency capital for insurers on the basis of their respective risk profiles and their risk management systems, guided by the provisions of extant laws and international best practice. This is where the efficacy of the tier-based capitalization counts.
There are strong chords of relationships between insurance and economic develop ment, and it is based on this that analysts key into the position held by experts, that the regulatory agency’s latest disposition constitutes an important step towards constructing a safe and prosperous market.
It is equally imperative for the industry to change in the short and medium term to reverse the ugly narrative of low insurance penetration, which mirrors the industry’s meagre contribution of 0.48 percent to the country’s GDP in 2016 and a declining gross written premium (GWP) of N235 billion in the 3rd quarter of 2017 against N325 billion at year end in 2016.
It is not all doom and gloom for Nigeria’s insurance market, as they need to buy into the new regime to ensure that the productivity-boosting reforms being crafted and implemented by NAICOM succeed. They must also not fail to understand that they need to continually brainstorm, conceptualize and roll out market-creating innovations, the game-changer they need to reinvigorate their staying power in business.
Insurance uptake of the Nigeria adult population remains low at 1.9 per cent, meaning that about two million of the adult population has one form of insurance or the other and about 94.4 percent has none, while 41.6 percent are financially excluded, according to 2016 EFInA research findings.
Insurance underwriters need to realize that far from the focus of conventional competition, which concentrates on the included consuming minority, the future market belongs to those with capacity to develop innovations that can satisfactorily address the tastes, preferences and needs of the significant portion of the excluded non-consuming pool. This indeed, is where the real competition is and will always be.
