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New capital base for insurers

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New capital base for insurers

After years of thought-provoking expectation, the Federal Government, through the National Insurance Commission (NAICOM), eventually did the needful a fortnight ago by moving the first step towards strengthening the nation’s insurance operations.

 

For a sector that ordinarily should be the pillar of the economy, it has been disheartening that for years, it held a begging bowl and operating below par.

With a country like Nigeria that is so endowed with huge human and natural resources, the fact that the nation’s insurance sector comes behind those of South Africa, Kenya and Algeria and may be one or two others, is another poor testimony of how much the country’s wealth has been poorly tapped.

 

After the last recapitalisation exercise in 2007, financial experts had expected the sector to make progress by going through another round of the process, especially since several factors have also weighed in on the economy.

 

Rather than experiencing growth, recent statistics revealed that the industry, in a manner that is not economically viable, has been carrying risks of over N1 trillion with just a gross premium income of less than N400 billion; a time bomb just waiting to explode in the event of very huge claims to be paid.

 

Since the last recapitalisation, which moved the capital base from the initial N150 million, N200 million and N350 million to N2 billion, N3 billion and N5 billion, for life, non-life and composite respectively, so many changes have been recorded in the economy.

 

For instance, a vehicle that cost N1 million in 2007 now cost close to N10 million or more. Also, inflation has eaten deeply into other aspects of the economy while foreign exchange rate has, unprecedentedly, gone higher than ever experienced in the country.

 

Amid these dynamics, underwriters chose to remain in their comfort zones, just getting by on a daily basis and contributing about 0.6 per cent to the Gross Domestic Product (GDP).

 

In the latest dispensation, which is set to redefine the sector, beginning from January 1, 2019, the industry will operate under a new Tier-Based Minimum Solvency Capital (TBMSC) consisting of Tier-1, Tier-2 and Tier-3.

 

The Risk Based Capitalisation (RBC) is expected to deepen the sector through the application of certain reform measures such as the Market Development and Restructuring Initiative (MDRI).

 

The tier-based recapitalisation arrangement is out to strengthen the industry and also make it possible for all the operators to concentrate on areas of their strength so as not to run into crisis in the event of claims payment or under-price risks just to be seen as part of the system.

 

Good enough, the soft landing is coming about 11 years after the first recapitalisation and barely two years after the Minister of Finance, Mrs. Kemi Adeosun, said the sector was due for another round of the exercise.

 

In order not to put pressure on them, the operators are not mandated to search for funds but should rather readjust their business and concentrate on certain risks based on their financial capacity.

 

According to the arrangement, 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 Life Insurance business are mandated to upgrade their capital base 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.

 

Despite efforts made by the regulator in the past to improve the process through several reform initiatives, the operators have, however, defined their target markets, even if it is not paying off too well, thereby, abandoning others and leaving them untapped.

 

Apart from denying the industry the necessary premium, it has also rendered penetration abysmally low at just about one per cent in a country of over 160 million people.

 

To ensure a better coverage of the six Compulsory Insurances, the regulator had introduced MDRI with an advice for the operators to design products that will appeal to members of the public.

 

Rather than key into such initiatives, the operators had long preferred to do things their own way, after which they get into manipulating reportage of annual profit just to be seen as making progress while actually swimming in losses and sundry expenses.

Long before the current Risk Based Capitalisation, Adeosun had lent her voice for the operators to up their game to enable them play in big ticket risks.

The minister, like every other investor, believes the latest reform will lead to emergence of bigger and stronger players with enhanced capacity, restore public confidence, and also enhance the international competitiveness of local operators.

 

With the latest development, we believe underwriters will naturally fall into their capital classification and cover risks therein widely and effectively.

 

The process will also throw up investors and more money into the system, thereby creating jobs for teeming youths.

 

We also align with the fact that apart from instilling sanity in the system, it will also boost awareness, and deepen penetration especially in the grassroots.

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