Risk based supervision: time for bad eggs to be swept out – operators

By ROSEMARY ONUOHA
The global economic crisis brought to the fore the need to refocus regulation and supervision. It brought a lot of lessons such as ‘that lenders, borrowers and regulators erred; that better financial risk management is required; that no company is too big or too old to fail; that central banks, other regulators and governments cannot be bystanders; and that greater regulation and monitoring of exposure is required.’

Being the regulator in charge of the insurance industry, the National Insurance Commission (NAICOM) adopted the risk based supervision.

The Commissioner for Insurance, Mr. Fola Daniel, stated that the current shift from the traditional compliance based supervision to risk based supervision has been precipitated by the recent financial crisis that has seen the failures in many financial institutions, adding “The general understanding is that supervisors failed to ensure that institutions understood and dealt with risks that they were undertaking and also failed to ensure that institutions could raise  capital from conventional sources when the need arose.”

Explaining what risked based supervision entails for the insurance industry, Mr. George Onekhena, deputy commissioner finance & accounts stated that risked based supervision is an approach to supervision in which the action of the regulator is determined by both the risk profile of relevant institution and the extent to which such institution can manage associated risk with minimal impact on policyholders and market interest.

While noting that risk based supervision is predicated on the relationship between risk and capital, Onekhena stated that the higher the risk profile of the insurer, the higher the capital it must hold.

Change imperative for NAICOM Onekhena explained that change imperative for NAICOM includes demand for more effective regulation; need to optimise use of limited resources as well as need to prove effectiveness to stakeholders. According to him, risked based supervision is an approach that can facilitate NAICOM’s success in addressing these change imperative.

He explained that risk based supervision treats operators differently depending on each operators demonstrated ability to manage risks, adding that it does not penalize well_managed entities by making them operate under standards designed to keep weak, poorly managed ones solvent as what prudential supervision is about is helping protect other people from the failure of the institution by trying to ensure the institution is adequately run.

In his words “An adequately run institution needs to know why it is in business. It needs to have a strategy and some idea of where its revenue will come from. It needs to know what kind of risks it faces and, preferable to try to measure them. It needs to know what kinds of risks it wants to face and take measures to eliminate the rest. And it needs to have some way of telling how much capital it needs to deliver an acceptable risk_adjusted return to shareholders.

Bold move
A move by NAICOM that operators have described to be  enforcement of risked based supervision is the suspension of both Spring Life and IAA not too long ago.

Acting in accordance with its statutory powers under (part V11) of the NAICOM Act 1997, NAICOM suspended the management of Investment & Allied Insurance Plc (IAA) from office last December and as the insurance regulatory authority, assumed control of the company and appointed a new management team to manage the affairs of the company for an initial period of six months.

NAICOM noted that the move became imperative when in the course of on_site inspection exercise, discovered a number of fundamental weaknesses in the management of the company including poor corporate governance structure practices, weak management and internal control, non_payment of outstanding claims and, failure to account for the sum of N26.6 billion being proceeds of private placements in the company.

NAICOM also suspended Spring Life Assurance Company Limited from operating in the country’s insurance market pending when the management and board would shore up their capital base to the N2 billion statutorily required of life insurers operating in the country.

Operators’ position
Commending the move of the regulator, Mr. Yemi Soladoye, an industry consultant stressed that NAICOM should enforce strict regulation on insurance companies and not just impose fines on them when they fail to abide by industry standard as has been the method prior to now.

Soladoye noted that NAICOM should go as far as suspending companies from operating in the market just like the Nigerian Stock Exchange (NSE) did when companies fail to submit their results on time to the NSE last year.

In his words “Sanctioning a company should not be about paying fine. It should be about making the industry players know that NAICOM has the power to withdraw a license as the regulator. It should not be about ‘we fine you,’ but by telling them ‘you are probably not fit to run this business.”

Meanwhile, Prince Mike Ikupolati, Director General of West Africa Insurance Institute (WAII) tasked NAICOM to be specific and more alert to its responsibilities and should have indicators to monitor unethical practices.

Ikupolati charged insurers on the other hand to follow the rule of the profession ethically, saying that such action is pertinent because if insurance companies follow the rule of the game they are not likely to run into the kind of problem that the banks ran into.

In his words “I believe that NAICOM should not wait until there is crisis. They should put in some monitoring devises to see that they do a total diagnosis of the industry and operators and be able to know when operators are going off course and when they are not.

Managing Director of Consolidated Hallmark Insurance Plc Mr. Eddie Efekoha noted that it is high time the industry rid itself of the bad eggs that have been giving it  negative perception.