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Fraud over statement of accounts, lawlessness mar insurance practice

By OMOH GABRIEL Business Editor

A study of the Insurance industry in Nigeria has painted a gloomy picture of lawlessness, fraud, fictitious accounting and misstated accounts in the books of insurance, brokers and underwriters in Nigeria. The accounts of insurance companies, the report said, are open to misuse for fictitious and fraudulent entries which are often difficult to detect because of either the sheer volume of transactions involved or the lack of frequent reconciliation exercises. The probability of account balances in balance sheets of affected parties being grossly misstated is high.

The report compiled by a group of Nigerian insurance consultants says: “Large amounts are reported in the financials of insurance and reinsurance companies as outstanding premiums. As a result of this, the reported solvency margins of many companies is lower than it ought to be because premiums outstanding for more than a year are disregarded in the determination of solvency margin”. According to the industry study report, “Capacity of insurers and reinsurers to meet their obligations to clients is constrained, insurers and reinsurers are deprived of funds which should have been invested to earn income necessary for meeting the increasingly demanding expectations of shareholders”, while “the financial management of some companies has become a nightmare, the insurance industry is exposed to the contagious impact of the possible failure of any or a few of the major debtors.”

Fola Daniel, Commissioner for Insurance
Fola Daniel, Commissioner for Insurance

According to the industry report, “The current state of affairs with regards to wide difference in the values of premium receivable/payable reported by interfacing parties in the insurance value chain and high level of premium receivable in the financials of insurers and reinsurers has a number of noteworthy implications. These include: non-compliance with the law; the Insurance Act 2003, incomplete as it may seem, has provisions which if completely complied with, should have prevented the current state of affairs on premium receivable. Thus the current problem suggests that some parties in the industry are violating the provisions of the law.”

Continuing it said: “When the accounts are eventually reconciled, it may be discovered that brokers, insurers or reinsurers may have unduly overstated or understated premium receivable and/or payable in their records. When the accounts are corrected, the financial position of some operators may be significantly lower than what is currently being reported. Although assessed solvency levels may not change because premium receivables are disregarded in the determination of solvency levels, the net worth of many companies as reported in their financial statement may be substantially less than it actually is because uncollectible premiums are carried as assets.

“Since the contracts on which the current premium receivables are based are not valid in law, no legal rights of recovery may accrue to insurers/reinsurers. Consequently, recovery under processes of the law may not be feasible. Only voluntary action by the brokers, persuasive intervention by industry elders, administrative action by NAICOM and use of institutions like EFCC will guarantee the recovery of the debts.”

Stating the problem of insurance practice in Nigeria, the report said: “There are wide differences between the balances reported as premiums receivable/payable in the books of interfacing parties in the insurance value chain (brokers, insurers and reinsurers). As a result of this, lots of avoidable man hours are spent on reconciliation exercises which, in many cases, are never fully concluded; debtors use accounts differences as excuses for not honouring their obligations; auditors find it difficult to conclude on the verification of balances indicated as outstanding in the books of the parties.”

Continuing it stated that “many brokers and lead insurers do not operate proper trust accounts; Insurers’/Reinsurers’ assets and their clients’ liabilities are mixed up with own operating assets. Similarly, lead insurers mix up co-insurers’ assets and clients’ liabilities with their own operating assets and liabilities. The failure to keep properly segregated records contributes to the accounting differences and the difficulty experienced during reconciliation exercises. Insurance brokers who fail to keep separate records for insurance transactions are in contravention of section “42.-(I) of the Insurance Act 2003 which provides that “An insurance broker shall keep records of all insurance business handled by him and, for the purposes of this section, separate records shall be kept by the broker with respect to


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