By Patience Saghana
Insurance companies have appealed to the Federal Government to inject bailout funds into the sector to save it from imminent collapse.
Recently, the Central Bank of Nigeria (CBN) injected about N620 billion bailout fund into eight banks which suffered erosion of capital due to huge non-performing loans. Vanguard investigations revealed thatÂ a lot of insurance companies are also battling similar challenge of erosion of shareholdersâ€™ funds occasioned by diminution in value of investments in shares, loss of deposit to distressed banks and loss arising from payment of fraudulent claims. These insurance companies, it was gathered, might close down except the authorities intervene to save them by injecting bailout funds.
Mr Wole Oshin, chairman, Nigeria Insurers Association (NIA) confirmed this saying, â€œThe insurance industry did not have to collapse before it could get a bailout rather, the bailout to the sector should be prompt to enhance capacity of insurers and also strengthen the sector further.â€
He said that the toll on investments with diminution in value of shares and in some cases, loss of deposit to distressed banks and increase in fraudulent claims paid by insurers, had eroded shareholdersâ€™ funds of insurers and crippled their investment income.
He said in addition to injecting bailout funds, the authorities should concentrate on supervision of insurance companies as against supervision of products offered by insurance companies which is what obtains presently.
Speaking at this yearâ€™s conference and annual general meeting of the Nigerian Council of Registered Insurance Brokers (NCRIB) in Lagos, Oshin averredÂ the nationâ€™s insurance industry would do better with bailout at this critical time adding that this isÂ reinforced by the report of the Jacques de LarosiÃ¨re led seven-man team set up by the European Union that critically assessed the EU financial services sector and advised the President of the European Commission, JosÃ© Manuel Barroso on the future of European Union’s financial regulation and supervision.
Oshin noted that the objective of the Larosiere-led team submitted early this year, was geared towards a new regulatory agenda â€“ to reduce risk and improve risk management; to improve systemic shock absorbers; to weaken pro-cyclical amplifiers; to strengthen transparency; and to get the incentives in financial markets right and above all, to build confidence of investors; depositors; and to protect the EUâ€™s citizenry.
â€œDe LarosiÃ¨reâ€™s report is, as at today, an important contribution to providing a blueprint for future financial construction especially on the reportâ€™s proposals for reform of the supervisory role in the EU regulation and to a large extent, to global reforms.
Part of the report reads: â€œThe crisis originated and developed in the banking sector. But the insurance sector has been far from immune. The largest insurance company in the world has had to be bailed out because of its entanglement with the entire financial sector, inter alia through credit default swaps activities. In addition, the failure of the business models of monocline insurers has created significant market and regulatory concern.
â€œIt is, therefore important, especially at a time when Europe is in the process of overhauling its regulatory framework for the entire insurance sector, to draw the lessons from the crisis in the US insurance sector. Insurance companies can in particular be subject to major market and concentration risks. Compared to banks, insurance companies tend to be more sensitive to stock market developments (and less to liquidity and credit risks, even if the crisis has shown that they are not immune to those risks either)â€.
But Mr. Fola Daniel, Commissioner for Insurance noted that the theories establishing global systems need a rethink, and that the mode of sectoral regulations must change. Daniel said, â€œThere will be need for regulators to watch carefully what their licensees are doing, not just in their core sectors but where there are subsidiaries, what these are up to.
“Whilst governments consider various bailout options, I am of the opinion that uncoordinated actions will not totally solve these problems, but may in fact lead to the resurgence of economic nationalism.â€
He observed that much has been said about the low penetration of insurance in the country and the reasons for it, but it seems that insurers are not adequately equipped for the challenge as there is now lack of interest in anything outside the industry.
Daniel said that the current global crisis has shown how small the world is, and that locally, it has shown that beyond the price of oil, problems in other economies can cripple ours too.
“As we seek to operate on the global level, we should realise that we will not be insulated from global problems. The crisis has also shown how interrelated the various sectors are. Problems in the banking sector affect the capital market which in turn affects investments in insurance companies. Technically sound insurance companies are becoming unsettled by over dependence on speculative investments in the capital market,” he maintained.
“The current crisis is not just a result of exotic or fundamentally unsound financial products, but also a failure of regulation. As someone puts it, regulators look the other way and fail to do what they are supposed to do.
Despite warnings, regulators have refused to act in most cases, the extreme one is the situation where a stock trader freely garnered over $50 billion worldwide without a record of his activities or even supervision of his activities by relevant regulators.”
The Insurance commissioner said that from the domestic angle, the current market difficulty was powered by the undue attention companies attach to their share prices rather than to the companyâ€™s growth. He said that no effort was spared to drive and shore up the share price as if this was the main product of the company, adding that in order not to be left out of the speculative trading, insurance companies were raising funds from the capital market, but only applied 20 per cent or thereabouts of those funds to their core operations.
He said the capital market and its ancillary activities rather than grow the insurance business, became the unintended result of the capitalisation exercise.
He said that privately, NAICOM expressed worries about these trends which appeared to be a way to escape the strict enforcement of the Investment Trustees Act as it affects insurance funds, and at the same time, providing these companies with unregulated funds to join the speculation in the capital market. He observed that NAICOMâ€™s refusal to grant requisite approvals for additional capital funds of doubtful application was considered over regulation and also an attempt to hinder the competitiveness of the affected companies. But the development has turned to be effective for the industry in the face of the emerging meltdown.
His words: “We resolved that subsequent approvals for requests to raise funds will be issued on the basis of the need to grow the core business.â€ The meltdown, the NAICOM boss said, would also affect insurance companies through reduction in purchasing power of the insuring public arising from poor sales and financial losses they have suffered in the capital market. This possibility can however be curtailed through introduction of time-sensitive and environment-friendly new products.
Meanwhile, Oshin advised that insurance companies in the country could do themselves a lot of good if they could come up with dynamic products that are relevant to the global crisis and could also add value to the economy of this nation.
For the Nigerian insurance market to render prop up services to the banks, Oshin believes that insurance companies could come up with meaningful products that can support the financial system other than the more traditional products like the Money Insurance and Fidelity Guarantee products.
â€œTo be relevant in the financial service sector, we must develop actuarially-basedÂ financial products which will ultimately make banks more dependent on insurance as opposed to the present situation (contrary to what operates elsewhere).
â€œOur traditional Property Insurance products also need to be more sophisticated and in line with modern developments in this sector.â€Â He said some of the products that insurance companies need to intensify effort at selling if they already have them in place or produce in order to boost the economy are: Credit Swap Insurance Modules; Mortgage Insurance; Professional Indemnity Insurance; Directors & Officers Liability Insurance; Fidelity Guarantee Insurance; Life Insurance; Annuity Insurance; Political Risk Insurance and Underwriting Share Offers.