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NAICOM tackles undercapitalisation of insurance companies

By Patience Sagh
The global financial crisis which led to the erosion of the capitalisation of  insurance companies has prompted the National Insurance Commission (NAICOM) to beam its searchlight on insurance companies whose capital have suffered erosion due to diminution in the values of assets and provision for bad debt.


The global economic recession and inflationary situations have accentuated the challenges posed by the rapidly changing information technology and dynamics of the business environment while the purchasing power of consumers and the market share of insurance companies have suffered severe diminution. Their real paid-up capital is also facing the same fate. The financial crisis triggered a shred of capital weakness in some insurance companies.

The commission’s regulation encompasses major activities which include not just financial regulation, the subject of this paper, but also: the formation and licensing of companies, the affiliations and holding company considerations, the licensing of agents and brokers, product approval, marketing methods, disclosure requirements, on-site examinations, investment restrictions, and rehabilitation and liquidation of companies and most importantly to ensure that insurance companies have the financial muscle not only to pay claims but to ensure the sustenance of the companies
Minimum paid-up capital of life insurance companies was raised to N2 billion representing an increase of 1,233.33 per cent while the capital base of non-life insurance companies was increased up by 1,400 per cent to N3 billion.

Composite insurance companies underwriting had their capital base increased by 1,328.57 per cent to N5 billion, while the reinsurance companies were required to increase their minimum paid-up capital to N10 billion, representing an increase of 2,575.14 per cent.

As at the end of December 2008, the market capitalization of insurance companies was N670billion, according to the Nigerian Insurers Association (NIA), apparently there would have been a drop in the figure as a result of huge loss incurred from the crashed in stocks and accumulated debt which insurance companies had to provide for.

Mr Fola Daniel, Commissioner for Insurance stated that the regulatory body would prefer insurance companies to adopt risk-based capital according to the size of the company and business volume rather being tossed about like a traveller without a road map. Daniel envisaged an era where the industry would migration from compliance to risk based model of supervision.

He stated, “It would do the commission a lot of good if insurance companies could migration from prescriptive capital requirement to minimum capital determination based on risk profile.” Some companies in the country do not have enough premium income to meet the liabilities undertaken because the market is not generating expected premium to allow sufficient spread.
Besides, insurance companies are still relatively undercapitalised, that is, neither their share capital nor their free assets match the exposures that they cover most times. This situation is mainly due to the long-term nature and modest yields of investment in insurance. Although underwriters’ technical results may be positive, the return on capital of the insurance business as a whole is generally not sufficiently profitable to attract additional capital.

Thus in many instances, underwriting companies merely satisfy minimum capital law requirements for their capital subscription whilst free reserves are generally kept low because of tax and dividend considerations which prevent insurers from increasing their assets. Again the problem of undercapitalization of insurance companies is further aggravated by crave for  rapid premium income growth which means that insurers must keep the ratio of capital and free assets on an equal footing with increases in the premium volume.

Mr. Sam Ordu, NAICOM’s Finance and Account Director, painted the effects of recession in the industry. He said the global economic meltdown had expectedly caused distress in the economy, eroded confidence, diminished the value of financial assets and created uncertainty for business, customers and the government. He said that the impact of the crisis on the capital market had a direct effect on the insurance industry, adding that the market acts as a vehicle which facilitates intermediary between economic agents with surplus funds and investors who desire long term investible funds.

He stated that the industry as part of the financial services sector generates a pool of long term investible funds from policy holders which are invested in the capital market, and as a result of the financial meltdown, the shares traded in the market have been eroded thereby causing loss of investments to investors including insurance institutions.

Ordu admitted that there as
an erosion of capital base of some insurance companies as a result of downturn in price of shares. Liquidity problems as a result of toxic assets that are not easily realisable and there is unprecedented loss of key employees of the industry as a result of the economic downturn. Some companies without proper asset and liability management are having difficulty in settlement of general claims.” The nation’s insurance market has not yet reached the level of growth and sophistication that characterise insurance markets of developed economies.
However, changing political and economic conditions in developing countries reinforced the tendency towards the serious statutory regulation of insurance in to order to defend and safeguard the rights of the insured much as the national Insurance Commission (NAICOM) is doing.

The driving force behind the commission’s action was the desire to achieve some degree of self-sufficiency in the field of insurance by creating a domestic insurance sector which could amass insurance funds for local investment and conserve foreign exchange. Besides, the developments led to the creation and consolidation of the nation’s insurance sector, so much so that local insurance companies became the principal supplier of insurance cover in the local markets.

But compared with developed market economies, the risk situation in local insurance market is still characterised by relatively modest values at risk, a slight degree of sophistication, a modern industrial set-up and a low level of awareness.

In spite of intensive efforts of insurance companies contribute to economic and social development toppled with their increasing use of modern technology and its different applications, some deterioration in underwriting results is to be expected, particularly in view of the imbalance between premium receipts and exposures.
Mr Justus Uranta, managing Director of Niger Insurance Plc in his submissions said  he still could not fathom why some people feel that the Nigerian insurance industry is not yet there in terms of capital base.

Uranta stated, “I don’t know what they mean when they say the insurance industry recapitalisation did not meet its expectation. When, you want to look at insurance business, you must look at the peculiarities which make it different from other sectors. What do I mean by this? In insurance, we have a lot of factors that play in the business which enable us meet our primary obligation of efficient settlement of claims and that is reinsurance, treaties and all that.

“On our income and capital base, I will say our income at the moment justifies our capital base because one important thing most of us operators run away from is research and this requires a lot of funding. In the product market, a lot of money is spent on research and you will be surprised that after spending close to N20 million or more, the product may not meet the taste of end users, so you jettison that and start afresh,” he stated.

The Niger Insurance boss submitted, “You can only do that when you have a strong capital base. If an insurance company with N2 billion capital base spends about one quarter of that on research over time, then you see that their bottom-line is eroded so much that it could impact negatively on their operations. So, beyond that, you also need to establish visible branch outlets that can convince people that this company is ready and means well.”



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