Recently insurance industry regulator NAICOM announced a new recapitalization round for insurers, Ebere Nwoji in this report examines the possibility of its success in an election year
The insurance industry regulator, the National Insurance Commission (NAICOM), at the recent Insurance Committee meeting held in Lagos, announced a new bid to carry out a recapitalization exercise in the industry.
Insurance Commissioner, Mr Sunday Olorundare Thomas, who announced it last week in Lagos at the fortnightly meeting between Chief Insurance Officers and NAICOM management, said the commission would disclose by the end of this month (April) the roadmap of the exercise. .
The meeting of the insurance committee which is akin to the committee of bankers in the banking sector is a crucial meeting where the management of all the insurance companies in the country represented by their managing directors rub shoulders with NAICOM, the regulator on sensitive issues which affect the industry. .
At the recent meeting held in Lagos, the commission muted the idea and said the capital raise this time would be risk-based.
Risk-based capital raising is a recapitalization model that requires insurance companies to provide capital based on the weight of risk they bear.
It examines the individual responsibility of companies and allocates capital adapted to the risks.
Industry analysts said the hint of the capital increase might not come as a surprise to a forward-looking insurance chief executive, as the high level of inflation in the country has obviously made the capital base minimum in force less valuable.
Currently, insurance companies that underwrite life business have N2 billion as minimum operating capital, those underwriting general business have N3 billion as minimum operating capital while composite businesses are i.e. those who underwrite life and general business, have N5 billion as the minimum capital requirement. Reinsurance companies have N10 billion as minimum capital required. The proposed capital increase has raised questions among operators and industry stakeholders, particularly in the area of timing.
One of the operators who spoke to THISDAY on an anonymous pitch said personally that he was not against the capital raise, but the only area he was worried about was when the regulator decided to raise the issue of recapitalization.
The licensed insurer said that although he was inevitably absent from the meeting to listen personally to what was said regarding the recapitalization offer, the regulator should be competent enough to consider the time to be able to take the right decisions on a sensitive issue of this nature.
In this offer, he said the regulator should be careful not to let what happened in previous years repeat itself.
According to him, one of the issues that forced those who frustrated the previous exercise to go to court was the fact that the exercise took place during the election and political campaign period as such the operators have struggled to raise funds from investors due to lack of confidence in the country’s political and economic climate.
The insurer said that this new recapitalization offer which returns in this political period raises many questions.
He said, however, that until the end of April, when the commission presents the roadmap on the exercise, stakeholders will have to wait to find out what to do.
For the regulator, he said it would be good to put the case on hold after the election or to structure it so that it is not affected by the election, especially with regard to the deadline and the period capital raising.
He also advised that the margin for increase should not be much higher than the level of capital the operators have already raised in the foiled exercises. He said it would rain down peace and leave no room for turmoil and controversy.
According to him, as it stands, no life insurer in the country has N2 billion and no non-life company has N3 billion, as previous attempts by the commission had forced many people to raise their capital before cancellation.
He said that being so, the commission should ensure that the new minimum capital is not such that it puts operators under very serious stress, so that those who often challenge it in court for fear of being swept away by the new capital would be able to reach the new capital and allow the exercise to hold.
For the operators, he advised to cooperate this time and make sure the exercise is successful.
He cited examples from the pensions and banking sectors, noting that they were sister sectors and that they were already seeking further recapitalization.
He said it was; insurers must work for the success of their own recapitalization.
According to him, when the minimum capital is spelled out, the operator whose capital capacity could not bear the level of risk he bears should be humble enough to go down to businesses that his financial capacity could bear rather than challenging the new capital in court or they would have to go into amalgamation.
The risk-based capital increase model was already introduced in the insurance industry by former Insurance Commissioner Mohammed Kari on July 25, 2018, through which he divided the entire Nigerian insurance industry into three tier one, tier two and tier three levels depending on the risk they bear.
In accordance with the capital regime issued by NAICOM management at the time, Tier 1 companies underwriting life insurance business were required to upgrade their minimum capital from the current N2 billion to N6 billion, Tier 2 companies were asked to upgrade from N2 billion to N3 billion. Tier one non-life businesses were to increase their capital from N3 billion to N9 billion while non-life insurance tier two businesses were to provide N4.5 billion, tier three was to retain the minimum existing capital of N3 billion.
Tier one composite companies were asked to raise their capital from N5 billion to N15 billion, while second tier composite companies were to provide N7.5 billion and tier three composite companies were to provide 5 billion naira.
NAICOM told operators that the risk-based capital increase was part of the globally accepted risk-based supervision model.
But shortly after this declaration, some operators rose against it mainly because of the issue of the compliance deadline.
Disruption of exercise
Some operators worked with their shareholders to challenge the development in court and along the line NAICOM was forced to quash the idea and then proposed the increase in the minimum share capital model which set the capital at 8 billion naira for life insurance operators, 10 billion naira for non-life insurance and 18 billion naira for joint ventures, which gives operators December 31, 2021 the deadline to comply.
But the operators again went to court and won an injunction to suspend the exercise until that day.
Need for recapitalization
Since then, industry stakeholders and business operators who have one business or another to deal with the insurance industry have been campaigning for a capital raise in the industry.
Recently, one of the airline operators said that the entire capital of the industry cannot insure a single aircraft in Nigeria.
The same goes for the operators in the oil sector who said that the capital of the entire insurance industry in Nigeria could not insure a single oil rig in the country.
The regulator itself had repeatedly explained that having enough operating capital would allow operators to reap more bounties instead of the current situation where huge industry bounties were often carried to the abroad due to lack of local capacity.
The regulator also said adequate capital would allow operators to settle claims easily.
These have prompted the current insurance commissioner to insist on raising the industry’s minimum working capital.
The commissioner at the meeting, however, did not specify whether he would downsize operators again in tiers or the minimum level of capital that operators would have to provide this time around.
He, however, told insurance chief executives that the picture of the current level of capital raising in the industry under the new risk-based capital raise would become clearer by the end of this month.
If the commission succeeds this time the exercise, it will remain the case of the single capital requirement for operators. This will also align with the regulator’s desire to place the Nigerian insurance industry on the same pedestal as global operators whose regulatory model is purely risk-based.
Warning to stakeholders
Industry stakeholders such as the President of the Progressive Shareholders Association; Boniface Okezie had blamed the failure of previous capitalization attempts on the timing of NAICOM’s implementation of its regulatory initiatives.
According to him, NAICOM failed in its previous capital increase offer which was to be completed on December 31, 2021 because the level base and its subsequent implementation of the share capital increase occurred while the policy was the main concern of the government and given the skepticism of investors. of the business climate in Nigeria during the 2019 elections and the outbreak of the COVID-19 pandemic. He said politics was the worst mistake a regulator would make.
In the present application, stakeholders ask how the commission would handle the exercise in the face of the upcoming elections in 2023.
Analysts’ point of view
Industry analysts said NAICOM should have raised the new issue of the capital increase earlier to ensure it does not coincide with the election period, when investors will be highly skeptical of their investment.
Stakeholders said on the other hand that the commission should have been patient until after the elections.
They argued that although the commission could have assumed that virtually all companies had raised their capital when the bid failed, some companies still struggled to reach the new capital and for these companies, the ego might not allow them to go down to underwriting smaller risks.
Stakeholders warned that any further failure of the much-talked-about capital raise in the industry due to taking the right initiative at the wrong time and being sued for another round of disruption or suspension would be very ridiculous for the operators and the regulator.
They cited an example of what is happening in the pension industry, adding that everything is done in a peaceful and mature way.