INDUSTRY RECAPITALISATION: OPPORTUNITIES FOR THE INSURANCE INDUSTRY

In 2005/2007, the insurance industry witnessed its last recapitalization and despite the astronomical increase in value of insured assets, spike in the exchange rate thus weakening insurers ability to retain businesses, consequent exposure to higher level of insured liabilities and Operating cost of insurers, the same capital continued to rule in the insurance industry. 

Another attempt by NAICOM at raising the capital base across the industry last year, through a risk-based capitalization scheme, communicated via a circular dated August 27, 2018 and titled: “Tier Based Solvency Capital Policy for Insurance Companies in Nigeria” (“TBSC Policy”), was subsequently withdrawn on November 23, 2018, following protests by some stakeholders and an order of the Federal High Court restraining the TBSC Policy from being enforced.

The insurance industry is a key component of any financial system, but unlike the banking industry in Nigeria, which has seen major growth since the last recapitalisation in 2005, the insurance industry has lagged behind. The increase in capital would introduce new big owners to the insurance industry and this may bring new ideas, innovations and improve oversights resulting to better corporate governance in the system.

HOW DOES RECAPITALISATION HELP US AS AN INDUSTRY?

1.      Increase in retention capacity and conservation of foreign exchange earnings: The insurance retention capacity is the maximum amount of risk retained by an insurer per policy/cover. Retention Capacity determinants/factors are:  Capital Base, Underwriting experience,  Solvency Margin,  Risk Size, Portfolio Mix  ETC. The capital base of an underwriter is of great important.

2.      A large proportion of the local risks especially energy and aviation ceded are presently outside because of low retention capacity. The table below shows selection of some risks in which Approval in Principles(AIP) have been granted recently. Hence, the increase in capital  base would definitely increase retention capacity of the underwriters.

3.      Emergence of bigger and stronger insurance companies: A recapitalised industry and the emergence of stronger and financially stable players will help stimulate business activities by increasing market penetration and also provide an indirect source of motivation and innovation for individuals and small businesses who know they are covered in the event of any loss.

4.      Increase attractiveness to foreign direct investment.

5.      Deployment of more advanced technological resources: A recapitalised insurance industry will enable companies deploy more capital to improvement in technology, which will help challenge the traditional ways of buying and underwriting insurance, and replace them with newer, faster and more reliable ways of insuring life, goods and property. In summary the benefits of improved technology for insurance companies will be:

·         Help generate new businesses, thereby increasing premium income.

·         Reduce overhead costs and improve efficiency.

·         Increase the Return on Investment (ROI) of insurance companies.

·         Increase competitiveness amongst players

·         Fund Research & Development and Innovation

6.      Improvement in the liquidity position of the insurance underwriters: The liquidity position of some of the underwriters is very bad. This is because, heavy investment are made on fixed assets like building, land etc. which are impacting on their ability to meet current obligations as they fall due. The capital increase will thus make the company liquid to meet their obligations.

7.      Improved marketing and corporate branding

8.      Underwrite complex risk and attract diverse skill and expertise

9.      Growth for the middlemen: As more businesses are retained, more commission are earned for brokers.

10.  Overall positive effect on the economy: Due to the nature of the insurance business, which is to provide cover in the event of any loss, insurance companies are vital to any economy because disasters are inevitable

BENEFITS OF TO THE INSURING PUBLIC AND THE ECONOMY

With recapitalization, the insuring public within the Nigerian insurance market will gain the following;

·         A more stable market

·         Improved service delivery as service becomes the selling point of many underwriting firms

·         Innovative products and better pricing

·         Prompt claims payment

·         Higher returns on investment.

·         More Innovative Products through development in ICT

Today, technology is at the heart of every industry, and if properly deployed, it will help create opportunities that are both exciting and convenient for customers. If technology is properly deployed by Nigerian insurers, it will enable them transform data provided by potential customers into actionable insights that will help properly assess individual risks, rather than relying solely on the information provided by customers.

In Kenya for example, a number of insurers have apps for clients. Jubilee Insurance launched JubiCare and JubiAgent, the apps that allow self-service using smartphones. Jubilee also integrated Artificial Intelligence into their Facebook Page through the use of a chatbot called Julie, it's ‘Live Intelligent Expert’ that answers queries. This ensures faster and efficient delivery.

THE WAY FORWARD

With this New Minimum Capital Requirement, further consolidation of the Nigerian insurance sector is imminent, as some insurers may seek to merge or be acquired by bigger firms, in a bid to comply with the Circular.

As insurance and reinsurance companies begin the necessary move towards shoring up their capital base (during the 13-month grace period granted to existing operators to fully comply with the Circular), it is expected that the market will gear up for new private equity and M&A deals in the coming months.

With this impending recapitalization and consolidation exercise, it is hoped that the “surviving” Nigerian insurers will be stronger in their capacity to take on profitable high risks, so as to enable the Nigeria Insurance Industry function well and fit into an integrated global financial market place, as envisioned in Nigeria’s Financial System Strategy (FSS) 2020 and the Vision 2020 development plans.

Written by: Atinuke Ajayi