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Companies in Nigeria” (“TBSC Policy”), was subsequently withdrawn on November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
INDUSTRY RECAPITALISATION: OPPORTUNITIES FOR THE INSURANCE INDUSTRY
Reviewed by Atinuke Aladenika
on
May 08, 2020
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