Fresh Recapitalisation Huddle for Insurers

Recently, insurance sector regulator, NAICOM announcement fresh round of recapitalization for insurers, Ebere Nwoji, in this report, looks at possibility of its success in an lection year

Insurance sector regulator, the National Insurance Commission (NAICOM), at the recent insurance Committee meeting held in Lagos announced fresh bid to carry out recapitalisation exercise in the industry.

The commissioner for insurance, Mr. Sunday Olorundare Thomas, who announced this last week in Lagos at the bi monthly meeting between insurance Chief Executives and NAICOM management said the commission would by the end of this month (April) unveil the road map for the exercise.

The insurance committee meeting which is similar to the bankers committee meeting in the banking sector is a crucial meeting where the headship of all the insurance companies in the country represented by their chief executives rub minds together with NAICOM the regulator on sensitive issues that affect the industry.

At the recent meeting held in Lagos, the commission muted the idea and said the capital increase this time would be risk based in nature.

The risk based capital increase is a model of recapitalisation that requires insurance firms to provide capital based on the weight of risk they bear.

It looks at the individual liability of companies and assigns a capital that suits the risks.

Timing of Exercise

Industry analysts said the hint on the capital increase may not be a surprise to any forward looking insurance chief executive as the high level of inflation in the country has obviously rendered the prevailing minimum capital base less valuable.

Currently, insurance firms underwriting life business have N2 billion as their minimum operating capital, those underwriting general business have N3 billion as their minimum operating capital while composite firms, that is those underwriting life and general businesses have N5 billion as their minimum required capital. Reinsurance firms have N10 billion as their minimum required capital. The proposed capital increase has raised questions among the operators and industry stakeholders especially in the area of timing.

One of the operators who spoke to THISDAY on anonymous ground said personally he was not against capital increase but that the only area he was worried about was the time the regulator decided to bring up the recapitalisation issue.

The chartered insurer said though he was unavoidably absent at the meeting to personally listen to what was said concerning the recapitaliation bid, the regulator should be competent enough to study time to be able to make right decisions on sensitive issue of this nature.

In the present bid, he said the regulator should take care not to allow what happened in the previous exercises to repeat itself.

According to him, one of the issues that compelled those who frustrated the previous exercise to go to court was the fact that the exercise came up within the election and political campaign period as such, operators found it difficult to raise money from investors because of lack of confidence in the political and economic climate of the country.

The insurer said this fresh recapitalisation bid coming up again this political period raises a lot of questions.

He however said until end of April when the commission comes up with the road map on the exercise stakeholders will have to wait to know what to do.

For the regulator, he said it would be good to rest the case until after elections or to structure it in a way that it won't be affected by the election, especially concerning the deadline and period of capital raising.

He also advised that the margin of increase should not be much higher than the level of capital operators have already raised during the foiled exercises. He said this would make peace to rain and would give no room for agitations and controversies.

According to him, as it stands now, no life insurer in the country has just N2 billion and no non-life firm has just N3 billion as the previous attempts by the commission had compelled many to raise their capital before the cancellation.

He said this being the case, the commission should ensure that the new minimum capital should not be such that would put operators into very serious stress so that those who often contest it in the court for fear of being swept by the way side by the new capital would be able to attain the new capital and allow the exercise to hold.

For the operators, he advised that they should cooperate this time and ensure that the exercise succeeds.

He cited examples of pension and banking sectors, noting that these were sister sectors and were already gunning for fresh recapitalisation.

He said this being the case; insurers should work for success of their own recapitalisation.

According to him, when the minimum capital is spelt, operator whose capital capacity could not carry the level of risk they bear should be humble enough to descend to businesses that their financial capacity could carry rather than contesting the new capital in court or they should go into merger.

Previous Attempts

Risk Based model of capital increase was before now introduced in the insurance industry by the former commissioner for insurance Mohammed Kari on July 25th 2018 through which he divided the entire Nigerian insurance sector into three tiers of tier one, tier two and tier three according to the risk they bear.

Going by the capital regime pronounced by NAICOM management then, tier one firms underwriting life insurance business were required to upgrade their minimum capital from the current N2billion to N6 billion, tier two life firms were asked to upgrade from N2billion to N3 billion. Non life firms on tier one level were to upgrade their capital from N3 billion to N9 billion while tier two firms under non life were to provide N4.5 billion, tier three were asked to retain the minimum existing capital of N3 billion.

Composite firms on tier one were asked to upgrade their capital to N15 billion from N5 billion while tier two composite firms were to provide N7.5 billion and tier three composite were to provide N5 billion.

NAICOM told the operators that the risk based capital increase was part of global accepted Risk Based supervision model.

But shortly after this pronouncement, some operators rose against it mainly because of issue of deadline for compliance.

Disruption of the Exercise

Some operators collaborated with their shareholders to contest the development in the court and along the line, NAICOM was compelled to cancel the idea and later came up with the increase in minimum share capital model which set the capital on N8 billion for operators of life insurance, N10 billion for non life and N18 billion for composite firms giving operators December 31, 2021 deadline to comply.

But the operators again went to court and got injunction to put the exercise on hold till date.

Need for the Recapitalisation

Since then, industry stakeholders and business operators who have one business or the other to transact with insurance sector have been agitating for capital increase in the industry.

Recently, one of the airline operators said the entire capital of the industry put together could not insure one aircraft in Nigeria.

The same is the confession of oil sector operators who said the capital of the entire insurance industry in Nigeria put together could not insure one oil rig in the country.

The regulator itself had severally explained that having enough operating capital would enable the operators rake in more premium instead of the present situation in which huge premium meant for the industry were often flown abroad because of lack of local capacity.

The regulator also said adequate capital would enable operators settle claims with ease.

These prompted the current commissioner for insurance to insist on upgrading the minimum operating capital of the industry.

The commissioner at the meeting, however did not spell out whether it will scale the operators into tiers again or the minimum capital level operators should provide this time.

He however told the insurance Chief Executives that the picture of the current level of capital increase in the industry under the new risk based capital increase would become clearer by the end of this month.

If the commission succeeds in the exercise this time, it will rest the case of single capital requirement for operators. It will also align with the regulator's desire to place Nigeria insurance sector on the same pedestal with the global operators whose regulatory model is purely risk based.

Caution by Stakeholders

Stakeholders in the industry like the president Progressive Shareholders Association; Boniface Okezie had blamed the failed previous capitalisation attempts on the timing of implementation of its regulatory initiatives by NAICOM.

According to him, NAICOM failed in its previous capital increase bid which was billed to be concluded on December 31,2021 because both the tier base and its subsequent share capital increase implementation came up when politics was the main concern of government and given investors' scepticism of business climate of Nigeria in 2019 election and COVID-19 pandemic outbreak. He said the policy was the worst mistake any regulator would make.

In the present bid, the stakeholders are asking how the commission would manage the exercise in the face of the forthcoming 2023 election.

Analysts' View

Industry analysts said NAICOM should have raised the fresh capital increase issue earlier before now to ensure it does not coincide with election period when investors will be much sceptical staking their money.

The stakeholders said on the other hand the commission should have exercised patience until after the election.

They argued that though the commission might have assumed that virtually every firm has upgraded its capital during the failed bid, there are still some firms struggling to meet the new capital and for such firms, ego may not allow them to descend to writing smaller risks.

The stakeholders cautioned that any further failure on the much talked about capital increase in the industry on account of putting right initiative at wrong time and going to court for another round of disruption or suspension would be very ridiculous for both the operators and the regulator.

They cited instance of what is going in the pension sector, adding that everything was being done peacefully and maturely.