Insurance logo

By  Prince Cookey —-As the Nigerian insurance industry was waking up to the 2023 business year, the regulator, National Insurance Commission (NAICOM), quietly signalled that the long-delayed risk-based recapitalisation plan for the market might indeed become a reality in 2024.
Sunday Thomas, the Commissioner for Insurance/CEO at NAICOM, laid down the basics of the risk-based capital model: “It has been quite revealing about the operations of insurance institutions. We are taking it to a new level: risk-based capital. If you know the history of capital in this country, it has been an issue, and we want to remove that.

You can trade, for instance, as a motor third-party insurance company, based on your capital. Then, if you want to trade in the highly volatile business environment of oil and gas, you must also provide the needed capital to be able to run at that level. That is where we are going now. The one-cap-fits-all will no longer be the case.”
He added: “This year we will be closing on that, and before I finish the first tenure, it will be operational. We are in partnership with multilateral institutions in our quest to evolve this risk-based capital model.”
For Nigerian insurers, the issue of recapitalisation has been a recurring nightmare for some and lost opportunity for others since 2018, when the idea of Tier-Based Minimum Solvency Capital (TBMSC) was first mooted.
The TBMSC framework was a multi-level capital structure that required capital levels that are proportionate to the class of business an insurance company is engaged in or desires to play in.
The current determination of NAICOM to implement the risk-based recapitalisation model, possibly by 2024, has its proponents and opponents within the insurance market.

Expectedly, the less-capitalised operators feel a sense of injustice of being denied access to underwrite big-ticket risks, either on a stand-alone basis or in collaboration with other players due to their smaller capital base.

Expectedly, the less-capitalised operators feel a sense of injustice of being denied access to underwrite big-ticket risks, either on a stand-alone basis or in collaboration with other players due to their smaller capital base.
To these players, the risk-based model will serve the interest of rich operators in the sector to the detriment of smaller insurance firms. They argue that competency should override level of capital in deciding which business to underwrite.
On the other hand, the well-capitalised operators believe the endless insolvency and claim liabilities plaguing the industry, leading to less confidence in the industry by the insuring public, would be scaled by the risk-based capital model wherein operators will only take in businesses commensurate with their level of capital. This, they believe, will also cure the industry of the problem of cut-throat competition leading to rate-cutting and other negative survival measures that tarnish the reputation of the sector.

For the industry body, Nigerian Insurers Association (NIA), the support for risk-based capitalisation was based on the assessment of several risk factors such as operation, market, credit and impact on assets and liabilities.
Ganiyu Musa, the former chairman of NIA, while making a presentation at a Public Hearing on the Consolidated Insurance Bill 2020 organised by the House of Representatives Committee on Insurance and Actuarial matters in Abuja, said: “We are convinced that a risk-based capital adequacy template is the best fit for the insurance industry in Nigeria, especially given the fact that the 2013 International Monetary Fund (IMF) Report has prescribed it and the Commission agreed with it.

The IMF peer review report on the insurance industry in Nigeria in 2013 observed that the Nigerian insurance industry was over-capitalised relative to other developing countries and recommended that the regulator should review the excessive capital requirement when adopting a risk-based capital framework.”
What next after adoption?
From the recent statement of the regulator, it seems clear that NAICOM is going forward with a risk-based recapitalisation model for the Nigerian insurance market.
The question is: what next before and after the implementation?
Mr Thomas himself hinted that for the industry to reap the fruits of the capitalisation model, operators in the insurance industry must strengthen their human resource base and capital backbone.
Mr Thomas said: “It has been observed that the gains of domestication policy of the government as enshrined in the Nigerian Content Development Act 2010 is gradually losing its meaning for the insurance sector. More businesses, especially in the oil and gas and the aviation sectors are now being re-insured abroad. Of more concern is the declining participation of life companies in the annuity business, which is the emerging business for our industry.”