It is commendable that the National Insurance Commission (NAICOM) introduced a 3 -tier based recapitalization for the insurance industry to create ‘enabling soundness and profitability’ of insurers through optimal capitalization and support the stability of the financial system.
The news of the Tier Based Minimum Solvency Requirement (TBMSR) is for sure a positive one. It is certainly a good initiative with potential upside for the industry to grow and take its rightful position as a formidable contributor to our national economic activities, growth and development as it is in developed economies.
Before now, underwriting companies had so often been described as ‘’poor cousins of the banks’’ a description which could be blamed on the rather poor financial position of that segment of the nation’s finance industry and the industry less than 2% contribution to GDP
But with the new TBMSR introduction to the sector, we expect the development will improve industry ranking within the comity of African insurers, heavily dominated currently by South Africa, as measured by the African Insurance Barometer.
Furthermore, we should expect an improvement in the capacity and reputation of the industry on the back of unwavering market discipline, improved claims settlement, stronger local retention, increased prudence and promotion of appropriate pricing.
Breakdown of the new Tier-Based Minimum Solvency Requirement (TBMSR), which is the minimum capital requirement for insurance companies remains as the base Tier 3 capital (N3 billion for General Insurance; N2 billion for Life). Tier 3 companies are now only able to write retail insurances (micro insurance, motor, fire, agriculture, compulsory liability insurances, individual life, health and miscellaneous insurance).
Tier 2 companies are required to have 150 percent of the base capital (N4.5 billion for General Insurance and N3 billion for Life) based on the types of risks written. Tier 2 companies can write retail insurance as prescribed under Tier 1, including commercial and industrial risks and group life assurance.
Tier 1 companies are ultimately required to have 300 percent of the base capital, that is N9 billion for General Insurance and N6 billion for Life, to write all risks including annuity and exclusively Special Risks, e.g. energy and aviation risks, which are highly capital intensive in terms of risks retained on the balance sheet of the insurer in addition to any reinsurance capital purchased.
What the new arrangement boils down to for the industry is that automatically, composite companies, which entail Life and General Insurance, at any tier only need add both sides to make up the required capital, so we have N5 billion for Tier 3, N7.5 billion for Tier 2 and N15 billion for Tier 1.
It is commendable to learn that all insurance companies already fall within each restructured tier therefore and therefore no company needs to raise additional capital unless they have existing capital deficiency or prefer to play within a tier above its current capital level.
The new regulatory policy should be applauded for noting that the industry needs strong players with financial capability, to play big in the marketplace. Indeed, it is the right step in the right direction. It will bring about professionalism, promoting strong competency, and also allow people to build their strength where they have comparative advantage.
However, the minimum requirement of N15billion is significantly higher than the existing minimum, and thus implies that underwriters that are unable, on their own to raise the additional capital to meet the new, specified minimum will have to merge with compatible brands. This also opens the window for companies that have the muscle to acquire smaller players towards meeting the new minimum capital.
This development is not new in the contemporary world of finance. Risk Based Supervision (RBS) has been a phenomenon in global financial system regulation, and recognizes that ‘not one size fits all’. As such, financial institutions will be categorized by their risks and the regulator will supervise them accordingly.
Fallout of the new financial requirement for the industry are that more resources will be devoted to more risky institutions and more independence given to institutions that are well structured and manage their risks effectively. We say kudos to NAICOM over the new policy.