Risk Based Supervision (RBS), a new policy that seeks to bring an end to common capital regime in the insurance industry, when implemented will strengthen industry capacity for big ticket risks especially in oil, gas and aviation, analysts have said.
The expectation is hinged on the firm believe that the policy would result in industry wide consolidation through mergers and acquisition, capital raising as well as human capital development that would further position the sector to realise its potential.
According to analysts, increased capacity will enhance industry retention of large risks, support local content development and save the country of foreign exchange outflows, resulting from shortage of local capacity to domesticate the risks emanating from the market.
Consequently, ahead the implementation date line of second quarter 2016 when the National Insurance Commission (NAICOM) is expected to release the transition timetable, firms are already consulting on how to step up their capital structure to be able to take advantage of growth opportunities expected in the sector.
RBS is a policy which requires insurance companies to match the risks they carry with their level of capital.
Benson Uwheru, senior manager, Advisory, Ernst Young said a major challenge facing the insurance industry in Nigeria, is lack of capacity to underwrite big risks. Uwheru pointed out that RBS would help strengthen capacity of the industry.
“Don’t forget that most of the insurance businesses are reinsured abroad, so, in terms of capacity and size, it is still low.
Uwheru said capital injection is important to underwrite big ticket transactions and also provide a platform that supports local players, instead of moving big insurance transactions outside the country.
Mohammed Kari, commissioner for Insurance and CEO of NAICOM, who underscored the need for bigger capacity to explore the industry potential said the Nigerian insurance industry does not have the appropriate capacity to retain the size of risk emanating from Nigeria. So, majority of the extras are taken abroad on reinsurance basis.”
Kari noted that some agencies like the Nigerian National Petroleum Corporation (NNPC) could access only 15 to 20 percent of its insurance from the domestic market, while the rest are reinsured abroad, pointing out that the local capacity would increase with the new efforts of the Commission.
“You remember what happened in the banking sector. After their recapitalisation, they came out stronger and they were able to operate in other countries. So, we want our insurance companies to be ready to take up that kind of challenge, not just locally but also internationally.”
Sujay Shah, Insurance and Actuarial Advisory Services, East and Central Africa, Ernst and Young, said consolidation in the market is necessary to build confidence among consumers, retain large risks, as presence of financially weak carriers erodes trust, especially if they are unable to pay valid claims.
He further noted that having a capital framework or strategy and monitoring its progress is a prerequisite for profitable growth, while urging operators to be proactive ahead regulations.
Presently, insurance companies doing general business have as statutory capital, N3 billion while life companies have N2 billion, whereas composite firms, that is, those doing both general and life have statutory capital of N5 billion. Reinsurance companies in the other hand have statutory capital base of N10 billion.
The plan for RBS in the Nigerian market actually started in July 2012, when NAICOM introduced Risk Management Framework Guidelines for identifying, measuring, monitoring and limiting the risk involved in the business for insurance and reinsurance companies.
The guidelines also laid down the processes for reviewing risk, identifying and prioritizing risk, and corporate governance issues, among others. The guidelines is primed to facilitate risk based approach and regime in the industry to ensure performance and effectiveness in its Risk Based Supervision and Risk Based Capital Approach.
The risk regulation approach was more focused on setting standard and shifting the responsibility of deciding the risk appetite of the operator to the Board and Management of each company.