Insurance Recapitalization; a race in futility?
The Quest for Change
Recently, the National Insurance Commission issued a directive for the recapitalization of insurance companies in Nigeria. The regulator’s position stems from the weak solvency capital base of the industry players, which has hitherto hampered their ability to underwrite big-ticket transactions and led to the loss of business to foreign players — premium flight. Prior to this directive, the industry had undergone a recapitalization exercise in 2005, which led insurance companies to increase their regulatory capital to NGN2.00bn ( vs NGN0.15bn ) for the life business, NGN3.00bn (vs NGN0.20bn ) for non-life and NGN10.00bn (vs NGN0.35bn ) for the reinsurance business.
Premium Flight Rising Amid Low Underwriting Capacity
Leading the onslaught against the industry is the perennial issue of premium flight vis-à-vis low underwriting capacity, as evidenced by an estimated top of USD46.2bn worth of business lost in the 2018FY. This stems from the inability of local players to fully underwrite such risks and thus ceding it as a reinsurance business or rejecting it outrightly to the waiting hands of foreign players. Similarly, the level of insurance penetration has remained depressed as it continually swings between 0.33% and 0.36% in the last two (2) years, a position that accentuates the state of the industry when compared to other African nations like South Africa (14.70%), Kenya (2.8%), Ghana ( 0.6%), and Egypt (0.6%).
Charting a Way Forward
These developments, therefore, have necessitated a need for the review of the industry’s capital adequacy. Hence, the recent directive for the adoption of a minimum-solvency capital of NGN8.00bn, NGN10.00bn, and NGN20.00bn for Life, Non-life, and Re-insurance businesses respectively before December 2020. In this light, the problems in terms of premium flight and low insurance penetration and density, which has hitherto been the bane of the industry, are expected to wane.
Zero-Sum, or Positive-Sum, What Outcome?
However, since the plan allows for mergers and acquisition, we are wary that uncontrolled mergers and acquisitions might defeat the overriding goal of the plan. Considering that M & A could lead to bigger firms, but not necessarily an industry with higher underwriting ability- as underwriting ability is tied to the size of risk capital. Hence, we suggest that NAICOM should discourage mergers and acquisitions. Conversely, the regulator should encourage takeovers from private equity firms, additional placement by equity holders and any other arrangement that would ensure that more companies can conveniently meet the requirements individually.
