What to Expect from NAICOM’s New Capital Requirements for Insurance Industry

By Ada Ufomadu 

The National Insurance Commission (NAICOM) recently increased the minimum paid up share capital requirements for insurance and reinsurance companies by a minimum of 100% across all segments. Life insurers are expected to raise minimum paid up capital from N2 billion to N8 billion; general underwriters from N3 billion to N10 billion; while composite and reinsurance companies have new minimum paid up share capital requirements of N18 billion and N20 billion, up from N5 billion and N10 billion respectively. The regulator exempted takaful and micro insurance companies from the recapitalisation exercise. According to NAICOM, the new regulation takes effect immediately (May 20, 2019) for new applications while existing operators have until June 30, 2020 to comply.

NAICOM’s new capital requirements are much stricter than the earlier proposed Tier Based Minimum Solvency Capital (TBMSC) which was cancelled in October 2018, a few months after its announcement in July 2018. The major reason for the cancellation was the short timeframe within which operators were required to comply as well as the tier-based model which discriminated smaller insurance companies. Although these have been addressed by the new directive, capital requirements across board are now much higher. This is similar to what the industry witnessed in its last recapitalisation between 2005 and 2007 when capital requirements for life companies increased from N150 million to N2 billion, general insurers from N200 million to N3 billion, composite underwriters from N350 million to N5 billion and reinsurers from N350 million to N10 billion.

The 2005/2007 recapitalisation saw a significant decline of the number of players from 103 direct insurers and four reinsurers operating as at 31 December 2005 with total core capital of N30 billion to 49 recertified firms (7 life, 23 general, 18 composite and 1 reinsurer) with a total capital base of N150 billion as at 31 December 2007. The consolidation involved major mergers comprising up to five insurance companies to form new companies with stronger capital. To ease the financial burden of the recapitalisation exercise, NAICOM obtained palliatives and concessions from other related authorities such as the Corporate Affairs Commission (CAC), Securities Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE) on application processing fees on M&As and other associated activities. However, it took the Industry up to two years to adopt the new capital standards.

Although the recapitalisation exercise in 2005/2007 strengthened the Insurance Industry’s underwriting capacity, there were major notable hitches during the process. Due to uncertainties that surrounded identities of the recertified insurance companies, brokers withheld premiums paid by clients as against transferring same to the underwriting firms. The resultant effect was a decline in premiums available for investments. A similar trend was observed in 2018 following the introduction of the TBMSC where a number of players were adversely impacted by large corporates (particularly in the oil & gas sector) demanding immediate payment of outstanding claims due to uncertainties on the insurers that qualified as Tier 1 insurance companies.

Going by available 2018 financials of 12 insurance companies, only WAPIC Insurance Plc meets the new minimum capital requirements with its current structure. However, some insurers such as Linkage Assurance Plc and NEM Insurance Plc have strong accumulated retained earnings that can potentially be converted to share capital through bonus issuances. On the other hand, a number of insurers meet the minimum paid up share capital, but have huge accumulated retained losses that have substantially or completely eroded capital. Therefore, substance over form, these companies do not have sufficient capital. We believe that this is worthy of consideration by the regulator.

General Insurers

 

FYE2018 FYE 2018  
    Paid up Share

Capital ‘000

Shareholders’

Funds ‘000

New Minimum

Requirement

1. Consolidated Hallmark Insurance Plc N4,220,264 N6,058,041 N10,000,000
2. Law, Union & Rock Insurance Plc N3,625,238 N6,372,504 N10,000,000
3. Linkage Assurance Plc N4,729,043 N17,920,487 N10,000,000
4. NEM Insurance Plc N2,912,802 N12,427,157 N10,000,000
5. Regency Alliance Insurance Plc N4,545,617 N5,050,801 N10,000,000
6. Sovereign Trust Insurance Plc N4,287,255 N5,820,355 N10,000,000
7. WAPIC Insurance Plc N12,886,352 N14,255,618 N10,000,000
8. SUNU Assurances Nigeria Plc N8,023,465 N3,757,942 N10,000,000
9. Prestige Assurance Plc N3,018,823 N8,101,086 N10,000,000

 

Composite Insurers

 

FYE 2018 FYE 2018  
    Paid up Share

Capital ‘000

Shareholders’

Funds ‘000

New Minimum

Requirement

1.

2.

AIICO Insurance Plc N6,289,491 N14,347,313 N18,000,000
AXA Mansard Insurance Plc

 

 

Reinsurance Companies

N9,693,453 N16,767,833 N18,000,000
 
    FYE 2018 FYE 2018  
  Paid up Share     Shareholders’          New Minimum

Capital ‘000         Funds ‘000          Requirement

1. Continental Reinsurance Plc              N9,101,823       N19,266,586       N 20,000,000

Overall, a significant percentage of underwriters would need to raise capital in the short term, leveraging shareholders support, brand equity and internally generated revenues. We recognise that compared to the 2005/2007 recapitalisation where there was a booming capital market and banks were allowed to invest or outrightly acquire controlling interests in insurance companies, underwriters now have limited avenues to raise capital.

Therefore, recapitalisation will be largely achieved through mergers & acquisitions, foreign direct investments (FDI), private placements and rights issues. We remain cautiously optimistic about foreign direct investments, given persistent weak investor sentiments on account of political and economic uncertainties.

Although NAICOM’s intention is to consolidate the highly fragmented industry through M&As, many insurance companies would need to raise additional capital as a prerequisite for a probable M&A. This would ultimately improve their position in merger negotiations and possibly reduce the number of insurance companies that would be required in a merger.

We expect a successful recapitalisation to redistribute market share among players. The Insurance industry is presently dominated by few players with top 5 operators accounting for 43% of gross premium income (GPI), 42% of total assets and 61% of profits. Overall, we believe that a consolidation will bring about the much-needed stronger and better capitalised industry, equipped to improve insurance penetration in Nigeria through technology and underwriting capacity.

This article was written by Ada Ufomadu, a Senior Financial Institutions Analyst at Agusto & Co.

Dipo Olowookere is a journalist based in Nigeria that has passion for reporting business news stories. At his leisure time, he watches football and supports 3SC of Ibadan. Mr Olowookere can be reached via dipo.olowookere@businesspost.ng

more recommended stories

%d bloggers like this: