Following the recent Tier-Based Minimum Solvency Requirement (TBMSR) announced by the National Insurance Commission (NAICOM), the Managing Director/Chief Executive Officer (CEO) of Leadway Assurance Company Limited, Mr.  Oye Hassan-Odukale, has commended the regulators for a policy he says is long overdue.

 

Mr. Hassan-Odukale, who is also the Chairman of the Sub-Committee on Publicity and Communication of the industry’s Insurers’ Committee, believes the introduction of the solvency requirement for insurers in Nigeria commencing January 1, 2019, will help to restructure the market in a way that insurers can choose which part of the consumer segment (retail, commercial or industrial) is best served based on the capital fund that it holds or is able to deploy.

 

He stated that with this restructuring, insurers do not have to be compelled to increase capital to underwrite risks that stress their capital without delivering commensurate returns to capital providers/shareholders. He believes that the restricting will foster the emergence of players with capacity to become retail specialists or become specialist underwriters of big-ticket risks in critical sectors of the economy, such as the aviation and oil & gas, whilst accelerating the growth of the industry and its contributions to the Gross Domestic Product (GDP) of the country. 

 

Mr. Hassaan-Odukale also expressed his confidence in the initiative stating; “The news of NAICOM’s introduction of TBMSR is a positive one. I am confident that it is an 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.

 

“It is high time we moved beyond the 0.3 per cent contribution to GDP and improve our ranking within the comity of African insurers (heavily dominated by South Africa) as measured by the African Insurance Barometer. Overall, 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”, he added. 

 

Under the new Tier-Based Minimum Solvency Requirement (TBMSR), the minimum capital requirement (policyholders’ surplus/shareholders’ funds) for insurance companies remains as the base Tier 3 capital (N3bn for General Insurance; N2bn 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% of the base capital (N4.5 for General Insurance and N3bn 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% of the base capital (N9bn for General Insurance and N6bn 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. Automatically, composite companies (Life and General Insurance) at any tier only need add both sides to make up the required capital, so you will have, N5bn for Tier 3, N7.5bn for Tier 2 and N15bn for Tier 1.

 

Speaking on how the TBMSR will affect the solvency margin of Nigerian Insurers, Hassan-Odukale added, “It is important to note that all insurance companies already fall within each restructured tier 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. 

 

“Leadway Assurance which falls within the Tier 1 bucket currently has shareholders’ funds valued in excess of N40bn compared to N15bn required for a Tier 1 composite insurer. A number of other Nigerian insurers are also within this tier. We believe this TBMSR is good for our industry as it helps to promote the financial health of insurers and ultimately consumer confidence. Nigerian insurers are already at different levels of the tiered system. Each company will then be placed within the bucket that they already belong. Should companies now decide to play at a level higher than their current tier, the shareholders can take capital actions either by mergers or injection of new funds. With the TBMSR, insurers simply play within the limit of their solvency capacity”, Mr. Hassan-Odukale said. 

 

Odukale also added that unlike the previous capitalization exercise, no insurer is being asked to shore up capital and neither will anyone’s licence be withdrawn either. He stated that companies simply get to choose which tier they want to operate in, ensuring that they stay within their capacity so that they are able to meet the obligations of the risks that they carry. “If a Tier 3 company then wants to play at Tier 1 level, nothing stops them from embracing voluntary merging with other companies in order to scale up their capacity and build more formidable and globally-competitive institutions that would create value for stakeholders and investors. 

 

“At the end, the major difference between the three tiers will be in the nature of risks underwritten by each insurer depending on each insurer’s current capital position. To reiterate, the choice of whether to increase capital is left to the insurer who must decide within which tier it wants to play the market as the regulator has not required any company to increase capital above the current minimum.”