New Capital Requirement Key to Strengthen Coverage Capacity of Insurers

New Capital Requirement Key to Strengthen Coverage Capacity of Insurers

Anaje Olumide Ojo Akinkungbe , AO2 Law, has said that it considers the new minimum paid-up share capital requirements as necessary to strengthen the depth of coverage capacity of local insurers in a bid to improve market penetration.

The law firm said this having noted that low underwriting capacity, as currently experience in the Nigerian insurance industry, is a barrier to a sustainable improvement of the market penetration data.

In its report on search for bigger and better fortress, the firm is of the view that the impact of regulation on positive performance in the insurance industry cannot be understated.

Growth in life insurance premiums, for instance, has maintained a steady upward trend anchored on the compulsory group life insurance policy requirement on all companies.

New Capital Requirement Key to Strengthen Coverage Capacity of Insurers

It would be recalled that National Insurance Commission, has recently reviewed the minimum paid-up share capital requirement for all classes of insurance business in Nigeria, save for takaful and micro-insurance businesses.

The enactment of the Insurance Companies Act in 1961 and establishment of a Department of Insurance in the Federal Ministry of Trade commenced the regulation of insurance business in Nigeria.

The insurance regulator issued a Tier Based Solvency Capital Policy for insurance companies.

Its attempt to implement another increase in share capital for insurance companies was withdrawn following an uproar in the insurance industry and an order of the Federal High Court.

According to AO2 Law, the firm said it hope to see, in the coming days, an effective implementation of the policy resulting in a consolidation of the sector through amalgamations, mergers and acquisitions as insurance companies aspire to attain full compliance with the Policy within the 13 months’ period earmarked for existing insurance companies.

“The best outcomes for the insurance sector, would be the birth of recapitalised insurance companies able to take on high value and risked segments of the economy such as the aviation, marine and petroleum sectors, thus enhancing local participation and improved insurance penetration.

“An invigorated insurance sector is fundamental to national economic stability as resilient and bigger institutions are better situated to withstand economic downturns, while providing a solid risk mitigation strategy for Nigeria’s teeming population”, AO2 Law added.

The insurance industry has in the past decade achieved an average annual growth rate of 35.07% in both life and non-life insurance businesses.

Gross premiums rose by 22% to N315 billion in the third quarter of 2018 from N258 billion in the corresponding period of 2017.

In its observation, it stated that despite growing at a faster pace than the economy, Nigeria’s insurance sector is still relatively underdeveloped, compared to its peers.

With a population estimated at about 200 million people, and a penetration rate of 0.3%, Nigeria has the lowest penetration rate amongst comparable African countries.

In comparison with other African countries, it was noted that South Africa currently stands at 14.7%; Kenya and Egypt boast of 2.8% and 0.6% insurance penetration levels respectively.

Considering the growing middle class and increased life expectancy rate for Nigerians vis – à – vis insurance’s character as an efficient diversifier of risk, the potential for growth in the sector is enormous.

AO2 Law stated that the 1961 Act was however grossly inadequate in the wake of rapid commercial and business enterprise in the then newly independent Nigeria.

However, to ameliorate this inadequacy, an Insurance (Miscellaneous Provisions) Act was enacted in 1964 and insurance Regulations issued in 1968 to give proper effect to and facilitate implementation of the 1961 Act.

The firm noted that these legislations were repealed by the Insurance Decree No. 59 of 1976 as implemented by Insurance Regulations, 1977.

Section 8 (1) of the Insurance Decree prescribes a minimum paid up capital of ₦300,000, ₦500,000 and ₦800,000 for life, non-life and composite offices respectively.

In the review, AO2 remarked that a number of other insurance focused legislations were enacted between 1977 and 1997, notably the Insurance Special Supervisory Fund Decree, 1989 and Insurance Decree 58 of 1991.

The firm recalled that in 1997, the National Insurance Decree No. 1, now National Insurance Commission Act, Cap. N53 Laws of the Federation, 2004, now Act, created NAICOM with the principal object of ensuring the effective administration, supervision, regulation and control of insurance business in Nigeria.

In the same year, Insurance Decree No. 2 required insurance businesses to attain a minimum paid up share capital of ₦20 million and ₦150 million for life and general insurance; and reinsurance, respectively.

“General insurance companies with oil and gas; marine and aviation; credit insurance and other listed business were obligated to maintain a paid-up share capital of ₦70 million, AO2 Law remarked”.

In tracking the historical facts, AO2 Law retraced that the Insurance Act, 2003 currently compiled as Cap. I17, Volume 7, LFN 2004 increased required minimum share capital for insurance companies to ₦150 million, ₦200 million for life insurance and general insurance while a share capital of ₦350 million was prescribed for composite and reinsurance businesses.

In September 2005, NAICOM issued a Guideline, pursuant to an announcement by the Federal Minister of Finance, increasing the minimum paid up capital requirements for insurance companies.

The directive raised the minimum paid up capital base of reinsurance and composite insurance companies from ₦350 million to ₦10 billion and ₦5 billion Naira respectively.

The minimum paid up share capital requirement for life and non-life insurance companies was equally affected by the recapitalization exercise with a marked increase to ₦2 billion and ₦3 billion.

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Insurance companies were granted a transition period of one year and five months to comply with the new capital base requirements.

This exercise culminated with the consolidation of the entire insurance industry; at the end of the consolidation exercise, only 49 out of the previous 104 insurance companies remained in operation.

It is reported that despite the drop in the number of players within the industry, activities increased with enhanced public awareness of the sector, rapid expansion and strategic business acquisitions and improved visibility.

In the review of the new minimum paid up share capital requirement, AO2 Law firm related that NAICOM’s power to administer, supervise, regulate and control the insurance industry is derived both from its establishment Act and the Insurance Act.

It said that Section 9(4) of the Insurance Act authorizes NAICOM to increase, from time to time, the amount of minimum paid-up share capital required to operate an insurance business.

The Policy is issued pursuant to these powers. Having noted that the Policy prescribes a minimum paid up share capital of ₦8 billion, ₦10 billion, ₦18 billion and ₦20 billion for life insurance, general insurance, composite and reinsurance businesses respectively.

The Policy takes immediate effect for new applications from the date of issuance; however, existing insurance and reinsurance companies are granted until June 30, 2020 to attain full compliance with the new minimum paid-up share capital requirement.

The Policy mandates all new applicants to deposit an equivalent of 50% of the prescribed minimum share capital with the Central Bank of Nigeria. Existing insurers are required to make a statutory deposit of 10% of the prescribed paid up share capital.

Failure to deposit the stipulated amount shall constitute a ground for cancellation of the certificate of registration issued to the defaulting.

New Capital Requirement Key to Strengthen Coverage Capacity of Insurers

VIATioluwani Fola. A
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