Recapitalisation: Insurers, banks compete for scarce funds under new NAICOM

• Omosehin faces litigation hurdle to reactive process 

• Naira depreciation, inflation shrink industry capacity   

• At 0.5 per cent, Nigeria among countries with lowest penetration

• Industry behind South Africa, Kenya, Ghana

• Underwriters about 10 times more capitalised in 2007

Nigerian insurance companies may join banks soon to source for fresh funds to inject into the industry as a staunch advocate of the muted recapitalisation, Olusegun Omosehin, assumes office soon as the new Commissioner for Insurance and Chief Executive Officer of the National Insurance Commission (NAICOM). Omosehin, a former Chairman of the Nigerian Insurance Association (NIA), was appointed by President Bola Tinubu at the weekend as a replacement for Sunday Thomas. 

 

Ahead of his resumption, industry experts are already expecting Omosehin to reactivate the insurance recapitilisation, an exercise that was truncated by litigation in 2020. Some operators had teamed up to sue NAICOM demanding the suspension of the exercise, which was expected to nail the curfews of many weak operators.

 

The recapitalisation programme sought to raise the capital base of the insurance companies and strengthen the underwriting capacity of the operators. Termed Tier-Based Minimum Solvency Capital (TBMSC), the programme was designed for the application of proportionate solvency capital that supports the nature, scale, complexity and risk profile of the business conducted by insurance companies. It divided the industry into three tiers. Tier one was the highly capitalised insurance firm, followed by tier two operators, with tier three insurance firms being the least capitalised.

 

Under the TBMSC, composite insurance companies, which were interested in playing in the tier 1 category are expected to raise their capitalisation from N5 billion to N15 billion, while those interested in the same tier but operating life business were mandated to upgrade their capital base from N2 billion to N6 billion.

 

Non-life insurers planning to play in the tier were expected to boost their capitalisation from N3 billion to N9 billion. While composite underwriters willing to operate in tier 2 were expected to increase their capitalisation to N7.5 billion, non-life operators were pegged at N4.5 billion just as life operators under the tier were expected to increase capitalisation to N3 billion. .

  

Experts are not convinced the 2020 thresholds for different categories suffice for today’s market realities. Naira depreciation and inflation have reduced the value of the proposed capital base significantly, which suggests the bar could be raised when a new scheme is designed.

  

For instance, the N15 billion minimum paid-up capital for the first category was $41.67 million in dollar terms. Owing to the fate of naira in the intervening years, the amount has lost about 70 per cent with the current dollar value at N12.85 million.

 

The last time the industry was recapilisated was 2007. Since then, the minimum capital base of tier-one composite operators (N5 billion), which was close to 10 times what it is worth today in dollar terms.

  

In 2007, at an exchange rate of N125/$, N5 billion was equivalent to $40 million. The same amount is a little above N4 million, which shows what the operators have lost in terms of their risk underwriting capacity.

 

The unending crises confronting the recapitalisation process, The Guardian gathered, have kneecapped the growth prospect of the sector and further impacted their penetration drive.

  

Analysts in the market believed that the onus is on the sector to expedite action on the recapitalisation exercise if it must underwrite big-ticket risks and compete with foreign operators in the local economy.

 The industry does not compete with its peers in other African countries in terms of penetration and market value. For instance, the penetration rate of insurance in the Nigerian market is 0.5 per cent compared to South Africa’s 12.2 per cent, Kenya’s 2.9 per cent and Ghana’s 1.2 per cent.

   

In terms of market value, Nigeria’s insurance net assets are valued at N2.67 trillion or $2.28 billion whereas Statista pegged South Africa’s market at $238.3 billion, which suggests that the insurance industry of the continental rival is about 105 times bigger than that of Nigeria. 

  

As Nigeria’s economy sinks deeper into the crisis caused by inflation, analysts lament that underwriting firms may be primed to take more hits in the coming months. According to them, this is because the industry flourishes on stability and is highly likely open to nuances such as inflation and exchange rate volatility.

 

There have been calls for more funding to shore up the capacity of the Nigerian insurance companies and the entire industry, a sentiment Omosehin may leverage to secure the necessary support to push through the coming recapilisation move. However, governance issues and a poor history of corporate actions are major hurdles the individual companies would need to weather to get the attention of investors.

  

The recapitliasation may coincide with that of banks. The banks are locked in a race to raise about N2.5 trillion to beef up their recapitalisation, an exercise that would end in two years. 

  

Already, experts are warning that the banks have the potential to crowd out other critical sectors in the next two years and the new capital deadline approaches.  This could significantly affect the chances of insurers raising fresh funds from both local and international markets.

   

Speaking on how litigation thwarted efforts to beef up the capital base of the operators, the outgoing Commissioner for Insurance, Sunday Thomas, said litigation and backlash besieged the recapitalisation exercise but assured that by the time the Consolidated Insurance Bill was signed into law, no operators would be forced into recapitalisation.

  

Thomas said the initiative will enhance the soundness and efficiency of underwriters through optimal capitalisation, even as it introduces proportionate capital that supports the nature of the underwriting business.

The incoming chief executive of NAICOM is a major lobbyist of the new legislation. He has led other members of NIA to the National Assembly to canvass support for the passage of the bill, which he said would change the fate of the industry and position it for optimal performance.

  

Omosehin would be counting on an early passage of the piece of legislation to clear the way for a seamless recapilisation of the industry or find a way to wriggle out of the legal constraint the pending litigation poses. But analysts are sure the appointee would not be ‘bullied’ out of the ambition to lead a properly capitalised insurance sector.

  

A stakeholder, Abiodun Ayelesho, at the weekend, said recapitilisation of the sector was long overdue, saying the initiative would not only help the sector to contribute maximally to the economy but would also result in increased penetration.

 

Ayelesho also called on the NAICOM to allow only genuine investors to participate in the industry, even as he urged the commission to put in place processes to checkmate activities of fake foreign investors to protect local operators.