As the Nigerian insurance industry embrace Risk-Based supervision (RBS), expert has outlined key areas of focus that will enable the industry enjoy the benefit of increased capacity and risks optimization.
The introduction of RBS regime in Nigeria insurance industry is likely to improve the financial and operational efficiency of the insurance companies and their ability to underwrite large volume of business and material risks, going forward, Pius Apere, actuarial scientist and chartered Insurer said.
Apere, who is also the chairman/CEO, Achor Actuarial Services Limited in an article titled ‘Risk-Based Supervision with Effective System of Risk Governance is the Panacea for Nigerian Insurance Industry’ said the RBS regime will enable insurance industry to compete globally and contribute significantly to the country’s GDP.
Apere said RBS is gradually becoming the dominant approach to regulatory supervision of financial institutions around the world, is defined as a system in which the supervising authority allocates time and resources to firms based on the level of risk inherent to their balance sheet. “The supervisor is expected to assess systemic risk that affects the industry as a whole (e.g. credit risk, market risk, operational risk etc.) and then analyses the level of risk specific to each firm (e.g. insurance underwriting risk). It takes a holistic approach by studying the business units within the enterprise, each of which may carry varying levels of risk.”
“In other words, RBS approach requires supervisors to review the manner in which insurers are identifying, analyzing and controlling risks (i.e. assessing the probability and severity of the material risks to which insurers are subjected to and the effectiveness of the controls in reducing the probability of risk events).The RBS is contrasted with compliance-based supervision where the latter involves applying the same minimum standards across the industry, checking for and enforcing compliance with rules, legislation, regulations or policies that apply to an entity. The risk-based capital (RBC) methodology is an integral part of the RBS framework and the former requires actuarial expertise/inputs in its determination.”
According to Apere, Ideally, the Insurance regulators are expected to develop a strategy for implementing RBS in consistent and/or compliance with the Insurance Core Principles (ICPs) of the International Association of Insurance Supervisors (IAIS).
“For effective implementation of RBS, there is need to bridge the insurance and/or risk management knowledge/experience gap that exists within the Non-Executive Directors (NEDs) in some Boards of the Nigeria insurance industry. This is because the presence of NEDs without insurance and/or risk management expertise in a board may create an environment where decisions are made in a manner not so well-thought-out, thereby making it difficult for the Board’s effective oversight functions without bias or compromise and communication with executive management and stakeholders. The limited insurance training programmes organized by the regulator for Directors in the industry might not be sufficient in the RBS regime. Thus, it would be appropriate to have at least one insurance professional as a NED (e.g. probably the Independent NED) on the Board of an insurance company, going forward.”
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For effective implementation of RBS, there is a need to bridge the insurance and/or risk management knowledge/experience gap that exists within the Non-Executive Directors (NEDs) in some Boards of the Nigeria insurance industry. This is because the presence of NEDs without insurance and/or risk management expertise in a board may create an environment where decisions are made in a manner not so well-thought-out, thereby making it difficult for the Board’s effective oversight functions without bias or compromise and communication with executive management and stakeholders. The limited insurance training programmes organized by the regulator for Directors in the industry might not be sufficient in the RBS regime. Thus, it would be appropriate to have at least one insurance professional as a NED (e.g. probably the Independent NED) on the Board of an insurance company, going forward.
According to him, the challenges the insurance industry is likely to face with the introduction of RBS regime include the following likely apprehension among the insurance players/stakeholders (i.e. pushback from insurers, clients and brokers) especially at the initial stages of implementation of RBS, particularly in the areas of risk management and governance, data collection, and actuarial expertise; RBC being viewed as a compliance item rather than a business tool;
“Because, the RBS process focuses heavily on off-site surveillance, it is therefore extremely data intensive and thus it is unlikely that insurance companies will be able to provide data in a seamless and automated manner to the regulator on a regular basis due to existing poor data quality and inappropriate IT systems; possible lack of sufficient regulatory guidance on transitionary measures for the industry, inadequate training and development programs to instill a risk-based approach/culture; and, the regulator seeming to be ahead of the industry’s preparedness and the availability of resources, capacity, and skills for the application of RBS.
