• Sunday, July 21, 2024
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Finance Act clears path for insurance recapitalisation

Dollar premium, annuity lift insurance sector growth to 19%

Insurance industry operators say they are ready to conclude the ongoing recapitalisation exercise in the industry with clearer definition now of what constitutes capital requirement for insurance operations.

This is following a provision in Finance Act 2021 that defines what constitutes capital requirement for insurance operations, as against what operators described as an obnoxious provision in the 2003 Insurance Act.

Session 33 of Finance Act 2021, which amended section 9 (102) of the Insurance Act 2003, substituted ‘paid-up share capital’ with ‘capital requirement’.

According to the Finance Act, what constitute capital requirements for existing companies are: the excess of admissible assets over liabilities, less the amount of own shares held by the company; subordinate liabilities subject to approval by the commission; and any other financial instrument as prescribed by the commission.

Admissible assets, according to the Act, are defined as share capital, share premium, retained earnings, contingency reserves, and any other admissible assets subject to the approval of the commission.

While in the case of a new company, capital requirements include government bonds and treasury bills, cash and bank balance, as well as cash and cash equivalents.

Ganiyu Musa, immediate past chairman of the Nigerian Insurers Association (NIA), said insurance underwriters in Nigeria were not opposed to recapitalisation, but could not reconcile what constituted the capital as required by the regulator at that time.

“There is no place in the world where only paid-up share capital is recognised as an element of capital. For us in the industry, we were not against recapitalisation, but we were against what constituted the capital in line with global standard,” he said.

Musa, who disclosed this while giving account of his stewardship as the outgoing chairman of the NIA, said: “We are delighted to report that with the President’s assent to the Finance Act 2021, we now have a more acceptable definition of capital. Prior to this time, the definition of capital in Insurance Act 2003 was defective and highly restrictive.”

He appreciated the minister of finance, budget and national planning, commissioner for insurance, KPMG and members of the trade body for their support in seeing this process through. “We are optimistic that this major milestone achievement has removed the major encumbrance on the recapitalisation exercise.”

Musa said the underwriters are looking up to the National Insurance Commission (NAICOM) for guidelines so that the recapitalisation exercise can be concluded.

Justice Aneke of the Lagos Division of the Federal High Court had on December 21, 2021 restrained NAICOM from taking any further steps in implementing its deadline date for insurance and reinsurance companies recapitalization exercise.

The judge had delivered the ruling in an ex-parte application brought before the court by the Incorporated Trustees of the Pragmatic Shareholders’ Association of Nigeria.

In the motion, marked FHC/L/CS/1797/2020, filed on December 15, 2020, and moved on behalf of the group by their lawyer, I.C. Ifedora, the applicant prayed the court for an order of interim injunction restraining the defendant and its agents from taking further steps in the recapitalisation process in the insurance industry pending the hearing and determination of its motion on notice before the court.

NAICOM had on June 3, 2020 extended insurance companies recapitalisation deadline to September 30, 2021, with the first phase to end on December 31, 2020.

It said the segmentation of minimum paid-up share capital requirement for insurance and reinsurance companies will run in two phases as follows: 50 percent of the minimum paid-up capital for insurance and 60 percent for reinsurance shall be met by December 31, 2020, while they will be required to fully comply with approved minimum paid-up capital not later than 30th September 2021.

In the segmentation, life companies that were operating with N2 billion were increase to N4 billion at first phase, and N8 billion in the second phase; general business companies operating then with N3 billion were to increase to N5 billion at the first phase, and N10 billion in the second phase; composite businesses operating then with N5 billion were to increase to N9 billion at first phase, and N18 billion at the second phase; while reinsurance companies operating then with N10 billion were to increase to N12 billion at the first phase and N20 billion in the second phase.

The recapitalisation in the industry had dragged on since 2018, when the regulator introduced tier-based recapitalisation that was also stopped through a court order.

A court ruling on July 14, 2022 barred NAICOM from increasing the solvency capital base of insurance companies.

The Federal High Court in Lagos held that NAICOM could not increase the statutory minimum solvency capital policy for insurance companies without the National Assembly amending the Insurance Act and Regulation 2003.

Justice Chukwujeku Aneke directed NAICOM to reverse itself on the increase in the statutory minimum solvency capital policy for insurance companies.

He held that the directives/guidelines/circular on capital base increase offends Section 4 of the 1999 Constitution and Section 9 of the Insurance Act and Regulation 2003.

The court made the orders in a suit marked FHC/L/CS/1518/18 between Tope Alabi as the plaintiff and NAICOM and the Attorney-General of the Federation as first and second defendants.

The suit followed NAICOM’s announcement in 2018 that it planned to release the guidelines for the implementation of the minimum solvency capital policy in August 2018, while implementation was meant to take effect from January 1, 2019.

The plaintiff averred that it prescribed tier-based minimum solvency capital for insurances on the bases of their respective risks profiles and their risks management systems.

On September 28, 2018, the plaintiff filed an originating summons in which he sought the determination of whether NAICOM can unilaterally increase the statutory minimum solvency capital policy for insurance firms “as contained in Section 9 of the Insurance Act and Regulation 2003, by a mere circular without an amendment to the enabling statute by the National Assembly to increase such capital base.”