Small sized insurance firms that may not be able to meet 50 percent of the minimum paid up share capital by December 31, 2020, as directed by the National Insurance Commission (NAICOM), will face severe competition that may squeeze them out of major businesses.
For companies in this category, their best option will be to consolidate through a merger arrangement that would have been half way cemented by December 31, to give customers and brokers the conviction that they would be alive come September 30, 2021, the last compliance date is fixed.
BusinessDay investigations reveal that, beyond the regulatory sanctions of not going to be allowed to participate in certain classes of risks, brokers and customers may not take the risk of placing their businesses with underwriters (insurers) they are not sure will make the recapitalisation list.
Another major challenge for the small players will come from the 2021 renewal seasons, which normally start by November/December every year. Therefore, not being in comfortable position with the recapitalisation by this time may cast a big shadow on their business prospect for the New Year. NAICOM had on June 3, 2020, extended compliance deadline of the ongoing recapitalisation exercise in the insurance industry to September 30, 2021, with first phase to end December 31, 2020.
The Commission said insurance companies were expected to recapitalise 50 percent of the paid up share capital requirement by end of 2020, and reinsurance companies 60 percent, while the remaining 50 percent and 40 percent, respectively, would be completed by end of September 2021.
According to the Commission, any insurance and reinsurance company that fails to meet the first phase of the capitalisation by end of 2020 may be restricted on the scope of business they will transact.
Pius Apere, chairman/CEO, Achor Actuarial Services Limited, says the guideline has its implications for the small-size insurance companies (i.e. insurers with low existing capital base).
According to Apere, this may create the risk of selection effect i.e. the insuring public including brokers would select against the insurers with low capital base during the next business renewal cycle.
This is because the insuring public would prefer to do business with insurers that have already met the phase 1 of the segmented recapitalisation requirement (50% of required minimum paid-up capital for insurers) or already fully recapitalised in the run-up to the business renewal period, Apere states.
“The fear of an insurer being restricted to write a class of business in the near future would make the insuring public to be cautious in dealing with small-size insurance companies,” he notes.
He notes that while it is expected that some will not make it, he urges the regulator to introduce a mandatory default (merger/acquisition) option, as plan B, for such insurers (if they have not already put in place such plan) in the run-up to December 31, 2020, in order to avoid last minute disqualification by September 30, 2021, that would affect the smooth transitional to the recapitalisation process.
It should be the responsibility of the affected insurers to have the merger/acquisition plan in place to secure the confidence and trust of the insuring public, he argues.
“The so-called restriction of scope of business such companies will transact to be imposed by the regulator may not be far-reaching enough to build the insuring public’s confidence not to select against them,” he further states.
The Nigerian Council of Registered Insurance Brokers (NCRIB) has persistently said it is not directing its members where to place their risks in relation to the recapitalisation segmentation or any other criteria.
But it however states that individual brokers have their discretion to choose underwriters they want to do business with. But, “as a broker would you be placing tour clients business with an underwater you are not sure of its survival?” one of the brokers askes BusinessDay.
The segmentation of recapitalisation, according to NAICOM, shows life companies operating currently with N2 billion will increase to N4 billion by December 31, 2020, as first phase and to N8 billion by September 30, 2021; General business companies operating currently with N3 billion will increase to N5 billion by December 31, 2020, as first phase and to N10 billion by September 30, 2021; Composite business companies operating currently with N5 billion will increase to N9 billion by December 31, 2020, as first phase and to N18 billion by September 31, 2021; while Reinsurance companies operating currently with N10 billion will increase to N12 billion by December 31, 2020, as first phase and to N20 billion by September 30, 2021.
