Why NAICOM’s recapitalization policy may consume many insurance coys

Just like the banking sector, the insurance sector in Nigeria is about to witness a revolution that will ensure a more robust and efficient insurance sector which is driven by professionalism and quality service delivery.

As such, an analyses by Daily Times, looked into the current recapitalization plans by the National Insurance Commission. 

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In 2005, the Central Bank of Nigeria which was then headed by Prof. Charles Soludo successfully implemented the recapitalization process for banks, an event that lead to many mergers of banks while others folded up. 

The recapitalization policy saw Nigerian banks maintain a minimum capital of N25 billion.

According to him, the policy to consolidate and recapitalize banks was due to “Weak corporate governance, gross insider abuses, insolvency, weak capital base, over-dependency on public sector deposit and neglect of small and medium,”

Fast track to 2020, the same revolution to make Nigeria’s insurance companies more proactive and financially strong is about to take place as the National Insurance Commission has concluded plans to recapitalize Nigeria’s insurance sectors.

To this end, Daily Times findings reveal that the recapitalization deadline which has now been extended from June to December 31st 2020, may lead to mergers or eventual fold up of some insurance companies

Already, the National Insurance Commission has revealed that six insurance companies have notified the National Insurance Commission of their plans to merge as part of their efforts to meet the regulator’s recapitalisation requirements.

The Director, Policy and Regulation at NAICOM, Pius Agboola said “Only six companies have indicated interest in mergers and acquisitions out of 44 companies reviewed,” 

Also Daily Times understands that NAICOM had barred several regulatory entities from borrowing money to meet their recapitalisation requirements.

He added that enhanced capital base would enable the insurance companies to have more capacity to underwrite more risks.

He also said that “If any of them wants to bring in money, they must become owners and manage the company together, not give them money and go and sit down and expect them to pay back.

“When they are owners, they will have directors; they know how the company is being run. If the person at the helm of affairs is not doing well, they will fire him and employ another person.”

With the latest strict regulation strategies coming of NAICOM, it is clear that some insurance and re-insurance companies may have to fold up or merge in order to survive in the industry.

Latest summary of the recapitalisation plans of insurance companies obtained from NAICOM showed that most of the companies planned to raise capital through share premium, capitalisation of retained earnings, Initial Public Offerings, right issues and private placement.

Currently, there are 57 insurance companies, comprising 14 specialist life insurance firms, 28 general insurance companies, 13 composite insurance companies and two reinsurance companies operating in the country, according to the Nigerian Insurers Association.

It would be recalled that in 2019, NAICOM raised life insurance companies’ capital from N2bn to N8bn.
General companies got a raise from N3bn to N10bn, while composite insurance companies’ capital was raised from N5bn to N18bn.

The regulator also increased the capital of reinsurance companies from N10bn to N20bn.

NAICOM stated that the insurance firms’ paid-up capital would be their new capital base.
In a recent circular, NAICOM extended the recapitalisation deadline for insurance companies earlier slated for June 30, 2020 to December 31, 2020.

Also, NAICOM issued a circular increasing the paid up share capital of Insurers and reinsurers in Nigeria and, the subsequent directives to companies to submit their recapitalization plans by August 20, 2019.

The Commission also notified all insurance stakeholders that it received plans of 47 insurers and two 2 reinsurers.

“In keeping with the recapitalization roadmap, the Commission has concluded review of the submissions and have communicated individual companies on their positions as detailed below:“Twenty six (26) companies have been granted “No Objection ” to proceed with their plans.

“The plans of 17 companies were corrected and have been advised to resubmit their new plans using paid-up capital and not shareholders fund.

“Four (4) companies do not have the requisite 2018 financial statements and are thus, advised to review their plans of using IPO.

“One (1) company has litigation issues and has been advised to resolve them as soon as possible to enable its progress; one (1) company’s submission was noted to have met the necessary requirements, the review of submissions from two (2) companies is ongoing while three (3) companies are yet to submit their recapitalization plans, “ NAICOM highlighted.

The National Insurance Commission (NAICOM) is resolved to adhere to the recapitalization roadmap towards achieving its desired objectives in the best interest of all stakeholders.

It would be recalled earlier that NAICOM had set timeline for the implementation of risk-based recapitalization of insurance companies The commission also introduced a 3-tier based recapitalisation for the insurance industry. 

Therefore composite insurance companies that are now interested to play in the Tier 1 category are expected to increase their capitalisation from N5 billion to N15 billion, while those interested in the same tier but operating life business are required to recapitalize from N2 billion to N6 billion.

In the same vein, Non-life insurers planning to play in this tier are expected to improve capitalisation.

Consequently, the tier two category, he said the composite insurers are required to recapitalized to N7.5 billion; non-life operators to increase their capital base to N4.5 billion, while life operators under Tier 2 category are to increase capitalisation to N3bn.

However, for insurers willing to play in the lowest tier, which is Tier 3, they are expected to maintain the current capital base of the insurance industry.

To this end, non-life insurance firms in tier 3 are to maintain N3bn; Life Insurance operators, N2bn and Composite insurers N5bn. 

Finally with the December 31st 2020 deadline edging closer, many analyst and industry players believe that many insurance companies may struggle to meet the requirements before deadline except NAICOM eventually grants a further extension.