…Operators may dump high-profile risks
National Insurance Commission (NAICOM), the nation's insurance regulatory body, may likely not consider a straitjacket recapitalisation plan for all insurance companies like it earlier planned. Rather, it may adopt a risk-
based capitalisation which would see companies recapitalising on the basis of the level of risks they carry.
The implication of this is that companies many be prevented from absorbing risks in areas where they lack the capacity to underwrite. At the same time, they may be forced to relinquish a percentage share of a particular risk, if it is discovered that they may lose shareholders' fund in the event of large claims.
If this eventually comes to pass, the insurance industry may witness specialist companies, a situation whereby companies decide to carry out only a single risk-based business, as is the case in other markets.
The decision to introduce this regulation into the industry, BusinessDay gathered, is not unconnected with a recent NAICOM post-consolidation inspection, during which it discovered that some companies needed further capital injection to remain liquid.
The commission had in the course of its inspection, discovered that some companies were going bankrupt and were therefore threatening the protection of policyholders.
Solvency as it is used here means "the ability of an insurance company to settle liabilities." That is, if the asset value of the company is inadequate over indebtedness or cannot be accessed (lack of liquidity) to settle claims when needed, then the company is insolvent.
Nicholas Opara, deputy director, Supervision at the NAICOM, notes that primarily, the solvency of an insurance company depends on the constitution of adequate technical reserves to meet contractual liabilities and the existence of shareholders funds that would guarantee security.
According to Opara, when the commission discovers that the solvency of an insurer has fallen below the margin stipulated, it shall forthwith direct the insurer to make good the deficiency by way of cash payment into its accounts, and satisfactory evidence of such payments shall be produced to the Commission within 60 days of the receipt of the directive. Failure shall constitute adequate grounds for cancellation of its licence.
Fola Daniel, commissioner for insurance, disclosed that the plan would be risk-based, such that companies would have capital based on the kind of risk they undertake.
Daniel explained that the commission intends to avoid a situation where capital would not be effectively utilised, stating that "in this case, if your capital does not qualify for a particular risk, you must forget about. It is not compulsory that because you are a general business company, you must play in all risks in the general class of insurance."
Meanwhile, the commission has begun looking at the insurance brokers' returns, so as to ensure that though they are not statutorily required to have huge capital, they would remain solvent all the time.
