Why Tier-Based Minimum Solvency Capital Requirement Essential, NAICOM

***Cites Increasing Risks, Inflation, Insurers Failure To Meet Contractual obligations, Others

By CLEMENT NWOJI, Abuja

Nigeria’s apex regulatory body of insurance sector, the National Insurance Commission (NAICOM) has advanced major reasons why it introduced the Tier-Based Minimum Solvency Capital (TBMSC) requirements, which takes effect from October 1, 2018.

The TBMSC requirements mainly specifies capital requirements for each Three-Tier Levels, based on risk classification for each Tiers and restricts insurers to focus on the area of their strengths, encourage innovation and deepen market penetration.

NAICOM in a circular to all insurance companies with reference NAICOM/DAPClR/14/2018 and dated August 27, 2018, further gave details of the operational guidelines towards the realisation of the new recapitalization model.

The Commission observed that the new recapitalization had become expedient in that insurance sector since the last recapitalization in 2005, has witnessed turbulence and uncertainties with the associated increased risks which prevailing capital base did not take into consideration and could not cope with.

It also said that these had been compounded by the global financial meltdown in 2008 which virtually wiped off the value of the Naira and insurance companies capital base triggering off inflation even as risks continue to increase.

NAICOM observed that in the midst of all these, the consequences have been the inability of insurers to continue to take too much risk with their little capital as well as an increasing inability of many insurers to honour contractual commitments to the insured and the shareholders.

According to NAICOM since the last recapitalization in 2005/7, “The previous capital framework was rule-based, and risk factors of business lines within each insurance segment which vary significantly, were not considered.

“Immediately after the 2005/7 exercise, the 2008 global financial crisis set in, with far reaching effect on the wealth of insurers. This was followed with significant upward increase in risks arising from macro-economic environment such as inflation rate, interest rate and devaluation of the national currency, and other factors.

“These led to increase in current value of insured assets and operating cost of insurers. Yet, the same regulatory capital continued to rule and no significant increase in shareholders’ funds of many insurers.

“As Insurers continue to take too much risk with their little capital, coupled with the twin risks arising from impairment of certain assets and inappropriate pricing of insured risks, there has been an increasing inability of many insurers to honour contractual commitments to the insured and the shareholders.

“Guided by the provisions of extant laws and international best practice, the Commission has identified underlying trends, some of which were enumerated above; and has accordingly, considered and hereby prescribed Tier-Based Minimum Solvency Capital for insurers on the basis of their respective risk profiles and their risk management systems.

“The National Insurance Commission (“The Commission”) in pursuant of its statutory function of protecting insurance policyholders, beneficiaries and other stakeholders, has deemed it necessary to expound upon the minimum capital conditions of insurers, with the aim of providing clarity on the restriction of business activities and scope of operation of insurers to the underwriting of risks commensurate to their solvency capital level.

“In the exercise of the powers conferred on the Commission under extant laws, it hereby issue this Circular for the introduction of the Tier-Based Minimum Solvency Capital requirements, for assessment of capital adequacy and solvency control levels of all insurance companies in Nigeria, with effect from October 1, 2018.”

The Commission stressed that all insurance companies, with the exception of Reinsurers, Takaful operators and Micro-insurance Companies, should adhere strictly to the provisions of the guidelines and ensure compliance.

It listed the policy thrust of the guidelines meant to achieve as follows: a) Enabling soundness and profitability of insurers through optimal capitalization,

b) Support the stability of the financial system and increase insurance contribution to the nation’s
Gross Domestic Product,

c) To limit significant systemic risks and build confidence in the insurance industry while ensuring the stability of the insurance sector. d) The application of proportionate capital that support the nature, size, complexity and risk profile of the business conducted by insurers,

e) Introduces a 3 -Tier-Based Minimum Solvency Capital (TBMSC) model

f) Specifies capital requirement for each Tier Levels, based on risk classification for each Tiers,

g) Introduces solvency control levels as an early warning and intervention mechanism,

h) Encourage insurers to focus on the area of their strengths, encourage innovation and deepen market penetration, build investors’ and public confidence in the industry, and build a stronger insurance industry,

i) To create capacity for bridging insurance gap, optimize local retention and minimize capital flight and j) Achieved the above without mandatorily requiring insurers to inject capital.