NAICOM tackles undercapitalisation of insurance companieson May 03, 2010 at 12:00 am in Finance Facebook Share Twitter Share By Patience Sagh The global financial crisis which led to the erosion of the capitalisation of insurance companies has prompted the National Insurance Commission (NAICOM) to beam its searchlight on insurance companies whose capital have suffered erosion due to diminution in the values of assets and provision for bad debt. FOLA DANIE The global economic recession and inflationary situations have accentuated the challenges posed by the rapidly changing information technology and dynamics of the business environment while the purchasing power of consumers and the market share of insurance companies have suffered severe diminution. Their real paid-up capital is also facing the same fate. The financial crisis triggered a shred of capital weakness in some insurance companies. The commission’s regulation encompasses major activities which include not just financial regulation, the subject of this paper, but also: the formation and licensing of companies, the affiliations and holding company considerations, the licensing of agents and brokers, product approval, marketing methods, disclosure requirements, on-site examinations, investment restrictions, and rehabilitation and liquidation of companies and most importantly to ensure that insurance companies have the financial muscle not only to pay claims but to ensure the sustenance of the companies Minimum paid-up capital of life insurance companies was raised to N2 billion representing an increase of 1,233.33 per cent while the capital base of non-life insurance companies was increased up by 1,400 per cent to N3 billion. Composite insurance companies underwriting had their capital base increased by 1,328.57 per cent to N5 billion, while the reinsurance companies were required to increase their minimum paid-up capital to N10 billion, representing an increase of 2,575.14 per cent. As at the end of December 2008, the market capitalization of insurance companies was N670billion, according to the Nigerian Insurers Association (NIA), apparently there would have been a drop in the figure as a result of huge loss incurred from the crashed in stocks and accumulated debt which insurance companies had to provide for. Mr Fola Daniel, Commissioner for Insurance stated that the regulatory body would prefer insurance companies to adopt risk-based capital according to the size of the company and business volume rather being tossed about like a traveller without a road map. Daniel envisaged an era where the industry would migration from compliance to risk based model of supervision. He stated, “It would do the commission a lot of good if insurance companies could migration from prescriptive capital requirement to minimum capital determination based on risk profile.†Some companies in the country do not have enough premium income to meet the liabilities undertaken because the market is not generating expected premium to allow sufficient spread. Besides, insurance companies are still relatively undercapitalised, that is, neither their share capital nor their free assets match the exposures that they cover most times. This situation is mainly due to the long-term nature and modest yields of investment in insurance. Although underwriters’ technical results may be positive, the return on capital of the insurance business as a whole is generally not sufficiently profitable to attract additional capital. Thus in many instances, underwriting companies merely satisfy minimum capital law requirements for their capital subscription whilst free reserves are generally kept low because of tax and dividend considerations which prevent insurers from increasing their assets. Again the problem of undercapitalization of insurance companies is further aggravated by crave for rapid premium income growth which means that insurers must keep the ratio of capital and free assets on an equal footing with increases in the premium volume. Mr. Sam Ordu, NAICOM’s Finance and Account Director, painted the effects of recession in the industry. He said the global economic meltdown had expectedly caused distress in the economy, eroded confidence, diminished the value of financial assets and created uncertainty for business, customers and the government. He said that the impact of the crisis on the capital market had a direct effect on the insurance industry, adding that the market acts as a vehicle which facilitates intermediary between economic agents with surplus funds and investors who desire long term investible funds. He stated that the industry as part of the financial services sector generates a pool of long term investible funds from policy holders which are invested in the capital market, and as a result of the financial meltdown, the shares traded in the market have been eroded thereby causing loss of investments to investors including insurance institutions. Ordu admitted that there as an erosion of capital base of some insurance companies as a result of downturn in price of shares. Liquidity problems as a result of toxic assets that are not easily realisable and there is unprecedented loss of key employees of the industry as a result of the economic downturn. Some companies without proper asset and liability management are having difficulty in settlement of general claims
Posted on: Sun, 07 Dec 2014 10:35:24 +0000
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