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Chuks Udo Okonta
Criticisms such as not allowing a level playing field for all conventional companies in the insurance industry under the cancelled Tier Based Minimum Solvency Capital, (TBMSC), may be applicable to the current tiered micro-insurance capital structure, the Managing Director/Chief Executive Officer, Achor Actuarial Services Limited, Pius Apere, has said.
He said this at the 4th National Insurance and Pension Correspondents (NAIPCO) National Conference in Lagos, adding that the tier base system would lead to situations, where customers would prefer to purchase insurance from National Micro-Insurers than Unit Micro-insurers due to potential risk of failure to meet claims payment obligations by the latter due to limited capital base, a scenario which is likely to arise also from no level playing field amongst micro-insurance providers.
He also expressed worries that the capital base proposed for micro insurers, may not be adequacy to meet the cost of insurance operations including new business acquisitions, particularly for Unit micro-insurers, adding that the efficiency ratios for micro-insurers might appear worse if the costs of managing thousands of small policies are high relative to the premiums.
“It is worthy of note that the Insurance Act 2003 and regulations 2003 regarding the minimum level of mathematical reserves that must be held, often combined with minimum solvency capital requirements, have the effect of (a) limiting the capital available within a company to write new business and (b) effectively placing a minimum requirement on the finance required to write a contract. Basically, the above has an indirect constraint on the amount of business that may be written.
“Thus, there is a requirement for long term insurance underwriters to set aside money (free reserves, free capital or free assets) to meet the initial capital strain (or new business strain). The initial capital strain is the mathematical reserves plus any required solvency capital less the initial net cash outflow (i.e. premium income less outgo), when writing a new policy,” he said.
According to him, the capital (free assets) that an insurance company has available to write new business is the supervisory value of its assets minus the supervisory value of its liabilities including any Solvency Capital Requirements (SCR).
The larger the value of supervisory reserves plus SCR that the insurance company has to hold on the existing in-force business, the smaller the free assets and hence less capital is available for writing new business, he said, noting that on the other hand, the bigger the reserves plus SCR that have to be set up for any new contract, the greater the amount of the limited capital available that will be used up when each new contract is written.
“The above is an indication that the tiered micro-insurers are more likely to have the challenge of inadequate capital to write the desired level of new business volume than the conventional insurers,” he added.
For a new business risks, he said a micro-insurance company will need to ensure that the capital and administrative requirements of writing new business are within the resources available to it, stressing that an inappropriately high volume of new business could lead to the available resources becoming inadequate, and in on the other hand, inappropriately low volumes of a newly introduced product line may pose a risk of not recovering the fixed development costs that will already have been incurred.
“One of the greatest challenges for micro-insurance is the target market’s lack of insurance information and understanding. This leads to weak demand for products by customers who do not get appropriate cover that meets their needs. It also opens the door to deliberate mis-selling by micro-insurance agents striving to reach sales targets or higher commission levels. This further deteriorates the reputation of insurance companies leading to increase in policy lapse rates.
“The risks can be mitigated by providing the agents with suitable training of the insurer’s products and good selling practices, including good, clear sales literature,” he posited.
He maintained that since the TBMSC policy has been cancelled, it will be appropriate to revisit the tiered minimum capital base approach for micro-insurance by encouraging existing conventional insurance companies that will not be able to recapitalize under the new recapitalization regime to register as national micro-insurers in order to serve the low-income segments (downscaling), thereby supporting the evolution of more inclusive insurance systems. “The above would no doubt increase the number of micro-insurance providers needed significantly which in turn would accelerate the insurance penetration at the grass-roots in the country. Such un-recapitalized conventional companies would leverage more on their existing IT infrastructure, quality staff and with relatively lower expected strain on resources,” he added.
He also expressed worries that with the micro-insurance guidelines stating that “Registered Insurance Companies be granted national micro-insurer licence upon application”, allowing the recapitalised conventional insurance companies to enter the micro-insurance market has its implications and consequences, in terms of unethical business practices, undue price competition – rate cutting – at the detriment of other micro-insurers.