Recapitalisation: Expert advocates conversion of failed firms to micro insurers

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Chuks Udo Okonta

The National Insurance Commission (NAICOM) has been told to consider the conversion of insurance firms that are not able to scale the recapitalisation hurdles to micro insurance underwriters.

The Managing Director/Chief Executive Officer, Achor Actuarial Services Limited, Pius Apere, said this at the 4th National Insurance and Pension Correspondents (NAIPCO) National Conference in Lagos, stressing that it would be better to have firms with N2 billion and N3 billion engaged in micro insurance business, which would help increase the number of micro-insurance providers and accelerate the insurance penetration at the grass-roots in the country.

“Now that TBMSC policy is 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.

“It is also observed that micro-insurance guidelines state that “Registered Insurance Companies shall be granted national micro-insurer licence upon application”, which is in line with and/or similar to the concept proposed above. However, allowing the recapitalized conventional insurance companies to enter the micro-insurance market has its implications and consequences, in terms of unethical business practices, undue price competition (e.g. rate cutting) at the detriment of other micro-insurers,” he said.

He noted that the success of the micro-insurance market is largely dependent on the regulatory activities in that market, particularly the implementation, evaluation and monitoring of the micro-insurance guidelines being operated by all relevant stakeholders.

According to him, it is observed that the solvency margin for non-life micro-insurance business (not less than 25 per cent of premium income as stated in micro-insurance guidelines) is definitely more onerous than the solvency margin for non-life conventional insurance business (not less than 15 per cent of premium income as stated in section 24(2) of Insurance Act 2003).

This, he said is an additional 10 per cent of gross premium income (GPI), at the minimum. It is unclear if a different micro-insurance solvency margin would need to apply to a registered General Insurance company which is granted a national micro-insurer licence. Such ring-fenced arrangement carries additional operational burden. It is also not clear why the above discrepancy is not applicable to life insurance business.

“Risk-based supervision – As the TBMSC is cancelled, it is more likely that the regulator would develop or propose a different framework for risk based supervision that will be suitable for the recapitalized conventional insurance companies in the insurance industry next year, reflecting a level playing field in business acquisition and the minimum level of capital based on overall level of risk retained which may be measured in terms of risk exposure, or by size of premium income or technical provisions/reserves.

“When the foregoing is being implemented for the conventional insurance companies, the regulator should also ensure that the principle of proportionality be applied in the supervisory regime for the micro-insurance market.

“Actuarial valuation – Micro-insurance guidelines state that an actuarial valuation should be carried out for life micro-insurance business once in every period of 5 years by an appointed Actuary. However, section 27(1) of Insurance Act 2003 states that an actuarial valuation for conventional life insurance business should be carried out once in every period of 3 years.

“The choice of inter-valuation period of 5 years for life micro-insurance portfolio is quite reasonable if the high cost of actuarial valuation of the conventional life insurance portfolio being charged by the actuary is the overarching consideration.

“However, all things being equal, the above decision would require that the regulator needs to scrutinize the Micro-Insurer’s risk management activities and operations on more regular basis in order to ensure that solvency is being maintained during the inter-valuation period.

“Furthermore, in practice, an actuarial valuation for the non-life conventional insurance business has been carried out once a year in order to estimatethe Liability Adequacy Test (LAT) in line with IFRS requirements. However, there is no actuarial valuation guideline for the non-life micro-insurance business equivalent provided in Micro-insurance guidelines. The above needs clarification, even if it is obvious, for the purpose of consistency,” he posited.

He maintained that there is clear evidence that low-income socio-economic groups need a range of financial services, which is affordable and yet easily accessible, and should typically include credit, savings, remittances, insurance and pension, stressing that without micro-insurance plans any improvements in alleviating poverty may be quickly lost due to the impact of risks.

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