By Henry Uche [email protected]
To stand strong in the competitive global business environment, Nigeria’s insurance sector regulator, National Insurance Commission (NAICOM), is taking every necessary step to position the sector to stand the test of time. One of such measures is the much anticipated risk-based capitalisation exercise commencing in the insurance industry in the current year. This is following a successful nod for Risk-based Supervision (RBS).
In insurance, risk-based supervision (RBS) is an organised, flexible, advanced and innovative process; designed to identify, assess, measure, monitor, control and extenuate key risk factors to which operators and other players in the industry are exposed to.
RBS focuses on those risk areas that pose the greatest threats to the underwriters’ safety and level-headedness. It supports regulators like NAICOM in achieving its objectives while taking cognisance of the need to employ and deploy resources judiciously and ensure that interventions are in line with appraisals.
The key purpose for this kind of supervision is to promote the maintenance of stable, potent, fair, safer and secured insurance market for the benefit and protection of every policyholder and stakeholder. Some experts in the industry have maintained that a progressive supervisory structure would tip an underwriter to take proactive and corrective steps should it fail to operate in a manner that is consistent with ethical business practices or regulatory requirements.
Ordinarily, authorities like NAICOM, ab initio, perform these functions by way of compliance-based supervision. But under this style of supervision, insurers are expected to comply with a set of rules and regulations and by extension, laws guiding the sector. In recent times, the supervision has metamorphosed and still evolving from compliance-based to risk-based, having explored the numerous purposes of adopting risk base supervision.
In a telephone interview with Dr. Obinna Chilekezi, an insurance researcher and consultant, he corroborated NAICOM’s quest for risk- based supervision. Hear him, “The world is talking about risk based capitalisation and not fixed capital base. Have you ask what is the capital base of an insurance company in UK or in Kenya?
“Ask what is the role of reinsurance on insurance business. Investors would not be happy if their investment in an insurance company is used for just claims payment. The dynamics of insurance is quite different from that of banking and others sectors.”
Chilekezi maintained that what is currently obtainable based on solvency 1 and 2 is that ‘companies should be capitalized according to their risks exposure’, saying that, “No one is talking of a fixed- capital base. This also entails that the regulatory framework should be risk-based supervision which would demand a lot of involvement of the regulator. Under this regime a company can decide to sell only a class of policy and capitalize to that tune.”
He added that reinsurance plays important role in enhancing the capacity of an insurance company, noting that it was not just a matter of capital as outsiders could see it. He noted, “The ability of an insurance company to accept and retain risks could be enhanced by its reinsurance treaty. More so, it is from the premiums collected that claims are paid and not from capital. This may be strange to non insurance professionals” he affirmed.
Risks associated with this regime
Some of the risks under risk-based supervision are: Systemic risk, Insurance risk, market risk, credit risk, operational risk, concentration risk, liquidity risk, regulatory/compliance risk, reputational and strategic risk, among others.
Already, there are over 50 insurance companies in Nigeria. 13 of which are strictly into Life Insurance, 12 are composite, 15 are into General insurance business, three are into Reinsurance business, four are into General & Family Takaful, seven are into microinsurance, among others.
However, some industry experts are worried about the fate of some categories of underwriters. They asked, “Could risk-based supervision swallow smaller insurance firms?” They noted that the multiplicity of insurance companies is likely to reduce in the future with the introduction of Risk- Based Supervision.
But according to the regulator, the adoption would enable companies to become adequately capitalised as new minimum capital requirements are proposed by industry czars. In October 2023, at the National Conference, put together by NAICOM, the Founder/Chairman of Heirs Holdings & UBA Group, Mr Tony Elumelu, proposed N30 billion capital base for general insurance, N20 billion for Life insurance, N50 billion for composite Insurance and N1 billion capital base for insurance brokers. This, according to him, would enable operators stand strong amidst current market realities and the associated risks and compete favourably in the dynamic but troubled global business environment.
Though some insurance consultants have expressed dissatisfaction over Elumelu’s recapitalization proposal for the sector as they argue that Capital -based supervision is likely to reduce in the future, especially with the introduction of Risk Based Supervision (RBS).
For more emphasis, RBS is an approach that throws a strong weight on understanding and assessing the adequacy of each insurance’s risk management systems, proposed and designed to identify, measure, monitor and control risk in an appropriate and timely manner. RBS requires the regulator to review the manner in which insurers are identifying and controlling their peculiar risks.
Put simply, RBS is a risk-sensitive basis of supervision and control. An approach that is going to be used by NAICOM to regulate and supervise insurance players, by making sure they have in place, policies and control mechanism that will mitigate risk before it happens. This is meant to ease the work of the regulator, while securing the lifeline of insurers, in other words, RBS is an equivalent of IFRS 9 (a new accounting standard for the financial sector that requires provisioning for future losses on the company’s books) in banking sector.
Some experts in the field, who craved anonymity, said the move by the authority aside from seeking to protect insurance companies from insolvency, stems from insufficient resources to supervise all insurers spread throughout the country. “The other main reason for adoption of the RBS is that the regulator has limited resources. Time needs to be spent on those companies, which represent a larger degree of risk to the NAICOM.
However, a low risk insurer is one which has excellent policies and systems to mitigate risks and implements them effectively at all times and is well capitalised with access to additional capital if required,” one stressed.
“The proliferation of low risk insurers subsequently curtails costs incurred by the regulator in supervisory missions, human resource and financial escapades. The regulator will shift concern to weak and high risk insurers since low risk companies will not need frequent drop-ins from the regulator. NAICOM’s work will also be eased since they will review reports from low risk companies and cut down on routine visits,” another expert said.
NAICOM’s stand, execution
NAICOM has over the past six years been heralding the coming of RBS. In 2016 for instance, the Commission revealed that transition to risk-based supervision in the industry will help to provide systematic assessment of insurers’ risks. Its then Director of Supervision, Barineka Thompson, said this while making a presentation on transition to risk-based supervision.
According to him, the objectives include a supervision system that comes with international best practices, risk-focused supervision, which helps to strengthen the risk management systems of insurers, and carry out preventive control.
From that time, the Commission has asserted that RBS would promote appropriate regulatory action in line with the risk profile of an insurer, focus supervision on resources for more effective and efficient operations and productivity; as well as provide a more flexible regulation which lay emphasise on principles rather than the rules.
Thompson described the RBS as a structured supervisory approach that aimed at identifying the most critical risks facing each company and through a focused review by the supervisor, to assess the company’s management of those risks and the company’s financial vulnerability to potential adverse experience.
More so, RBS involves assessing whether an insurer’s governance, risk management and internal controls are adequate, and whether the solvency and liquidity of the insurer are sufficient enough to withstand unexpected shocks.
Some Key Benefits of the RBS are: Allowing the systematic assessment of insurers’ risks using a formalised framework at regular intervals; allowing the identification of insurers’ strengths and weaknesses and areas within insurers where difficulties or challenges exist; encouraging a strong risk management function in insurers.
Others are promoting the cost-effective use of regulatory resources and allowing for the continuous monitoring, early warning indicators, prompt intervention and timely action/s.
Moreover, with the RBB, every material risks faced by an insurer and the control mechanisms for those risks would be in checked; assessment of all material risks and the assessment of the financial position of insurer in the context of residual risk would be seamless. It could also help insurers to ensure that policies, processes and systems were duly followed.
Additionally, a unique feature surrounding the approach is that the insurance companies would be granted permission to create custom made policies, on which they will run their operations. However, the authority will require these companies to enforce corporate governance by ensuring that a qualified personnel drives it. With this, the authority would now prioritise companies with weak internal controls. Some companies Board of Directors may decide to hire internal auditor on a regular basis to assess the liquidity of the company and determine the amount of risk the company could be exposed to, among other responsibilities.
To insurers
To an experienced insurance broker, Charles Ude, insurance companies are willing to conduct business in accordance with international best practice in the socio-economic environment, which is leaning towards risk based supervision. He affirmed that RBS will affect insurers quantitatively; with issues to do with capital, debt, recognition of premium income and resources; qualitatively through supervision requirements relating to corporate governance and group wide supervision among others.
RBS, he added provides for the establishment and maintenance of control functions such as a risk management function; a compliance function; an actuarial function; an internal audit function; as well as other control functions as may be specified in regulations made under the insurance act 2003 as amended. Under risk management the function is risk based capital (RBC). According to him, the two, RBS and RBC works hand in glove to effectively reduce the risks the insurer is exposed to.
The previous order
Risk -based capital is a preventive measure that requires insurers in addition to the minimum capital requirements set by the authority, to increase their capital in line with the premiums underwritten. It means that insurers that continue growing their figures in regards to premiums underwritten will be required to increase capital to handle claims in case of materialisation. This is in line with the regulator’s role in safeguarding policyholders and ensuring insurers pay claims as and when due.
Prior to RBC, the regulator set minimum capital requirements needed to have as capital base in their company before a license was issued.
Before now, insurance analysts were convinced that since capital requires was going to increase, small insurers would be swallowed by the big fish (should there be merger) to stay in business, they will be forced either to sell or liquidate.
This is where smaller companies may find a challenge, as they need to match capital with premiums. This kind of scenario may tend to favour the bigger players with deeper pockets.
Benefits of RBS to policyholders
Industry watchers have posited that the regulator has combined compliance- based and limited RBS approaches to supervise the players. However, now the shift is moving to an all-round RBS approach for effective management and supervision. Everyone needs to sit up.
Insurance supervision is purposed to protect insurers and policyholders. RBS will protect the insurers from going broke which in turn protects the policyholders from losing their benefits. Through risk based capital, the policyholders are also going to be protected from failure by insurers to pay claims as well as protection from mistreatment by insurers, while RBS would help mitigate the risk from outset. They maintained.
Stakeholders’ position
The move to risk based supervision is quickly becoming the most forward and internationally recognised system to allow regulator supervise the insurance services industry effectively. It is therefore more forward looking as it incorporates possible future events including the different risks facing different insurers. NAICOM has been singing the chorus for Nigeria’s insurers to join their counterparts in the world and shifted to RBS to protect their financial institutions.
Employee retention challenge
During mergers and acquisitions, as well as change in Strategic and Corporate structure, employee retention can be a challenge, as many believe it can be a threat. Inherently, many operational changes have retention issues, which result from negative attitudes felt by employees. This can include uncertainty about the future of the organisation’s direction, job security, perceptions of lack of leadership credibility and feelings of confusion due to lack of communication. In essence, employees often lose trust in their organisation and feel betrayed by their leadership.
Other interested voices in insurance business were of the opinion that, since the birth of the NAICOM in 1997, the status quo, therefore, has been the compliance- based manner of supervision to keep tabs on insurers. Then the regulator set requirements and it was assumed that compliance with requirements will ensure viability of institutions. But now, “It is a matter of checking boxes to ensure that the insurance companies adhered to the requirements of the new narrative – Risk-Based Supervision,” they submitted.