September 29 – 30, 2010.
Gentlemen of the press, it is my pleasure to welcome you to this year’s seminar organised for Insurance Correspondents in both the Print and Electronic Media. This the second in the sequence of the seminar initiated and organised by the National Insurance Commission (NAICOM).
Let me reiterate once again that the objective of the seminar is to among others, enhance the understanding and analytical ability of the press on insurance issues. The major deliverable at the end of the seminar would be better appreciation and high understanding of NAICOM’s policies, operations and of course, objective reporting,
I consider the theme for this seminar, “Migration to Risk-Based Supervision: Prospects and Challenges” very apt based on the recent developments and reforms in the Country’s Financial Services Sector, particularly the Insurance industry. Let me quickly observe that attaining effective risk- based supervision is one of the cardinal objectives of the Market Development and Restructuring Initiatives (MDRI) of the Commission. That being the case, the Commission will always be passionate about issues relating to risk- based supervision. I therefore consider this forum as appropriate for raising industry awareness towards risk-based supervision.
As you are already aware, the role of supervisory authorities undertaking prudential supervision is to promote the maintenance of efficient, fair, safe and stable insurance markets for the benefit and protection of policy holders. An effective supervisory authority is able to require an insurer to take timely preventive and corrective measures if the insurer fails to operate in a manner that is consistent with sound business practices or regulatory requirements.
Traditionally, authorities have performed this role by way of compliance-based supervision. Under this approach, insurers must comply with a set of prudential rules generally written into law or subordinate legislation. The role of the supervisory authority is to ensure that insurers do, in fact comply with these rules.
On the other hand Risk Based Supervision (RBS) is predicated on the relationship between Risk and Capital- the higher the risk profile of the insurer, the higher the capital it must hold. Supervisors perform RBS by looking at all material risks that are faced by an insurer and how it controls those risks. Supervisors must be satisfied that insurers are complying with their own risk management practices. In doing this supervisors must have a holistic view of the insurers and understand the relationship between the risks.
The current shift from the traditional compliance based supervision to risk based supervision has been precipitated by the recent financial crises that has seen the failures in many financial institutions. The general understanding is that supervisors failed to ensure that institutions understood and dealt with the risks that they were undertaking and also failed to ensure that institutions could raise capital from conventional sources when the need arose.
Under RBS there is a process of continuously updating risk assessment through on-site reviews, off-site reviews and market intelligence that creates an ‘early warning’ or rating system for the supervisory authority to anticipate and deal with emerging issues. If adequately implemented, risk-based supervision has the potential for closer monitoring of insurance institutions thereby reducing the chances of failure.
Ladies and Gentlemen, migrating from compliance based supervision to RBS will require supervisory agencies to overcome practical challenges. These include legal framework, structure of the supervisory agency, guidance and training for supervisors, and risk rating model and a measurement tools. How do we stand?
In terms of legal framework, the Commission has achieved a comprehensive revision of our insurance laws and it is our expectation that the amended version will soon be passed into law by the National Assembly. The amended legislation which is in main frame form that enhances the regulatory capacity of the Commission will no doubt provide the enabling legal environment for implementing risk based supervision in Nigeria.
Implementing risk based supervision will also require experienced and knowledgeable supervisors to exercise subjective judgement on continuous basis. This means that the staff of the Commission must quickly build relevant capacity. To this end, Iam happy to announce that the Commission has since embarked on restructuring of the delivery of training to our staff. Programmes for training have now been restructured to meet the needs of different levels of staff. Meanwhile, the Commission has instituted a knowledge sharing platform through which staff are assisted and encouraged to develop competencies. Our overall desire is to have a Commission that is knowledge - driven and capable of effective supervision of the insurance industry.
A final formidable challenge on the road to effective migration relates to what risk rating model and measurement tools should be adopted. The Commission is currently considering a compromise between the Australian Prudential Regulatory Authority (APRA) and the Office of the Superintendent for Insurance of Canada (OSFI) models, but is still open to new ideas.
Gentlemen of the press, this seminar is very imperative. No doubt there are one or two shortcomings in the industry. But we are doing everything possible to address them. So let us all join hands to build a stronger insurance industry in line with international best practice. Let us be conscious of the need to reinvent insurance and insurance regulation as a means of stabilizing the Nigerian economy in the light of the current dispensation.
Once again I welcome you all to this seminar. Thank you.
Commissioner for Insurance