Monday, 06 December 2010 09:00 Modestus Anasoronye
In compliance with the National Insurance Commission’s (NAICOM) directive that companies must not have more than 25 percent of their capital in non-insurance subsidiaries, a new wave of divestment has begun in the market.
Companies with more than the approved level of equity holding outside core-insurance would have to shed weight or face the market regulator’s sanctions.
The quest to invest in non-insurance subsidiaries actually started post-consolidation of the insurance industry in 2007, when insurance companies went through what could be termed ‘excess capital raise’ which spurred business diversification and the emergence of group structures.
At the end of the recapitalisation exercise which took place between 2005 and 2007, life insurance companies were statutorily compelled to increase their capital base from N150 million to N2 billion; while non-life insurers or the general business players had theirs raised from N200 million to N3 billion, and re-insurers from N350 million to N10 billion.
With this huge cash base, companies started establishing subsidiaries outside core insurance, including asset management, real estate, micro finance banks, Health Management Organisations (HMO’s) and the hospitality industry, among others, in order to increase investment income.
For instance, the International Energy Insurance plc has about 35 percent of its capital in non-insurance subsidiaries and this, the company has decided, would be reduced according to the maximum limit set by NAICOM.
Currently, the company has equity interests in IEI Asset Management Limited, IEI Anchor Pension Limited and TMC Savings and Loans Limited.
International Energy, again, wants to concentrate on its core business of underwriting as part of its strategic effort to create shareholder value and meet the expectations of all stakeholders.
Disclosing the plan recently, Pat Sule Nduka Ugboma, chairman of the company, said IEI had exhaustively reviewed the business environment, and in compliance with NAICOM directives, will divest part of its equity in each of the non-insurance subsidiaries.
According to him, this development will not affect the company’s interests in IEI Ghana and the strategic expansionist programme in the insurance sector within Africa.
In this vein, the shareholders, at their meeting in Kano, approved the resolution that “subject to all relevant regulatory approvals being obtained, the directors are hereby authorised to divest the company’s control of its non-insurance subsidiaries in such manner as they consider necessary. This may include but not limited to management buy-out, direct sale, auction, transfer, distribution in special or such other divestment mechanisms, and upon such terms and conditions as the directors may determine in the best interest of the company.”
Fola Daniel, commissioner for Insurance, had persistently said the commission would not allow companies to raise funds that would not be utilised in the core business of insurance. Daniel’s argument is that in developing the insurance industry, players must show interest in their business by deploying resources available to develop the sector.
This is part of the risk supervisory mechanism of the commission targeted at ensuring that insurers expose less of their shareholders’ funds in risk-prone areas.
He noted that the nation’s insurance industry would soon witness a stronger regulated market environment that would not only help secure shareholders funds, but also protect policyholders’ investment and check the excesses of operators.
Accordingly, the new market regime would ensure that before serious damage is noticed in any insurance institution, particularly in the underwriting business, the market regulator would have seen it in advance and possibly intervene.
This is coming on the heels of the transformation of the supervisory model of the industry from compliance-based supervision to risk-based supervision.
Analysts, who are not oblivious of the challenges that the new model would pose, foresee a longer term benefit and believe players should key in for a better insurance market. Daniel noted that with the new regime of risk-based supervision, there is a process of continuously updating risk assessment through on-site reviews and market intelligence that creates an early warning 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,” he said.