Insurance In Nigeria: First Reforms, Then Growth

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Tuesday, July 30, 2019 / 01:26PM / By Coronation Merchant Bank   / Header Image Credit:

Last year the National Insurance Commission (NAICOM) issued a circular requiring Nigeria’s insurance companies to adhere to new mandatory levels of Solvency Capital (SC), which divided the insurance business in each segment (composite, general – also known as Non-life and Life) into separate tiers representing different levels of risk. ReFHC Stops NAICOM From Implementing October Recapitalisation Deadline


That circular was successfully challenged in the courts and was withdrawn. In May this year NAICOM issued a new circular specify new levels of capital that insurance companies need to reach. ReNigeria: New Minimum Paid-Up Share Capital Policy For Insurance And Reinsurance Firms


According to the new circular, Life insurers are required to increase their existing equity capital by 300% to N8bn (US$22.2 million). General insurers are required to gross up capital by 233% to N10bn (US$27.8 million). Composite insurers are required to increase capital by 260%, while reinsurers must double their existing capital. Paid-up capital, share premium and retained earnings all qualify as equity in the new circular. The deadline for companies is next June. Re: Nigeria: What You Need To Know About The New Minimum Capital Requirement For Insurance Companies



New Capital Requirements for Insurance Companies

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Source: National Insurance Commission (NAICOM), Coronation Research 


The Nigerian finance industry has already seen a similar disruption, namely the banking industry reform of 2004. That exercise demonstrated that enhanced capital formation can be positive for growth, and it resulted in the emergence of more robust banking entities than before. For Example, revenues (inflation-adjusted) of the current eight largest lenders grew by a CAGR of 3.36% from 2010 to 2018, while Gross premiums written of the insurance industry declined by a CAGR of 1.36% over the same period.


The mere fact that, on average, lending institutions are about six times bigger than their insurance counterparts by contribution to GDP over the last decade, suggests that the insurance industry remains at a very nascent stage. In 2014, Nigeria was reported to have only three million policy holders. An insurance industry CAGR of 2.63% between 2014 and 2018 suggests little changes in insurance take-up over the period. In contrast, there were 71.2 million active bank accounts in 2018, with 38.5 million unique individuals who own and operate them.


Naturally, the next question is whether the recently-announced reforms will be the catalyst to unlocking growth in the insurance industry. Clearly, NAICOM thinks so. But sustainable value creation and growth occurs when capital employed yields a return greater than the cost of capital acquisition. Such ideals are threatened in an industry plagued by high cots and low penetration in our view. Nevertheless, if the administrative prudence that comes with enhanced capital levels is achieved through NAICOM’s reforms, then growth is all the more likely.


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