Monday, April 01, 2019 / 03.17PM / By
Olubunmi Abayomi-Olukunle* /Header Image Credit: The Centre of Management Practice
Other
than an increasingly stable macro-economic environment, a growing middle class,
large infrastructure and energy plays, steady increases in premium volumes and
penetration rates, we consider the regulatory approach of Nigeria’s National
Insurance Commission, (NAICOM), the other big driver of growth in the insurance
sector and the additional reason why a strategic decision to invest in the
sector may be a compelling proposition.
NAICOM
has over the last couple of years implemented and followed through with a
variety of initiatives aimed at deepening the market for insurance products and
have done this, largely, in compliance with overarching insurance laws and
established policy framework.
Some
of these initiatives include:
NAICOM
also has a solid bench strength of industry professionals in its ranks and in
terms of its approach to dealing with operator issues, we find evidence of
proportionality and a consistent focus on building investor & consumer
confidence. Accordingly, the regulatory environment in Nigeria’s insurance
sector is significantly more predictable than previously.
Although
enforcement of insurance laws and regulations, is an ongoing challenge, we
think that, given the cultural resistance to the profit-oriented institutional
logic of the insurance industry, a full scale enforcement approach may be
counter-productive and have unintended consequences for the industry.
In our
view, the approach to enforcement has to be incremental, incentivized and
strategic. Insurance firms will also need to demonstrate more innovation and
better data and analytical capabilities around the nature and distribution of
insurance products. Although the penetration levels are still relatively low,
we think that over the long-term, an increasingly stable macro environment
coupled with the rise of the Nigerian middle class and the usual need to secure
their growing wealth, will drive significant opportunities in the local market.
The New Tiered Insurance Solvency Regime – The Tier Based Minimum
Solvency Capital Structure (TBMSC)
The
NAICOM has recently notified the market of a new tier-based minimum solvency
capital model for Nigeria’s insurance industry, which specifies capital
requirement and insurance business for each Tier Level, based on risk
classification for each Tier.
Under
the new solvency regime, life, non-life and composite insurance business will
now be classified into Tiers 1, 2 and 3. Tier 1 insurance firms, in each
business category will be required to have the highest capital base for that
category, whilst Tier 3 insurance firms, in each business category will be
required to have the minimum capital base required for that category.
For
life insurance business, Tier I firms will now be required to have a capital
base of N6 billion; whilst Tier 2 firms will be required to have a capital base
of N3 billion, and Tier 3 firms will maintain the current capital base of N2
billion. For non-life insurance business, Tier 1 firms will be required to have
a capital base of N9 billion; Tier 2 firms are to have a capital base of N4.5
billion, while Tier 3 firms will maintain the current capital base of N3
billion circa. For composite insurance business, Tier 1 firms will be required
to have a capital base of N15 billion, whilst Tier 2 firms will be required to
have a capital base of N7.5 billion. Tier 3 firms will maintain the current
capital base of N5 billion.
As far
as corporate strategy goes, the tier-based minimum solvency capital model approach
is important, because, following implementation, on January 1, 2019, only a few
insurance firms will be able to operate in the Tier I category with a bunch of
others facing the zone of insolvency.
Although,
NAICOM has noted that it will merely classify operators into Tiers and will not
withdraw licenses or mandate injection of fresh capital by insurance firms, a
default classification by NAICOM into a ‘lesser’ tier is generally considered
unfavourable, hence the majority of local insurance firms, who wish to retain
and/or assume a Tier 1 status in order to be able to underwrite certain types
of risks, are now out in the market exploring a variety of corporate finance
options.
A
lesser Tier classification may actually have less than positive consequences in
terms of how an insurance firm is perceived by the market and existing clients.
Also, to the extent that a default classification into a lesser Tier will imply
that an insurance firm does not have the capacity to underwrite certain types
of risk, a firm’s existing contractual relationships with high-profile
corporate insureds will require an additional layer of legal analysis, in
regard to the contractual duty of an insured to its financiers and
shareholders, to continue to use an insurance firm which has a lesser tier
classification relative to the risk which it was contracted to underwrite.
Additional Investment Route for Local and Foreign Investors
There
has been a wave of M&A in the local industry with a significant number of
investments into local insurance companies. A lot of this play has been
strategic with relatively little private equity participation. Some of the
foreign investors who have taken equity positions local insurance firms, in
recent times include, SwissRe, Sunu Assurances, Liberty Holdings, AXA,
Prudential, Old Mutual, FBN Life, Liberty Holdings, Prudential and Allianz
Group. Following the issuance of the TBMSC, we expect that some of thee
strategics may now be faced with an option to increase their stakes to the
extent to which extant regulation permits. We expect that M&A will continue
to be a trend in the short term.
However,
in its recent communication to the market, NAICOM notified the market that it
would open up the licensing window to interested investors at higher Tier
levels. NAICOM’s decision here is significant on a number of levels.
In
light of the fact that NAICOM had previously tightened the licensing window
with the intent of driving further consolidation of the industry; other than
providing new investors with an alternative route to entering Nigeria’s
insurance market, newly registered subsidiaries of strategic or financial
investors may also explore possibilities around acquiring blocks of business
from existing insurance firms with a view to implementing indemnity or
assumption reinsurance options as part of own entry strategy.
Above all, the route should allow willing investors the opportunity to implement own innovative approaches to product development and distribution and may provide an alternative to the usual divergence around culture and corporate strategy, that is becoming increasingly typical of frontier market M&As.
About the Author
Olubunmi
Abayomi-Olukunle is a partner and Lead Counsel at the Private Equity, Venture
Capital & Emerging Companies sector-focused, specialist investment &
finance law firm of Balogun Harold - www.balogunharold.com.
He can be reached by e-mail vide olu@balogunharold.com
Other Contributions By
The Author Available On This Site
1.
SEC
Nigeria Clarifies and Establishes Fiduciary Standard For Investment Advisers in
Nigeria – Apr 01, 2019
2.
Landmark
FHC Judgment On The Information Rights of Investors In The Nigerian Capital
Market – Jun 12, 2018
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