Tuesday, July
30, 2019 / 01:26PM / By Coronation Merchant Bank / Header Image Credit: project-sherpa.eu
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. Re: FHC 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courts and was withdrawn.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. Re: Nigeria: 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
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.
For further enquiries, please contact research@coronationmb.com
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