Sector Report – Recapitalisation of Insurance Industry

Proshare

Sunday, August 26, 2018 03:30PM /Anchoria AM Research

 

Summary of The New Regulation

Following the Insurers Committee Retreat which held between 15th and 16th February 2018 at Abeokuta, the Insurance players unanimously consented to the Introduction of “Tier Based Minimum Solvency Capital” (TBMSC) structure. The TBMSC is part of Risk-Based Supervision (RBS) programme of the Insurance industry that specifies capital requirement for each Tier levels, based on risk classification for each tier. The Structure introduces:  

a)     Shift of focus to solvency capital rather than shareholders’ fund.

b)     Three different tiers (Tier 1, Tier 2 and Tier 3) for different insurance business (Life Insurance, Non-Life Insurance and Composite Insurance).

c)      Intervention levels and safety parameters.

d)     Businesses allowable for different tiers 

NAICOM introduces a new guideline which will become effective on 1st January 2019 with a stipulated deadline of 14th September 2018 for Insurers to notify NAICOM on their choice of Tier level. 

Shift of focus to solvency capital rather than shareholders’ fund: The current minimum required capital for Life Insurance Business is N2billion, Non-Life Insurance Business is N3billion while Composite Insurance business is N5billion with the introduction of Tier Based Minimum Solvency Capital, there is a shift of focus from the shareholders’ Fund to Solvency Capital as the basis for the minimum required capital. 

Life, Non-Life and Composite Insurance businesses now have different tiers. However, the present review does not extend to Reinsurance Companies, the Minimum Base Capital remains N10billion. 

For Life Insurance Business, the minimum solvency capital for Tier 1 - N6billion, Tier 2 – N3billion and Tier 3 – N2billion; for Non-Life Insurance Business, the minimum solvency capital for Tier 1 - N9billion, Tier 2 – N4.5billion and Tier 3 – N3billion; while for Composite Insurance Business, the minimum solvency capital for Tier 1 - N15billion, Tier 2 – N7.5billion and Tier 3 – N5billion (For companies that decide to play in similar Tier of Life and Non-life insurance business i.e. Combination of Tier 1 of Life Insurance and Tier 1 of Non-Life Insurance). 

Allowable Business per Tier – a distinguishing factor: The New Tier-Based Minimum Solvency Capital stipulates different kinds of insurance businesses allowable for different Tier, this is to prohibit insurance companies from taking too much risk with their capital and ensure that the capital to support the nature, scale and complexity of the businesses conducted by insurance Companies is sufficient. 

Insurance companies in the Life Insurance business and operate in Tier 3 can cover Individual Life Insurance, Health Insurance and Miscellaneous Insurance with a minimum solvency capital of N2billion, those in Tier 2 can cover all Tier 3 risks plus Group Life Insurance with a minimum solvency capital of N3billion, while those in Tier 1 can cover Tier 2 risks plus annuity with a minimum solvency capital of N6billion. 

Meanwhile, Insurance companies in the Non-life Insurance business and operate in Tier 3 can cover Fire, Motor and General Accident Insurance, Agriculture Insurance, Miscellaneous Insurance and Engineering Insurance (only classes covered by compulsory Insurance) with a minimum solvency capital of N3billion; those in Tier 2 can cover all Tier 3 risks plus Engineering (All inclusive), Marine and Bonds Credit Guarantee and Surety Insurances with a minimum solvency capital of N4.5billion while those in Tier 1 covers all Tier 2 risks plus Oil & Gas and Aviation insurances with a minimum solvency capital of N9billion. 

Established intervention levels and Action plans required by the Insurance Companies and NAICOM: The new regulation introduces 4 control levels based on the solvency ratio of the Insurer and different actions required by the insurer and NAICOM at each level is established. The control levels include:

 

Control Level 1:

Parameter: Insurer with Solvency Margin above or equals to 130% 

Indicators: is an indication of a company well run, all financial and non-financial indicators within acceptable range. 

Insurer’s Action Plan: No special action is required by the Insurer.

NAICOM’s Action Plan: No special action is required.
 

Control Level 2: 

Parameter: Insurer with Solvency Margin above 120% but below 130%

Indicators: is an indication of a company reasonably well run, most financial and nonfinancial indicators within acceptable range, but few outside range or deteriorating.

Insurer’s Action Plan:  

  • Submit business strategies on how to sustain its solvency level;
  • Prepare and submit a five-year cash flow projection to the commission.

NAICOM’s Action Plan:  

  • Regular filing of returns, intensive monitoring, until company returns to control level 1; 
  • Any other measures as the Commission may deem fit in the circumstance.
     

Control Level 3: 

Parameter: Insurer with Solvency Margin above or equals 100% but below 120% Indicators: is an indication that the company generally is in an acceptable status but a number of indicators outside range or have been deteriorating.

Insurer’s Action Plan:  

  • In addition to action in control level 2, Insurers will inject additional capital to enhance its capital base;  
  • Limit redemption/repurchase of equity instruments (shares);  
  • Limit payment of dividends pending when the desired outcome is achieved;
  • Not take new international expansion.

NAICOM’s Action Plan:  

  • Commission questions management regarding the issues raised by the analysis;  
  • Any other measures as the commission may deem fit in the circumstance.
     

Control Level 4: 

Parameter: Insurer with Solvency Margin below 100%;

Indicators: is an indication that significant number of the company’s indicators are outside acceptable range or have shown significant deterioration.

Insurer’s Action Plan:  

  • In addition to action in control level 3, restrict new investment and/or restructure existing investment;  
  • No payment of dividend;  
  • Take further steps that would prevent final winding up of the company;

NAICOM’s Action Plan

  • Intervention to be considered;  
  • Taken over by a stronger company or eventual closure of the company if it fails;  
  • Any other measures as the commission may deem fit in the circumstance.

 

Corporate Actions (Right Issue, IPO, Public Offer) unavoidable for some Insurers: Based on the new solvency capital and introduction of control levels, corporate actions such as Merger & Acquisition (M&A); Right Issues; Initial Public Offer; Public Offer, become unavoidable for some insurance companies. 
 

Composite Insurance Business:

Based on our coverage, the following insurance companies operate within the composite insurance business: Leadway, AXA Mansard; AIICO; Cornerstone; Great Nigeria; LASACO and Niger Insurance. 

Leadway Assurance can operate within the Tier 1 space as a result of its high Solvency capital and a post implementation solvency margin of 282%. However, despite a high shareholders’ fund of N16.6billion for AXA Mansard which is above the proposed regulatory requirement for Tier 1 Minimum Solvency Capital, the firm can only play within Tier 3 space due to a low Solvency capital of N6.2billion as at 31st December 2017. 

Meanwhile Cornerstone Insurance and Great Nigerian Insurance Plc will have to inject additional capital to enhance its capital base regardless of the Tier they decide to operate. Their Solvency margin as at 31st December 2017 is 104% and 111% respectively. 

AIICO, Lasaco Assurance and Niger Insurance Company fall within the control level of 1, hence no special action is required. However, in order not to lose big transactions in the Oil & Gas, Aviation and Annuity space the company may decide to shore up their capital in order to play in the Tier 1.
 

Non-Life Insurance Business:

Regardless of the Tier the following Non-life insurance businesses would have to shore up their capital based due to low solvency margin: Royal Exchange (103%); Equity Assurance Plc (108%); and Guinea Insurance Plc (116%).  

Based our anticipation, NEM Insurance Co.; Wapic Insurance; Custodian Investment Plc; and Zenith General Insurance will play within the Tier 1 space. NEM has to shore up its capital to operate in Tier 1 due to a low solvency margin of 101%. Top insurance firms like Law Union & Rock Insurance; Prestige Assurance Company; Linkage Assurance; Sovereign Trust Insurance; Veritas Kapital Assurance; Mutual Benefit Assurance and Regency Alliance Insurance Company might need to play within the Tier 2 space hence losing big transactions in Oil & Gas and Aviation business.
 

Life Insurance Business:

ARM Life; United Metropolitan Life Insurance and Mutual Benefit Assurance Plc may have to play within the Tier 2 space. ARM Life has a post implementation solvency margin of 108%, hence would have to shore up its capital base. 

With a lot of insurers having low solvency capital or ratio, we anticipate several corporate actions within the insurance space. Corporate Actions ranging from Mergers & Acquisitions (M&A); Rights Issues; Initial Public Offer; Public Offers; Introductions to the Exchange.

 

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

 


 Proshare Nigeria Pvt. Ltd. 

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