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 firstname.lastname@example.org
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