Poor insurance capitalization exposes policyholders to risk in Nigeria

By Emeka Nze

Poor capitalization by Nigerian insurance companies aggravated by increasing interest rates and macroeconomic distortions are putting policyholders and shareholders to risk due to risk exposure beyond their capitalization limit.

As a result of the poor capitalization, some insurance companies are struggling to meet their obligations to policyholders as well as to their shareholders and other stakeholders.

The situation is further worsened as hope for enhanced capitalisation was recently dashed by the National Insurance Commission (NAICOM) which had failed in their promise to implement a proposed risk-based recapitalization of insurance companies.  The new scheme was scheduled to begin in January 1, 2019.

If NAICOM had gone ahead with the proposed plan, composite insurance companies that were interested in participating in Tier 1 category would have increased their capitalisation from N5 billion to N15 billion, while those interested in the same tier but operating life business would have recapitalized from N2 billion to N6 billion.  Similarly, non-life insurers willing to play in this tier would have raised capitalisation from N3 billion to N9 billion.

Besides, in the Tier 2 category, composite insurers were required to recapitalized to N7.5 billion, and non-life operators raising their capital base to N4.5 billion, while life operators would have increased capitalisation to N3bn.

Similarly, under the plan, Tier 3 category which is the lowest tier, insurers in this category would have maintained a current capital base of the insurance industry, while non-life insurance firms were expected to maintain N3bn, and Life Insurance operators, N2bn, while composite insurers, N5bn.

But as things stand, the insurance firms have become so weak to the extent that they are incapable of providing security and protection for their policyholders and other clients and stakeholders.

In support of increased capitalization, the Commissioner for Insurance, Mohammed Kari, had recently explained that the sector that insures critical sectors like aviation, should not be seen to have capital base less than that of microfinance banks.

He said, “Insurance anywhere in the world is the mobiliser of funds and provider of security. You cannot provide security if you don’t have capital.  How can you approach a microfinance bank of N5billion and tell them you want to give them protection. What is your capital?”

Implicitly, NAICOM appears willing to go ahead with the increase in capital base, but are constrained by institutional pressures with preference for status quo.

Currently capital base of life insurance firms in Nigeria is N2 billion, that of non -life is N3 billion, composite firms have N5 billion capital while reinsurers have N10 billion capital base.

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