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Improving business environment better than enforcing compulsory insurance 17 Dec 2018

Nigeria's insurance regulator, National Insurance Commission (NAICOM), released, last month, its guidelines for a new type of insurance agency, called State Insurance Producer (SIP). According to the guidelines, which have set January 1, 2019 as the policy's takeoff date, state governments will set up the SIPs as new alternative insurance distribution channels and to enforce compulsory insurance within the states.
    
There are about six types of compulsory insurance policies in Nigerian laws – the oldest and most popular being the Motor Vehicles (Third Party Insurance) Act of 1945. Despite being in existence for more than 70 years, official statistics indicate that only about 10 percent of motor vehicles on Nigerian roads have genuine insurance cover. In the construction sector, two important insurance policies have been legislated to protect construction workers and people who access public buildings – including those under construction. Yet, even in this sector, there is a low level of compliance with the insurance policies.

Faced with very low compliance levels and frequent and fatal accidents on the country's roads, NAICOM and the insurance market have been seeking partnerships with relevant government agencies for enforcement of insurance laws. The logic is simple and straightforward: Since the government enacted the insurance laws, it should also enforce compliance with the laws by its citizens, whether they are individuals, corporates, or government agencies.

The intent of these liability laws is to protect Nigerians and other residents in the country from harmful but lawful activities. That is why it is compulsory for owners of vehicles to purchase motor insurance. Whilst the vehicle owner is at liberty to either insure or not insure his or her vehicle against damage or loss, he or she is bound by law to insure other parties who might be in harm's way in the course of using the vehicle. Third party liability coverage protects vehicle owners by providing cover for the cost of damage to other vehicles, property as well as injuries sustained in a crash in which the driver of the vehicle was at fault.
    
Apart from deepening insurance penetration in the country and boosting premium income, enforcing compliance with compulsory classes of insurance under the SIPs framework is an important development given the spate of accidents on Nigerian roads. Nearly 6,000 lives were lost to road accidents in 2017 alone, according to Federal Road Safety Corps statistics. All this happened without compensation or insurance claims for victims or their families.
    
However, it is a bit odd for state governments to earn insurance brokerage income from citizens for enforcing laws to protect them. Under the SIP framework, the government becomes the regulator, the business owner and the enforcer. This model will also crowd out private insurance companies.
    
According to the NAICOM guidelines, State Insurance Producers are meant to be brokers acting on behalf of state governments to sell compulsory insurances as well as other classes of insurance. If this becomes effective, an important source of premium income for private brokers will be lost, in that state governments currently have assets that are underwritten by private brokers. It will be an uphill task for the brokers to compete with state-owned insurance agencies for the business of the state government.
    
When a similar policy was introduced in Lagos about a year ago, it was learnt from the public's reaction that it is better for the government to create an enabling business environment to deepen insurance penetration, rather than undertaking the responsibility to run an insurance business.
    
Suffice to say that governments in many developed and emerging economies around the world are increasingly leaving business to private companies as they focus on efficient policymaking and enforcement.
    
The SIP guidelines also contain incongruities and conflicting provisions. For example, NAICOM pegs to a threshold of 75% for the SIPs the commission currently payable to insurance brokers. This introduces a 25% insurance commission subsidy, which could increase the level of inefficiency in the industry, more than any conceivable positive effect it might have for insurance penetration.
    
There are other issues to clear up to properly define the functions of SIPs within existing laws to avoid conflicts. If SIPs are insurance brokers, they should be defined as such. The government insurance agencies should also comply with same registration procedures and terms of practice as the private insurance brokers. But there is an apparent waiver granted to SIPs in terms of their licensing fees, which they are to pay later.
    
Registration and licensing of underwriters, reinsurers, brokers and other players in the insurance industry is a statutory requirement. SIPs should not be different in this regard. The waivers granted by NAICOM to the proposed agencies seems inappropriate unless the Commission provides further clarification.
    
NAICOM will also do well to clarify its position on “holding the State Government responsible” for any breaches instead of the particular SIP. Perhaps, it would be better if SIPs are registered as a limited liability firm, which is self-accounting and has clear objectives and mandates.
    
SIPs are not known to the Insurance Act 2003 as players in the insurance industry. However, the law does not exclude State Governments from ownership of brokerage firms or insurance companies. For instance, Bayelsa State owns controlling shares in Linkage Assurance Plc; ditto Lagos State in LASACO Assurance. Numerous brokerage firms are state-owned.
    
The SIP guidelines tend to redefine an existing framework in a way that appears to give undue advantage to state-owned insurance entities through special waivers. This contravenes the existing law, which states: “No person shall transact business in Nigeria as an insurance broker unless he is registered under this Act. (2) Application for registration as an insurance broker shall be made to the Commission in the prescribed form and accompanied by the prescribed fee and such other documents as may be prescribed, from time to time.  (3) If the Commission is satisfied that the applicant – (a) has the prescribed qualifications; and (b) is a partnership or a company with limited liability duly registered under the Companies and Allied Matters Act, 1990, it shall register the applicant as an insurance broker by issuing the applicant with a certificate of registration.”
    
While it is true that different avenues should be explored to boost insurance penetration in Nigeria, a more sustainable approach to achieving this objective will be through existing laws or sending a bill to the National Assembly to amend the existing law. Moreover, the country needs more private sector expertise to deepen insurance penetration. We cannot attract this expertise by licensing public agencies that will crowd out the private sector.