Ifeanyi Ugwuadu, Lead Editor, Insurance magazine and www.iintelnews.com

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NAICOM needs to shed its toga as insurers' undertaker 24 Jan 2019

The Nigerian insurance business environment is challenging, especially for operators, investors and the regulator. The history of the insurance industry is replete with insurance company failures, largely due to solvency shortfalls. Although there are regulatory solvency ratios that determine if a company possesses the required financial capability to underwrite businesses under the class it is registered, interventions by the National Insurance Commission (NAICOM) do not bring about effective and satisfactory resolutions to solvency challenges.   
Despite the fact that the Insurance Act 2003 provides the legal basis for rescuing ailing insurers, there is no record of business rescue for insurance companies. In fact, since NAICOM was established by the National Insurance Commission Act 1997, no insurance company has survived NAICOM's interventions.
The regulator's preferred resolution mechanism is often the appointment of 'technical managers' for ailing insurers, and subsequently liquidation of the companies. This is why the industry has unofficially tagged NAICOM as the "undertaker."         
Before writing this article, this writer sent the following enquiries to some NAICOM officials but, unfortunately, got no response: Does NAICOM have any business rescue template? What are the red lines that, if crossed, would trigger a regulatory takeover of the board and management of insurers? How often are NAICOM's stress tests conducted?
Usually, when NAICOM takes over a distressed insurer, both the management and board of the company are removed. Then, a technical manager is appointed by the regulator. This takeover has never had the intended goal of turning around the fortunes of the company. Instead, the result is often liquidation. A business rescue operation should include the regulator's broad strategy towards reviving a financially distressed company.

It is possible that a business rescue strategy could produce positive outcomes for the insurance company. Such a strategy, according to experts, would involve a restructuring of the company's businesses and portfolios, thereby bringing the company to an acceptable solvency margin. Without the regulator even injecting capital into the insurer, a credible business rescue plan might attract investment from individual or institutional investors.

During the insurance industry recapitalisation exercise that took place in 2007, seven insurers failed. These companies were: Metropolitan General Insurance Company, Sun Insurance Nigeria Plc, and Lion of Africa Insurance Company Ltd. Others were Trustworld Insurance Company Limited, Presidential Insurance Plc, Mutual Assurance Ltd and Energy and Special Risks Insurance Company Ltd. The companies failed because they were unable to meet the minimum capital requirements impose by the regulator.

Following the recapitalisation, NAICOM has taken over some other companies after sacking their boards and management. It is yet to be determined if these companies – namely Goldlink Insurance Plc, IEI Plc and IGI – would be rescued or go the way of previous interventions, which will ultimately be liquidation.

The Nigerian insurance industry cannot afford to keep haemorrhaging investment due to its inability to achieve satisfactory business rescue interventions. When any company fails, investors lose money, and investor apathy kicks in. The current perception of the investing public is that insurance is not a good investment. Beyond this negative perception, material facts indicate that only a few quoted insurance entities pay dividends.

The chairman of a now-defunct insurance company once told me immediately after an Annual General Meeting (AGM): “I have not seen an investment like this one,” he stated with a hint of regret. “All I see are requests for approval for large claims payments. I don't see any dividend." He was responding to my question on the outlook of insurance investment. While it is important to pay claims, the obligation to shareholders can only be ignored to the detriment of the industry.

Going by the current speculations in the industry, a number of additional insurers with weak capital adequacy ratios may soon face regulatory takeover. According to the law, the reasons for the cancellation of an insurer's licence may border on three main structural issues, which are financial, technical and ethical. Most of the previous interventions have been on financial and technical grounds. The regulator has often talked about the inappropriate risk-pricing by the operators as the reason for not meeting their financial targets, including the N1 trillion premium income target that the industry was given in 2017.

Broadly, speaking, there are eight scenarios that might lead to regulatory takeover of insurance companies. These scenarios are as follows:
1.    When an insurer has failed to satisfy the margin of solvency.
2.    Failure of an insurer to submit to an examination of its books.
3.    Failure of an insurer to submit its audited annual accounts by June 30 deadline.
4.    When an insurer has failed to maintain adequate reinsurance arrangements and treaties in respect of the classes or category of insurance business the insurer is authorized to transact.
5.    Lack of expertise by virtue of a reduction in the number of an insurer's employee.
6.    When the net asset of an insurer is below the minimum paid-up capital and the capital injections has not been made within the time stipulated by the Commission.
7.    When the Commission has received and verified not less than five complaints of failure to pay claims promptly.
8.    Failure of an insurer to setup special reserves and provisions as prescribed in the law.
In the event that financial inadequacies persist in the annual reports of those companies, the auditors and NAICOM officials are required to decline certification of the accounts. Specifically, the law states “an auditor who audits a balance sheet, profit and loss and revenue account of an insurer under section 28 of this Act shall insure a certification stating the extent to which the insurer has satisfied the margin of solvency required under this section.”
It states further states that: “If the Commission is not satisfied with a certification issued under subsection (9) of this section, it may conduct an independent investigation on the matter with a view to determining what action to take against the insurer or the auditor.”
To remove the negative perception of the insurance industry in Nigeria and in the interest of giving it a better image, NAICOM should provide guidelines for its interventions. The following items should be included in the guidelines:
1.    The legal basis for regulatory takeover.
2.    Objectives and goals of interventions.
3.    Expected outcomes of interventions.
4.    Reporting dashboards to enable NAICOM to monitor the intervention process.
5.    Timelines for interventions.
6.    Appointment of competent turnaround managers.
7.    Framework for shareholder, investor and employee engagement.
8.    Broad strategy for takeovers.
9.    Penalties for board members who fail in their oversight functions.
While it is important for the regulator to intervene in a timely manner, the intervention framework should include other remedial actions to possibly prevent liquidation. NAICOM, as the regulator, should also develop the necessary capacity both in terms of personnel and other resources needed to turnaround the businesses of ailing insurance companies. The imperative for developing a robust resolution template is to ensure investors and shareholders do not lose their investments.