• NAICOM reports 10 weak companies
WEIGHED down by a heavy debt portfolio and the threats of sanction by their regulatory body, the nation’s underwriters have embraced the option of corporate merger to stay in business.
Already, Custodian & Allied Insurance Plc and Crusader Insurance Plc have applied to a high court for approval to merge their operations.
The Guardian learnt at the weekend that the realignment became necessary following inspectorate reports by the National Insurance Commission (NAICOM), which observed the insurance companies’ deficiencies relating to their solvency margin.
Specifically, the report indicated that about 10 underwriting firms were very weak and operating below the minimum paid up capital of N3 billion for general insurance business, N2 billion for life offices, as a result of sanctions and penalties on outstanding premium/bad-debt, which impacted seriously on the balance sheet and capital base of these companies.
Following the 2005 reforms, the industry¢ s minimum capital increased from N150 million to N2 billion for life business offices, N200 million to N3 billion for general insurance business, while minimum paid up capital for reinsurance business was jerked up from N350 million to N10 billion.
Industry operators agree that this capitalisation level in the industry is the highest in the Africa insurance market, but with the lowest penetration level of below six per cent on the continent.
Sources at the commission confirmed that merger talks were ongoing in the industry for companies to realign their operations to meet observed deficiencies in the minimum capitalisation level in accordance with the statutory requirements.
The development may have been informed by the directives of the industry regulators in November last year banning underwriting of insurance contracts on credit with effect from January this year to enhance the industry service delivery including prompt payment of all genuine insurance claims.
The new order may have been meant to put a stop to the increasing volume of unpaid premium, write- offs and agency debts, which have continued to pose serious challenges to the insurance industry.
The commission in 2010 had introduced guidelines on code of good corporate governance to stop unethical practices in the industry. It required underwriting firms to make general allowance for outstanding premium/bad debt in the company’s book.
For instance, for an outstanding premium/bad debt of up to three months and one year, an insurance company must make an allowance of between 25 and 50 per cent in its book of account within the financial year and must be written off in the profit and loss account when the extent of loss has been determined.
The impact of the requirement made nearly all the underwriting firms to record losses in their operations in the past two years. However, the policy did not deter the underwriting companies from giving insurance cover on credit as a result of competition.
The Commissioner for Insurance, Fola Daniel, told The Guardian that the industry was structurally and financially deficient and that was the major reason for the unprofessional misconduct in the industry, and that was the major reason the commission was doing everything possible to ensure that operators conduct the business according to the law.
“As you are aware,” he said, “the industry has continued to suffer from inadequate capital and limited human capital. The challenge relating to inadequate capital may continue for some time, as the industry is not known for self-induced capitalisation. But if practitioners are sincere in their approach to the game and we have, for instance, about 20 strong underwriting companies in the industry, it will be very good for the market.”
He confirmed, however, that a number of institutional and private investors have made enquiries at the commission, indicating keen interest in the investment potential in the insurance industry in Nigeria. The investors, he said, were free to buy into the existing insurance companies and bring in their expertise into the industry especially in the oil and gas insurance, individual life, micro-finance insurance, among others.
According to Daniel, although the commission is not ready to issue new licences for underwriting business, potential investors, both local and foreign, could buy into the existing insurance and reinsurance companies, as there are huge investment opportunities in the oil and gas portfolio, life assurance, micro insurance and the market development initiative (MDRI), among others.
“With a huge population of 168 million, the insurance industry in Nigeria has capacity to become the biggest market in Africa and among the biggest in the world, and that is the reason we are doing everything to grow the insurance market in this country”, he said.
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