Côte d'Ivoire revises capital requirements to ensure companies have solid fundamentals

Regulators have faced challenges ensuring that all sector players are financially sound, as insurance markets across the Inter-African Conference of Insurance Markets (Conférence Inter-africaine des Marchés d’ Assurances, CIMA) have seen an influx of new competitors. To provide continuous high-quality services to their clients and to avoid undermining the stability of the system, CIMA, which oversees insurance regulation in Côte d’Ivoire and 13 other regional markets, decided in April 2016 to improve solvency in the system, even if it means reducing the number of players.

New Rules

The introduction of new rules is expected to gradually improve the quality of companies as stricter minimum capital requirements are implemented. The incoming measures will see the minimum capital requirement for insurance companies increase from CFA1bn (€1.5m) to CFA5bn (€7.5m) over a five-year period, with an interim requirement of CFA3bn (€4.5m) after three years. Meanwhile, for mutual insurers, the minimum capital requirement will rise from CFA800m (€1.2m) to CFA2bn (€3m) after three years, and CFA3bn (€4.5m) after five, in line with Article 330 of the CIMA Insurance Code. In both cases, the equity of a company cannot be less than 80% of the minimum share capital.

Meeting Requirements

Given the limited size of some of the markets in the CIMA region, however, industry players are concerned that the new regulations could lead to a very sharp reduction in the number of insurers, potentially leaving some countries without any providers. The impact is expected to be even greater at life insurance firms given the capital-intensive nature of this activity. In a report published in October 2016, the Africa-based global consulting group Finactu estimated that based on standard metrics for profitability, the new capital requirements would necessitate a minimum turnover of CFA9.4bn (€14.1m) for a non-life insurance firm and CFA18.8bn (€28.2m) for a life insurance firms to support the capital base required by the rules. Based on sales in 2016, only the six largest non-life and the four largest life insurers operating in Côte d’Ivoire would meet these criteria. Finactu estimated that four in 10 insurers across the CIMA region could disappear as a result, while highlighting that the insurance markets of Central African Republic, Chad, Equatorial Guinea, Guinea Bissau and Niger would likely be too small to support firms of the required size.

“Achieving the new minimum social capital requirements is not going to be a problem for the biggest players, and those that are part of big global companies. But, smaller players and smaller markets across the CIMA region could really struggle” Patricia Gotta, former CFO at Allianz Côte d’Ivoire, told OBG. “One option insurers have been using is the incorporation of reserves as part of social capital, but authorities are starting to crack down on this approach, insisting that an insurer’s social capital must consist of cash or equity only.”

Consolidation Ahead

It is unclear as to exactly how and when the new requirements would be implemented. “The increase in minimum social capital would certainly change the landscape of the insurance sector across the whole CIMA region. It will be a big challenge to achieve these levels on such an ambitious timeline,” Daniel Diallo, secretary general of the Association of Insurance Companies of Côte d’Ivoire, told OBG. “One way in which the burden could be lessened would be if a “passport” system is applied, whereby insurers could meet minimum capital requirements across the region, as opposed to every market in which they operate.”

There is a broad expectation that when the new regime is enforced, it will have the effect of spurring consolidation in the sector, producing fewer small players, although challenges to this exist. “The consolidation that everyone expects to see will only come about if the new regulations on capital are widely respected and enforced,” Kamal Harati, director general of KH Assurances, told OBG. “If regulations exist only on paper, the credibility of the sector will be further undermined. But, in any case, there are likely to be changes ahead.”