Nigeria's insurance sector moves towards a risk-based supervision model

Nigeria’s National Insurance Commission (NAICOM) is advancing with its plan to transition from a compliance-based model of supervision to that of risk-based supervision (RBS) in 2017. According to the World Bank, RBS is a system in which the supervising authority allocates time and resources to firms based on the level of risk inherent to their balance sheet. The supervisor assesses systemic risk that affects the industry as a whole, and then analyses the level of risk specific to each firm. It takes a holistic approach, and studies the business units within the enterprise, each of which may carry varying levels of risk.

New Model

The transition process, which has been under way since 2015, will allow NAICOM to determine capital requirements for individual insurance companies based on the risk they carry in their portfolios instead of applying the same minimum standards across the industry. The commission released a set of draft guidelines for feedback in November 2016 and gave the industry four weeks to submit comments. Enterprise risk management and code of corporate governance guidelines were among those released by NAICOM in May 2017, with mandatory training for insurance company directors to follow. In preparation of the industry-wide rollout, NAICOM conducted a verification exercise of capital resources during the first quarter of 2017 – the first step in assessing the level of risk of the country’s 56 insurance firms.

Phasing In

The increase in capital requirements of the phasing-in of RBS may not fully cover the risk inherent to each company in 2017, thus the industry expects the requirements to be revised and raised over time. Paulinus Offorzor, technical head at Universal Insurance, told OBG, “If you compare what Nigeria does at the moment with what is practised globally, you will see that we are far behind our contemporaries. We are growing, but it’s a gradual process.”

RBS is common among major insurance industries globally and is largely supported by the domestic market. “I think that RBS is a fantastic idea,” Adewale Foster-Aileru, head of strategy and investor relations at Cornerstone Insurance, told OBG. “It will help the insurance companies stay within a certain limit, and it could also help prevent an insurance company from carrying more risk than it can bear. It will improve our ability to underwrite larger risks.”

Impacts

The advent of RBS and the higher capital requirements that will accompany the new supervision model has already began to incite capital raising among firms. In May 2017 three publicly listed insurers – Consolidated Hallmark Insurance, Royal Exchange, and Law Union and Rock Insurance – entered into talks with the Nigerian Stock Exchange (NSE) to raise a combined N6bn ($21.2m) through a mix of public offerings and private placements. Insurance firms that are interested in taking part in Nigeria’s most capital-intensive industries, such as oil and gas or mining, are taking steps to shore up their capital base before they are required to do so under RBS implementation.

RBS is also expected to usher in a new wave of consolidation in the industry, especially among those firms that are unable to meet stiffer requirements through direct investment or the capital markets. This consolidation will most likely come in the form of mergers and acquisitions, but firms that fall short of the new capital requirements may reduce the scale of their operations by shuttering less profitable lines of business and concentrating on boosting revenue in markets they can better service. RBS should also lead to specialisation in this way, as smaller firms focus on their comparative advantages and niche markets.

In addition, foreign insurance firms, which already have a prominent stake in the industry, may view RBS as an opportunity to increase their footprint in the country. If the low valuations that NSE-listed companies suffered in 2016 and early 2017 persist, raising capital through direct investment from abroad may prove to be a more attractive option than issuing new equity.