Recapitalisation in insurance sector, pathway to strength or barrier to growth?

By Esther Agbo

The proposed recapitalisation in Nigeria’s insurance sector has sparked significant debate among industry stakeholders, with opinions divided on whether it will serve as a catalyst for growth or an impediment to new entrants.

Experts highlighted that while the recapitalisation effort could strengthen existing firms, it may also introduce new challenges for smaller players, potentially restricting their entry into the market.

The immediate past President of the Chartered Insurance Institute of Nigeria, Edwin Igbiti, voiced concerns about the implications of higher capital requirements.

He argued that the sector, already grappling with low penetration, could face additional barriers, particularly for companies focused on retail insurance, where smaller capital bases are more typical.

He said, “Comparing us with other countries in Africa, you will realise that we are the ones with the highest base as an industry. My argument has been that, as much as we all agree, we need capital to run the business. Excess capital is counterproductive because, at a minimum, you are expected to make a turnover of your capital about 10 times and if you cannot have that, it means that you are not sweating the capital and that has been a challenge.

“We have been complaining about the penetration rate and it is about inclusivity. In the retail space, there is no need for much capital. It is those who are involved in oil and gas, property that is of value but retail space with a small sum insured. Therefore, capital in that segment is what we can retain in its entirety.”

The newly introduced ‘Nigeria Insurance Industry Reform Bill 2024’ in the Senate seeks to raise the minimum capital requirements for insurance companies significantly.

According to the bill sponsored by the Chairman of the Senate Committee on Banking, Insurance and Other Financial Institutions, Tokunbo Abiru, and 41 other senators, If passed, life insurance companies would need to increase their capital from N2bn to N15bn, general insurance from N3bn to N25bn, and reinsurance businesses from N10bn to N45bn.

Igbiti suggested that the bill might be designed to encourage mergers and acquisitions within the sector, creating stronger and more resilient firms. However, he cautioned that this approach could reduce the number of industry players and create higher entry barriers saying, “What I perceive that the regulator wants to achieve is that they want to encourage mergers.

This move is tantamount to, if you cannot do it alone, looking for someone and merging, thus, reducing the number of players and becoming a barrier. At the moment, if we should check the minimum capital in the industry, how many companies have that cash? And what is the turnover with the capital that they have?

“However, if you set the minimum capital to be high, you have introduced a barrier to entry and that is why you will question what the essence of our risk-based supervision is.

“To safeguard the regulator, I feel that they would prefer to have the minimum capital be high. If everyone playing in a certain segment is like this, then, their risk-based approach means that they are not operating higher than that. If you observe, what they are now saying is either that minimum capital or the risk-based recommendation.”

Moreover, the CEO of the Nigerian Council of Registered Insurance Brokers, Tope Adaramola, emphasised the need for a careful approach to recapitalization, drawing parallels with the banking sector’s recent experience.

He noted that while higher capital could enable companies to underwrite more strategic risks, it might not necessarily deepen market penetration. Adaramola called for a phased implementation, giving companies sufficient time to meet the new capital requirements.

He said, “Those who believe in higher capitalisation believe that it would help and the insurance companies believe that it would be a position to be able to expand and underwrite strategic risk, which, hitherto, they do not seem to have the capacity to underwrite and for which it is being taken abroad.

“Some operators feel that higher capitalisation may not necessarily be a fillip for deepening the industry. And that is why the emphasis has been on risk-based supervision, risk-based consideration, and risk-based solvency for the industry.”

Some insurance companies, such as Prestige Assurance Plc and Cornerstone Insurance Plc, have already begun preparing for the potential changes. At their respective annual general meetings, company leaders expressed a readiness to raise additional capital and expand their underwriting capacities, viewing recapitalization as an opportunity to enhance financial stability and innovation.

However, the Nigerian Insurers Association (NIA) has expressed opposition to the proposed capital increases, advocating for lower thresholds and a risk-based capital regime that aligns with international standards. NIA Chairman, Kunle Ahmed, proposed a minimum capital of N8bn for life business; N10bn for non-life, and N20bn for reinsurance and the implementation of a risk-based capital regime that would enable them to undertake risk in line with their capital.  

He warned that excessive capital requirements might divert insurance companies from their core business, leading them to focus on investment activities rather than deepening insurance penetration in Nigeria.

He said, “Insurance is an international business, and we need to consider what is obtainable in other countries, even within Africa. I agree that it (the capital base) determines your retention, but it is not the single determinant of your capacity.

“What we risk is that we are going to have insurance companies that are not deepening their insurance business in Nigeria, but are just sitting down and investing the money that they have in other things. I believe that we should focus a lot more on deepening insurance in Nigeria.”