To print this article, all you need is to be registered or login on Mondaq.com.
In exercise of its statutory powers and regulatory functions,the National Insurance Commission("NAICOM"), recently reviewed theminimum paid-up share capital requirement for all classes ofinsurers (i.e. insurance and reinsurance companies, with theexception of Takaful operators and Micro-insurance companies) doingbusiness in Nigeria.
The reviewed minimum capital requirement, shown in the tablebelow (the "New Minimum CapitalRequirement"), was communicated via a circular datedMay 20, 2019, titled: Minimum Paid-up Share Capital Policyfor Insurance and Reinsurance Companies in Nigeria andreferenced: NAICOM/DPR/CIR/25/2019 ("theCircular").
S/N | CLASS OF BUSINESS | EXISTING MINIMUM PAID-UP SHARE CAPITAL (FROM FEBRUARY 2007) | REVIEWED MINIMUM PAID-UP SHARE CAPITAL (FROM MAY 2019) |
1 | Life Insurance Business | 2 Billion Naira | 8 Billion Naira |
2 | General Insurance Business | 3 Billion Naira | 10 Billion Naira |
3 | Composite Business | 5 Billion Naira | 18 Billion Naira |
4 | Reinsurance Business | 10 Billion Naira | 20 Billion Naira |
As stated in the Circular, the new paid-up share capitalrequirement takes immediate effect for new applications made toNAICOM by companies seeking to carry on insurance business inNigeria. However, existing insurance and reinsurance companies arerequired to fully comply with the New Minimum Capital Requirementby no later than June 30, 2020. The Circular further stipulatesthat consequent changes in the sums statutorily required to bedeposited by Nigerian insurance companies with the Central Bank ofNigeria (the "Statutory Deposit"), areto take effect from the commencement of the Circular.
Legal framework
By the combined provisions of sections 6, 7 and 64 of theNational Insurance Commission Act, 1997 and sections 86 and 101 ofthe Insurance Act, 2003, NAICOM, as the principal regulator of theNigerian insurance industry, is empowered to administer, supervise,regulate and control the business of insurance in the country.Specifically, with respect to the powers to review the minimumpaid-up share capital of Nigerian insurance companies, section 9(4)of the Insurance Act, 2003 empowers NAICOM to increase, from timeto time, the amount of minimum paid-up share capital statutorilyprescribed for Nigerian insurers.
Brief Analysis
Following the enactment of the Insurance Act in 2003, the firstreview of the capital base of insurers took place in 2005. Thereview followed hot on the heels of the banking industryconsolidation and was kick-started by an announcement by theFederal Government through the Honourable Minister of Finance,mandating the insurance industry to increase their capital base.Further to this, a Guideline was issued by NAICOM in September2005; establishing the existing minimum paid-up share capitalrequirement for various categories of insurance operations andsetting a period of eighteen (18) months between September 5, 2005and February 28, 2007 for full compliance by all insurers. Theexercise eventually led to the consolidation of the entireindustry. Consequently, the number of operators,post-consolidation, reduced significantly from 104 to 49 insurancecompanies and 4 to 2 reinsurance companies; which were stronger andbetter positioned to do business.
Another attempt by NAICOM at raising the capital base across theindustry last year, through a risk-based capitalization scheme,communicated via a circular dated August 27, 2018 and titled:"Tier Based Solvency Capital Policy for Insurance Companies inNigeria" ("TBSC Policy"), wassubsequently withdrawn on November 23, 2018, following protests bysome stakeholders and an order of the Federal High Courtrestraining the TBSC Policy from being enforced.
With this new Circular, many insurance companies now need toraise additional capital to comply with the New Minimum ShareCapital Requirement. Further, from the commencement of theCircular, any new application to NAICOM for the registration ofinsurance business must be accompanied by evidence of the StatutoryDeposit i.e., an amount equivalent to 50% of the NewMinimum Capital Requirement for the particular class ofinsurance business 1. Similarly, existing insurance andreinsurance companies are now required to increase their StatutoryDeposit with the Central Bank of Nigeria ("CBN"),to an amount equivalent to 10% of the New Minimum CapitalRequirement for their respective classes of insuranceoperations.
Consequently, in order to remain in business, existing insurershave only thirteen (13) months from the commencement date of May20, 2019 (till June 30, 2020) to shore up their respective capitalbase from the existing minimum paid-up share capital to the NewMinimum Capital Requirement, as set out in the Circular.
Industry Outlook
There is no doubt that the New Minimum Capital Requirement willhave a significant impact on the Nigerian insurance industry. GivenNigeria's untapped vast potential in the global insurancemarket place, a well-capitalized industry with insurers who havedeep pockets and excellent local capacity (other than Takafuland Micro-insurance companies specially established to respectivelycater to the insurance needs of Sharia-compliant and low-incomesegments of the market), is desirable and will contribute toimproving the Nigerian economy.
According to a report2 by credit rating agency, Agusto & Co, the penetration rate (measuredas a percentage of GDP) of the Nigerian insurance industry stood at0.3 percent in 2018; compared with 14.7 percent in South Africa;2.8 percent in Kenya; 1.1 percent in Ghana; 0.6 percent in Angolaand 0.6 percent in Egypt. Also, the density of the Nigerianinsurance sector (i.e. a measure of industry gross premium percapita) is currently at $6.2 and lags behind its Africancounterparts: South Africa ($762.5); Egypt ($22.8); Kenya ($40.5)and Angola ($30.5). We also gather from Agusto & Co'sreport that the asset base of the Nigerian insurance industry wasat N1.3 trillion as at December 31, 2018, indicating a compoundedannual growth rate of 17 percent over the last three years whileGross Premium Income (GPI) generated was estimated at N448.6billion, reflecting a 12 percent growth year-on-year.
Whilst these data portend vast growth potential for the Nigerianinsurance industry, many licensed insurers are still largelyunder-capitalized, thus limiting their ability to take on bigticket in-country risks, as may be seen in the oil & gas,marine and aviation sectors of the economy. Also, Nigerian insurersneed more capital to facilitate the acquisition of modern digitaland technology-driven infrastructure necessary to aid their effortsat deepening insurance penetration through InsurTech.
With this New Minimum Capital Requirement, a furtherconsolidation of the Nigerian insurance sector is imminent, as someinsurers may seek to merge or be acquired by bigger firms, in a bidto comply with the Circular. As insurance and reinsurance companiesbegin the necessary move towards shoring up their capital base(during the 13-month grace period granted to existing operators tofully comply with the Circular), it is expected that the marketwill gear up for new private equity and M&A deals in the comingmonths. With this impending recapitalization and consolidationexercise, it is hoped that the "surviving" Nigerianinsurers will be stronger and deeper in their capacity to take onprofitable high risks, so as to enable the Nigerian insuranceindustry function well and fit into an integrated global financialmarket place, as envisioned in the Nigeria's Financial SystemStrategy (FSS) 2020 and the Vision 2020 development plans.
Footnotes
1 Pursuant to Section 10(2) of the Insurance Act 2003,upon registration as an insurer, not later than sixty (60) daysafter registration, the CBN is required to return to the insurer,eighty percent (80%) of the deposit with interest calculated at theCBN's lending rate.
2 "2019 Insurance Industry Report", Agusto& Co –http://agustoresearch.com/product/2019-insurance-industry-report/
The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.
