RBS May trigger M&A, Fresh Capitalisation In Insurance Industry

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Transition to Risk Based Supervision(RBS), a new policy of the National Insurance Commission (NAICOM) expected to bring an end to common capital regime for insurance companies, may trigger a new wave mergers and acquisitions, fresh capitalisation as well as specialisation  in the insurance industry, analysts say.

Under this policy, insurance companies will have to raise fresh funds or combine businesses by way of mergers or acquisitions, to be able to underwrite certain classes and levels of risks, particularly in the oil & gas and aviation risks.

The implication is that the current level of statutory capitals may no longer qualify an insurance company to participate or bid for certain classes of business, as there would be pegs on qualification criteria for some businesses.

According to the analysts, this development will also result in the emergence of specialised insurance companies, where some firms by virtue of their level of capitalisation, could decide to do only motor business, fire & burglary or any other aspect of the business.

At the moment, insurance companies doing general business have as statutory capital N3 billion, while life companies have N2 billion, whereas composite firms- those doing both general and life, have statutory capital of N5 billion. Reinsurance companies on the other hand, have statutory capital base of N10 billion.

Auwalu Muktari, acting GMD, Royal Exchange plc said RBS is in the interest of the market because it will help build capacity.

“It is possible that it might result to mergers and acquisition, or raising of fresh funds to be able to play in some areas of the business, but the bottom line for me is that there will be increased capacity”.

Muktari observed that Nigeria would be able to reduce export of insurance to America and European markets if local capacity increases, “and we are able to retain a larger percentage of the volume of businesses emanating here, within us”

The CEO of a big insurance company, who preferred not to be named, said “I see a new wave of recapitalisation coming. But how firms will go about it, I do not know.”

The CEO said he has already intimated his foreign partners about the development and they will be looking at it in their next board meeting.

“But RBS is the way to go and it is what is obtainable globally. We should embrace it, but what I do not know is whether the regulator has the capacity to implement it”, the CEO observed.

Tony Randle, a globally renown risk management expert, describes RBS as the role of supervisory authorities undertaking prudential supervision to promote the maintenance of efficient, fair, safe and stable insurance markets for the benefit and protection of policy holders.

Randle observes that an effective supervisory authority is able to require an insurer to take timely preventive and corrective measures if the insurer fails to operate in a manner that is consistent with sound business practices or regulatory requirements.

The plan for RBS in the Nigerian market began in July 2012, when NAICOM introduced Risk Management Framework Guidelines for identifying, measuring, monitoring and limiting the risk involved in the business for insurance and reinsurance companies.

The guidelines also laid down the processes for reviewing risk, identifying and prioritising risk, and corporate governance issues, among others. The guidelines are primed to facilitate risk based approach and regime in the industry, to ensure performance and effectiveness in its Risk Based Supervision and Risk Based Capital Approach.

The risk regulation approach was more focused on setting standard and shifting the responsibility of deciding the risk appetite of the operator to the Board and Management of each company.

Source-Business Day

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