NAICOM: simplifying Tier-Based Minimum Solvency Capital Policy

The purpose of this article is to give clarifications and explain details of the policy frame work as contained in the released Circular to the Media.

This article will attempt to recap the background and policy concept, and examine the transition arrangements that will enable the successful implementation of the Commission’s policy action.

This is excerpts from the paper “Achieving a Seamless Implementation of the Tier-Based Minimum Solvency Capital Policy (TBMSC)” in Nigeria presented by NAICOM’s Director of Supervision, Mr. Barineka Thompson,  at the 2018 seminar for insurance correspondents/business editors and bureau chiefs organised by the National Insurance Commission (NAICOM) in Abuja recently.

Introduction

The Commission recently introduced the Tier-Based Minimum Solvency Capital (TBMSC) policy for insurance companies, via Circular No: NAICOM/DAPCIR/14/2018 dated August27, 2018;

Series of misinformation circulated in the media and amongst Insurance Institutions, Journalists and Financial Analysts, giving mischievously construed facts on the policy since its announcement.

The Two main classifications and their sub-classifications are:

For Life Insurance Business: Individual life insurance business; Group life insurance and pension business as well as Health insurance business and

For General Insurance Business: Fire insurance business; General accident insurance business; Motor vehicle insurance business; Marine and aviation insurance business; Oil and gas insurance business Engineering insurance business; Bonds, credit guarantee and surety ship insurance business and  Miscellaneous insurance business.

Background to the Recapitalization Action

The last capitalization programme of insurance companies was carried out in 2005/2007.

An offshoot of general resolve to recapitalize the industry at the Insurers’ Committee Retreat held on 15^th and 17^th February, 2018 in Abeokuta

Effect of macroeconomic and institutional factors on Insurers

Effect of 2008 global financial crisis and recent economic recession in Nigeria, on Insurers

The inability of some insurers to honour contractual commitments they have made to the insured and other stakeholders

Improper capital structures can lead to the extinction of the insurance industry

The Classification of Insurance Business -Insurance Act, 2003

Companies take too much risk with their capital, with additional risks of increasing incidence of emergence of holding companies

Insolvencies become more common, public confidence in insurance erodes, and the insurance industry declines

ICP 24.1 states that “the supervisor identifies underlying trends….; develops and applies appropriate tools that take into account the nature, scale and complexity of insurers, as well as non-core activities of insurance groups ,to limit significant systemic risk”

The TBMSC is a complimentary measure to the ongoing implementation of the Risk-Based Supervision (RBS) programme by NAICOM.

Background to the Recapitalization Action.

The TBMSC -Policy Concept

1. a) The TBMSC Model–is a regulatory model designed for the application of proportionate solvency capital that support the nature, scale, complexity and risk profile of the business conducted by insurers.
2. b) The classification of business according to the present level of capital that an insurer possesses in relation to the risks that the capital can effectively be deployed to.
3. c) Enabling soundness and profitability of insurers through optimal utilization of capital.
4. d) Encourage insurers to focus on the area of their strengths, encourage innovation and deepen market penetration, build investors’ and public confidence in the industry.

The TBMSC -Policy Concept

1. e) To create capacity for bridging insurance gap, optimize local retention and minimize capital flight.
2. f) To limit significant systemic risks and build confidence in the insurance industry
3. g) Support the stability of the financial system and increase insurance contribution to the nation’s Gross Domestic Product
4. h) Achieved the above without a mandatory injection of capital.
5. i) No cancellation of licence, but insurers will be subject to solvency control level

The TBMSC -The Policy Model

N/B: Composite Insurers: A combination of Tiers in Life and Non-Life OR any combination arising from the choices made by Board of Directors of an Insurer.

Basis of Assessment

The basis of assessment of TBMSC shall be consistent with the provisions of:

1. a) TheprovisionsofSection24oftheInsuranceAct2003;
2. b) The Prudential Guidelines for Insurers and Reinsurers in Nigeria 2015; and
3. c) Other Regulations and Circulars, issued or shall be issued by NAICOM.

The assessment shall apply to both Life, Non-Life and Composite Companies

Companies shall be assessed in the first instance on their approved Financial Statements (FS) for 2017; or the last approved financial Statement where 2017 is not yet approved

All Companies shall be assessed and graded to the equivalent Tier that its capital can accommodate

Subsequently, request for change of Tier-Level shall be subject to the filing of an application, and approval by  NAICOM, on satisfactory fulfillment of set conditions

If in the event items are missing from the computation, insurers may bring up such cases and provide supporting documents in evidence of your claim.

The TBMSC –Assessment Parameters   It shall be the responsibility of the Board of Directors of each Insurer to determine the risk category it wishes to operate within, provided that the insurer meets the Minimum Solvency Capital of the particular Tier.

At all times, an insurer shall not underwrite insurance policies or undertake risks outside the Tier Level of a risk class or combination thereof in the case of a composite insurer, that is authorized by the Commission. Any case of violation shall attract penalty equal to the sum of the advised gross premium involved and in addition, the CEO and other relevant Officer(s) of the insurer shall be penalized as the Commission may determine.

The sanction above will similarly extend to a broker that may be found to be culpable on the advised gross commission involved.

All insurers that do not meetTier1 orTier2 minimum solvency capital requirements but presently underwrites businesses in those Tiers, may however continue to participate in existing specific policies on facultative insurance basis up to December31, 2019

It shall be the responsibility of the Board of Directors of each Insurer to determine the risk category it wishes to operate within, provided that the insurer meets the Minimum Solvency Capital of the particular Tier.

At all times, an insurer shall not under write insurance policies or undertake risks outside the Tier Level of a   risk class or combination thereof in the case of a composite insurer that is authorized by the Commission. Any case of violation shall attract penalty equal to the sum of the advised gross premium involved and in addition, the CEO and other relevant Officer(s) of the insurer shall be penalized as the Commission may determine.

The sanctions above will similarly extend to a broker that may be found to be culpable on the advised gross commission involved.

All insurers that do not meet Tier1 or Tier2 minimum solvencycapitalrequirementsbutpresentlyunderwritesbusinessesinthoseTiers, may however continue to participate in existing specific policies on facultative insurance basis up to December31, 2019.

Transition Arrangement.

1. Composite insurers who choose to operate as wholly Life Company, shall continue to service all existing obligations on its Non-Life portfolio until such liabilities are exhausted, on a run-of basis.
2. Composite insurers who choose to operate as wholly Non-Life Company, shall incept transfer of its existing life portfolio (except for group life) within six (6) months of re-categorisation, or such other period as the Commission may determine, to a qualified life insurer, and advice to the PenCom. The insurer shall continue to service all existing obligations on the group life portfolio until such liabilities are exhausted, on a run-off basis.
3. Annuity operation–In case of a solvency assessment, re-categorising a life insurer below Tier1, the life insurer shall be required to commence transfer of its Annuity portfolio not later than six (6) months from October1, 2018, to another qualified Life insurer with the approval of the Commission and advice to the PenCom.
4. Details of portfolio transfer and run-off procedures are contained in paragraph. 6.2 of the Circular
5. No Mandatory requirement for injection of fresh capital

“No Mandatory Injection of Fund” by insurers and at the close of the initial certification date, there shall be no cancellation of license of any insurer.

Aimed at minimizing possible attempt to stampede shareholders to inject fresh capital.                                                                                                                                                                                                                                         Going forward, the Commission will recertify companies thatmay be willing to be reclassified to higher Tier level, semi-annually.  Insurers have perpetual  period to exercise whatsoever capital raising option(s) that they may deem appropriate in each of their circumstance and still operate in a desired level after the initial

Capacity support

1. Insurers may provide reinsurance support to higher tier categories on the provision to the Commission of an acceptable Reinsurance treaty.
2. Insurers are free to subscribe to any local and regional pooling arrangement, in any class of business irrespective of their tier categorisation.
3. Licensing of new companies in the Tier 1 category is open to encourage further capacity support

Relevant Dates

1. July25,2018–Exposure of the Policy Frame work to Insurers
2. August2, 2018–Issuance of the Policy Circular
3. August 30 ,2018–Issuance of Letter of Advice to each insurer on their“ Solvency Assessment Status” as at December 31,2017

d.September16,2018–An insurer who wishes to be categorized based on its half-year 2018 audited accounts to submit copy thereof to the Commission

1. Oct.–Dec.31,2018–insurer stop rocure and have in place, adequate Reinsurance Treaty arrangement for the forthcoming 2019 annual insurance year in support of their technical capacity to underwrite and retain more businesses and minimize capital flight
2. 1^st January and1st July of each year- new categorization shall take effect based on half-year and annual audited accounts fo reach period ended June 30^th and December 31st. g. In October, categorization list of insurers will be published or public information and guidance

Licencing Requirements for New Companies

1. a) The Commission shall from time to time pronounce the availability of license in specified Tier(s).
2. b) The rules relating to registration and operations of New Insurance Companies as prescribed in the Insurance Act and any other relevant legislations shall apply.
3. c) New Companies shall be required to meet the Tier-Based Minimum Solvency Capital of the declared category of business it intends to underwrite by full injection of capital fund, at the point of registration and licensing.

Conduct of Business by Insurance Institutions

1. a) Publication of Insurers’ Tier Level: The Commission shall have the sole responsibility to publish the list of insurers and their qualified Tier levels, before the commencement of this policy and from time to time, subsequently.
2. b) All insurers that are certified to operate in a specified Risk Class by the Commission shall be viewed and treated  by insurance institutions and the insuring public as having the same and equal opportunity, rights, obligations and qualifying financial capacity as any other insurer in the same risk class,until an insurer is declared otherwise.
3. c) The Tier-Based policy or any inference thereof shall not be used by an insurance institution in any form of public advertisement, commentary, presentation and/ or communication whatsoever, without the prior approval of the Commission.
4. d) No Insurance institution shall use the Tier-Based classification as a de-marketing tool against an insurer, within and outside the institution.
5. e) No insurance institution shall qualify or re-categorize an insurer against the certification issued by the Commission in this policy.
6. f) Where a client is having series of businesses that cut across different Tier levels or a combined policy (that is, different risk covers integrated into one policy), the Underwriters/Brokers shall sensitize their client(s) or sectionalize the policy into separate covers for other Risk Tiers. Subsequently, the business shall be allocated to qualified insurers in a lower Tier category.
7. g) Insurers in a Tier shall have the same privilege to participate in the covers attributable to its Tier category not withstanding the participation of an insurer in a higher Tier of the same client or in a combined policy.
8. h) Where the client chooses not to accept the proposal, only insurers in the higher Tier can underwrite the business.
9. i) All insurance institutions shall have an obligation to report all market abuse involving the operation of the Tier-Based policy to the Commission immediately on the occurrence of a violation by an insurance institution.
10. j) No insurance institution shall withhold, return or cease the sum of premium arising on or designated for the procurement of cover for a client on account of the operation of this policy where the insurer is certified as possessing the capacity to underwrite the risk in the category of business on which the premium was received or payable
11. k) No discrimination or inferior/superior adjectives shall be allowed by an insurer/broker of an insurer that qualify to underwrite business of a specified class of risk.
12. l) Insurance institutions shall ensure compliance with this Circular as any breach of any part thereof shall attract sanctions as specified in this circular and in addition, in accordance with the relevant provisions of the Insurance Act 2003 and NAICOM Act 1997.
13. m) Any case of violation shall, in addition to previously stated sanction, attract:

Sanctioning of the CEO and other relevant Officer(s) of the insurance institution, and/or Suspension of operational license for a period of six (6) months, and where the violation persists, the withdrawal of the operating license of the insurance institution, as the Commission may determine.

Reference should at all times, be made to paragraph 9 on conduct of business by insurance institutions in the Circular, when executing any part of the policy.

Intervention Levels and Control Parameters. It establishes basis for intervention levels and top-up requirements, stress indicators, insurer and regulator’s corrective measures and actions:

Control levels      Top-up requirements

1                          x ≥ 130%

2                          120% ≤ x < 130%

3                          100% ≤ x < 120%

The Parameters indicate the excess over the Minimum Solvency Capital Requirement of each of the Tier.

4                          x < 100%

Less than base (entry) level into each Tier level of the TBMSC.

A clarion call to Insurance Institutions to be properly guided by the rules of ethical practice and professionalism when dealing with insurers and clients.