Implementation of RBS: NAICOM Strengthens Regulatory Oversight, Risk Management Capabilities …As Experts Speak On Way Forward

The Nigerian insurance industry primary regulator, National Insurance Commission (NAICOM) is in the process of strengthening its regulatory oversight and risk management capabilities that will improve its internal capacity for assessment of emerging risks for effective implementation of Risk-Based Supervision(RBS) model.

Experts in the industry have also lent their voices In suggesting appropriate and effective strategies that the industry can adopt to ensure proper implementation of the RBS model.

The commission is currently building capacity with training and retraining of its staff for effective implementation of the policy.

It is also working on improving industry readiness assessment, implementing own risk and solvency assessment (ORSA), internal capital models, solvency test, stress testing, incentivising effective risk management enablers, among others.

The Commissioner for insurance and Chief Executive Officer of NAICOM, Olorundare Sunday Thomas, made the disclosure during the 2022 annual business outlook seminar organised by the Chartered Insurance Institute of Nigeria (CIIN) held in Lagos.

According to him, companies will be advised after a stress test on what is the appropriate capital requirement for their operations based on the risk they carry, and the commission will ensure it complied with.

Thomas, who supported the position of Oladimeji Alo, CEO, Excel Professional Services and the lead paper presenter at the seminar on what insurance companies should do about recapitalisation said: “Like what Alo said, companies should on their own work towards increasing their capital based on the level they want to play without waiting on the regulator to make a pronouncement.”

The capacity building training is in preparation of the Commission’s plan adopt of risk-based assessment for insurance companies in Nigeria, which a single capital requirement has been unveiled for players in the industry.

The commission said with full implementation of the policy expected to commence soon, companies will be required individually to capitalise based on their risk appetite and vision.

Industry analysts believe that If this happens, it will bring to an end ongoing recapitalisation exercise in the industry where players were expected to increase their capital requirement to over 300 percent, which exercise was to end on September 30, 2021, before the process was stalled by legal action against NAICOM by some industry’s stakeholders.

Under the inconclusive recapitalisation exercise, NAICOM had mandated life insurance firms to meet a minimum paid-up capital of N8 billion, up from N2 billion while general insurance companies are expected to increase their paid-up capital to N10 billion, from the earlier N3 billion.

Composite insurance (life and non-life operators) were asked to recapitalise to the tune of N18 billion as against the previous N5 billion while reinsurance businesses are now required to have a minimum capital of N20 billion, from N10 billion obtainable in the past.

Earlier, Oladimeji Alo, CEO, Excel Professional Services and the lead paper presenter at the event, said “if I were an insurance player, I would not wait for any new pronouncement for capital increase, but will on my own move ahead to increase because it will definitely come.”

All who was speaking on the theme ‘Economic Policies of the Federal Government of Nigeria in 2022 – Issues, Challenges and Prospects’, said, “insurance companies that will win the competitive game in 2022 are those that pay attention to economic policies of the government that have the highest possibility of being implemented.

“Invest in IT to drive operational efficiency and customer service; pay attention to challenges posed to the sector by the incursion of Fintechs; innovate strategies around cost containment automation, service delivery and product development.”
According to him, attention should be paid on industry wide collaborations on advocacy, consumer education and capacity building.

Muftau Oyegunle, president of CIIN, speaking earlier, said the programme among other things, examines the National Budget, reviews the thrusts of the fiscal and monetary policies of the government, estimate how these will influence the insurance industry in particular, and the economy in general.

He expressed optimism that this year’s outlook will be very insightful considering the positive projections of the global industry by international analysts, which suggest that demand for insurance would keep rising worldwide; and that the industry will be bullish notwithstanding concerns about the potential effects of Covid-19 variants.

Peter Ashade, CEO, United Capital in his presentation also emphasised the importance of capitalising the insurance industry, stating that, not only will it strengthen individual companies for a bigger role in the industry, it will elevate the status and contribution of the sector to the economy.

A financial expert Mr Pius Apere, has highlighted some areas the industry needs to look into in order to achieve effective implementation of Risk based supervision for optimal results.

Risk based supervision (RBS); a system where a supervising authority allocates time and resources to companies based on the level of risk inherent in their balance sheet, is gradually becoming the dominant approach to regulatory supervision of financial institutions around the world.

According to Pius Apere, an Actuarial Scientist and Chartered Insurer, the introduction of RBS regime in the Nigerian insurance industry would improve financial and operational efficiency of insurance companies and their ability to underwrite large volumes of business and material risks going forward.

Apere who is also the Chairman/CEO Achor Actuarial Services Limited, in a recent article titled “Risk-Based Supervision with Effective System of Risk Governance is the Panacea for Nigerian Insurance Industry”, equally stated that an RBS regime will enable the industry compete globally and contribute significantly to the country’s economy.

It is worthy of note that the Nigerian insurance regulator, the National Insurance Commission (NAICOM), has been planning since 2015 to move from a compliance-based supervision to risk-based supervision (RBS) of insurers by 2017.

However, this laudable plan and timeline did not materialise, even after preparative and proactive steps for take-off of the RBS including the release of guidelines for RBS with feedback mechanism from insurances companies, enterprise risk management and code of corporate governance, and also conducted a verification exercise of capital resources within individual insurance companies have been carried out.

Apere while explaining how the RBS works, said the supervisor which is the regulator is expected to assess systemic risk that affects the industry as a whole (e.g. credit risk, market risk, operational risk etc.) and then analyse the level of risk specific to each firm (e.g. insurance underwriting risk). It takes a holistic approach by studying the business units within the enterprise, each of which may carry varying levels of risk.

“In other words, the RBS approach requires supervisors to review the manner in which insurers are identifying, analysing and controlling risks (i.e. assessing the probability and severity of the material risks to which insurers are subjected to and the effectiveness of the controls in reducing the probability of risk events).

“The RBS is contrasted with compliance-based supervision where the latter involves applying the same minimum standards across the industry, checking for and enforcing compliance with rules, legislation, regulations or policies that apply to an entity. The risk-based capital (RBC) methodology is an integral part of the RBS framework and the former requires actuarial expertise/inputs in its determination.

“RBS focuses on the link between risk management and the management of capital adequacy and solvency. This requires an insurer to address relevant and material risks by recognizing the importance of an Enterprise Risk Management (ERM) framework in underpinning robust insurance enterprise-wide solvency assessment with the aim to enhance confidence in assessing the insurer’s financial strength.

The solvency assessment would require each insurer to identify the risks to which it is exposed, to identify the risk management process and controls in place and quantify its ongoing ability to continue to meet the regulatory capital requirements.”
He added that the principle of proportionate risk-based approach is also an important consideration for the application of RBS, especially in markets with conventional insurers, small insurers or micro-insurers and insurance products with lower risk profiles.

This requires that supervisors assess compliance with a regulatory framework in a manner proportionate to the nature, scale and complexity of the risks inherent in the business of insurers, as there is no “one-size-fits-all” approach for the application of RBS, he noted.

The Actuarial scientist said that ideally, the insurance regulators are expected to develop a strategy for implementing the RB  in consistent and/or compliance with the Insurance Core Principles (ICPs) of the International Association of Insurance Supervisors (IAIS).

Apere said a prerequisite for good and effective RBS is that an insurance regulator needs to have a good knowledge of the insurance companies, the industry and operating environment. These can all be observed by creating a risk profile of an insurance company by considering the company’s activities, the risks in those activities, quality of risk management process and the capital required to support operations.

“The current management of NAICOM has a good knowledge of the critical problem facing the insurance industry, the dearth of actuarial professionals that is likely to hinder the successful implementation of the RBS. Thus, NAICOM has already put in place a training programme for building actuarial capacity for the insurance industry in preparation ahead of commencement of the RBS policy.

Apere said that if RBS is implemented with an appropriate RBC methodology, even without adopting stochastic modelling techniques to determine the RBC at the initial stage of RBS regime, there will be no need to re-introduce the suspended Tier-Based Minimum Solvency Capital (TBMC) in the future, since an insurance company would not be able to underwrite large risks without the required capital. However, a new Insurance Act has to be introduced to provide the legal basis to support the implementation of the RBS framework.

“For effective implementation of RBS, there is need to bridge the insurance and/or risk management knowledge/experience gap that exists within the Non-Executive Directors (NEDs) in some Boards of the Nigeria insurance industry. This is because the presence of NEDs without insurance and/or risk management expertise in a board may create an environment where decisions are made in a manner not so well thought-out, thereby making it difficult for the Board’s effective oversight functions without bias or compromise and communication with executive management and stakeholders. The limited insurance training programmes organised by the regulator for Directors in the industry might not be sufficient in the RBS regime. Thus, it would be appropriate to have at least one insurance professional as a NED (e.g. probably the Independent NED) on the Board of an insurance company, going forward.”