NAICOM driving insurance growth through regulations
In This article EDET UDOH takes a retrospective look at insurance industry in Nigeria and writes that the National Insurance Commission (NAICOM) is growing the industry through regulations.
Historically, the first major step at regulating the activities of Insurance business in Nigeria was the report of J.C. Obande Commission of 1961, which resulted in the establishment of Department of Insurance in the then Federal Ministry of Trade and which was later transferred to the Ministry of Finance. The report also led to the enactment of Insurance Companies Act 1961, which came into effect on 4th May 1967.
The 1961 Act focused mainly on the activities of direct Insurers, made provisions for Registration and Record keeping. In 1968, Insurance Companies regulations was put in place to facilitate the implementation of Act No 58 of 1961 which then classified Insurance business into different classes for registration purpose and relevant forms for record keeping.
Insurance Decree No 59 of 1976 was enacted putting together the provisions of the various laws. The 1976 Decree among others made the following provision; Condition for authorisation of Insurers, Mode of operation, Amalgamation and Transfer, Administration and Enforcement,
The Insurance Decree No 59 of 1976 constituted the first All-embracing Law for the regulation and Supervision of Insurance business in Nigeria.
In 1968, concern was given to life Insurance business and it led to the enactment of Decree 40 of 1988 which made provisions among others for Assignment of Life Insurance Policy, named beneficiary on Life insurance policy document.
The Federal Government of Nigeria promulgated the Insurance Special Supervisory Fund (ISSF) decree 20 of 1989 to strengthen the manpower need of the Insurance Supervisory Board. That decree mandated all insurance companies to contribute 1% of their gross earning to the Fund.
Decree No 58 of 1991 was enacted improving provisions of Decree No 58 of 1979 and No 40 of 1988. The major highlights of 1991 Decree include: Increased paid-up share capital of insurers and Re-insurers in respect of non-life business and life business respectively, compulsory membership of trade associations; management of security fund by Nigeria Insurers Association (NIA); Practice of no-premium, no-cover.
In 1992, the Insurance Special Supervision Fund decree No 62 was enacted, establishing a body known as National Insurance Supervisory Board, bringing out Insurance supervision outside core civil service, changing designation of Chief Executive from Director of Insurance to Commissioner for Insurance and setting up the Board of Directors to oversee the affairs of the established Body. All this provisions were made to attract high level manpower. The provision of Decree No 62 of 1992 and 58 of 1991 were reviewed for effective supervision and efficient Insurance market, bringing into enactment Decree Numbers 1 & 2 of 1997, National Insurance Commission and Insurance Decree respectively.
The following provisions were made in reviewing decree No 62 of 1992, decree No 1 of 1997; change of name from National Insurance Supervisory Board to National Insurance Commission, establishment of Governing Board, staffing, source and application of funds, control and management of failed and failing Insurance companies, supervisory functions and powers.
Decree No 58 of 1991 was improved on with decree No 2 of 1997 in the following areas; by raising the paid up share capital for different categories of Insurance companies, qualification of Chief Executive, Insurance of Government properties and so on. Presently, the Insurance Act of 2003 is the major legislation that governs the insurance industry in Nigeria, alongside the National Insurance Commission (NAICOM) Act of 1997.
Other laws were enacted that aided the insurance industry included the Road Traffic Act of 1945, for example, which came into effect on the 1st of April 1950, made it compulsory for all motor vehicle owners to have Motor Vehicle (third party) insurance. The enactment and amendment of these legislations helped to improve the efficiency of the industry and to enable it fit into societal changes.
In the areas of reforms enactments were made which made certain insurance compulsory. This was a very welcomed reform as the insurance which were made compulsory were rather necessary in human endeavours. The Road Traffic Act of 1945 made motor vehicle (third party) insurance compulsory so as to protect innocent victims of road accidents when the defaulters cannot pay for damage suffered.
The second compulsory insurance is the insurance of all deposits made in banks by Nigeria Deposit Insurance Commission (NDIC). This gives depositors a level of safety that they will not lose out totally if the bank becomes insolvent. Presently, NDIC pays all customers a certain sum of money in case of insolvency of the bank.
The third compulsory insurance was introduced by the PENCOM (Pension Commission) Act of 2007 which was replaced by PenCom Reform Act (PRA 2014). It made it compulsory for companies to have pension schemes supported by compulsory life insurance for everyone in employment. These provisions increased the awareness of the people in insurance and its relevance in human activities.
Steps were taken to actualize certain provisions of the Insurance Act 2003 to ensure an increased efficacy of the industry. Section 72 of the Insurance Act 2003, for example provides that no one shall transact insurance or reinsurance business with a foreign company in respect of life, asset, interest or other property in Nigerian business which has been classified as domestic insurance unless with a company registered under the Act. The actualization of this section was to bring about the domestication of insurance business in Nigeria.
Section 50 (1) of the Insurance Act 2003 was also fully and rigorously implemented on the 1st of January, 2013 to prevent the non-payment of premium. The implementation of this section was in an attempt to ensure that insurance companies have enough capital to run as required. Thus, the new policy in operation now is “no premium, no cover”.
The enactment of the Nigerian Content Act of 2010 may also be seen as a reform of some sort as it positively impacted the insurance industry. It increased the participation of Nigerians in insurance and in getting Nigerian insurance companies to participate fully in insurance. The implementation of the provision of the Act gives Nigerians about 90 per cent of insurables in oil and gas. It ensures that Nigerian companies are given priority in the insurance of things that pertain to the oil and gas sector and it was estimated that it would boost insurance income and yield about $400 million in two years.
Agricultural insurance was also introduced to all interested people. The Nigerian Agricultural Insurance Corporation (NAIC) has the right to insure subsidized agricultural risks. However, certain risks in non-subsidized agricultural areas needed insurance, hence this reform. These reforms and provisions had significant effects in the insurance industry and indeed, in the financial sector of the country.
The National Insurance Commission (NAICOM) was established in 1997 by the National Insurance Commission Act 1997 with responsibility for ensuring the effective administration, supervision, regulation and control of insurance business in Nigeria and protection of insurance policyholders, beneficiaries and third parties to insurance contracts.
The strategic intent of the Commission is to effectively administer, regulate, supervise and develop the Nigerian Insurance Industry for the protection of insurance consumers and other stakeholders.
NAICOM vision is to ensure a safe and sound insurance industry competing globally and contributing optimally to the Nation’s Economic Growth and Development through proportionality, integrity, consistency and effectiveness.
The corporate goals of the Commission is to ensure safety and soundness of insurance institutions; facilitate stability of insurance sector; Secure protection of policyholders and public interest; promote optimal development of the Nigerian insurance market; engender public trust and confidence in the insurance system and achieve satisfactory level of regulatory effectiveness and compliance with relevant laws.
The Commission is mandated to establish standards for the conduct of insurance business in Nigeria; approve rates of insurance premiums to be paid in respect of all classes of insurance business; approve rates of commissions to be paid in respect of all classes of insurance business.
NAICOM is to ensure adequate protection of strategic government assets and other properties; act as advisers to the Federal Government on all insurance related matters; approve standards warranties applicable to all insurance business in order to protect insurance policyholders and beneficiaries and third parties to insurance contract.
The Commission is also mandated to publish for sale and distribution to the public, annual reports and statistics on the insurance industry; liaise with and advise Federal Ministries, extra ministerial departments, statutory bodies and other Government agencies on all matters relating to insurance as contained in any technical agreements to which Nigeria is a signatory.
NAICOM’s other statutory responsibility are Contribute to the educational programme of the Chartered Insurance Institute of Nigeria and the West African Insurance Institute and carry out such other activities connected or incidental to its other functions under the 1997 Act.
To foster growth in the industry and deepen insurance acceptance among Nigerians, NAICOM has introduced some strategic frame works which include the Market Restructuring and Development Initiative (MDRI), Risk Based Supervision (RBS) among others.
The Market Development and Restructuring Initiatives (MDRI) is an initiative designed to help the penetration of insurance. While Risk Based Supervision on the other hand requires insurance firms to undertake risks in line with their financial capability.
In its drive to ensure insurance market Development through enhanced access points for insurance services in Nigeria, NAICOM recently exposed four new Guidelines to the insurance market for inputs and/or Comments. The exposed guidelines covered Independent Agent Operation; Mutual Organizations, Associations, Community Based & Non-Governmental Organizations’ Microinsurance Agencies.
Other areas covered by the guidelines included State Governments’ Implementation of Compulsory Insurances, and insurance WEB aggregators operational guidelines.
The timeline of October 06, 2017 for the submission of comments and/or inputs by individuals and institutions in the insurance industry on the exposed Guidelines has lapsed and thus, the Commission had stopped entertaining comments.
On implementation of compulsory insurances, NAICOM had visited the Ogun and Gombe state governors to seek collaboration in this area which they have obliged. NAICOM has paid similar visit to the Kaduna State governor to seek the state’s collaboration in enforcing compulsory insurance in Kaduna and expressed desire to establish a branch office in the state.
To ensure success on the implementation of compulsory insurances in Nigeria, the NAICOM has recently inaugurated a Technical Committee that would drive the enforcement of public building insurance in the country.
The committee was inaugurated by the NAICOM’s Commissioner for Insurance, Mr Mohammed Kari, in Abuja. The technical committee is made up of representatives of NAICOM, the Federal Fire Service (FFS), representatives of states fire service from the six geo-political zones and the Nigeria Insurers Association (NIA). The steering committee on the other hand is made up of the Commissioner for Insurance, the Controller-General of the Federal Fire Service and the Chairman of the NIA.
In a recent interview with the Commissioner for Insurance, Muhammed Kari, he gives details of activities of the commission under his able leadership.
The Market Development and Restructuring Initiatives (MDRI)
The Market Development and Restructuring Initiatives (MDRI) is an initiative we would continue with, because it was designed to help the penetration of insurance and we can still do a lot on that. What we have done to strengthen the implementation is to set up an internal unit that is specifically assigned to handle public sector insurances and advices.
Again, let me emphatically state that the previous initiatives yielded some significant achievement and we are continuing with some of them especially the MDRI. Many more Nigerians are now aware of insurance and the need to take insurance. I am passionate about the deepening of insurance penetration in the country and that is why it is one of my key projects.
The Commission is in the process of launching the 2nd phase of the MDRI. You are aware that the Commission incepted the project code-named MDRI to among others strengthen and deepen the domestic market through ensuring insurance credibility, protection of policy holders, risk based capitalization of insurance companies, enhancing integration with external financial market through embedding the governance and risk management frame work for insurance companies; promotion of sustainable economic development by diversifying and integrating insurance products into financial services for long term financing; increasing access to insurance and penetration etc.
Creation of new distribution channels.
We have equally created new channels for insurance distribution in order to reach the larger populace and insurance consumers. To this end, new guidelines have been developed to ensure seamless operation of the new channel and we have signed MoUs with some interested corporate organizations. Such guidelines include the Referral Relationship Guidelines, Partnership Brokers’ Guidelines and Mutual Co-operative , Community and Non-Governmental Organisations Guidelines to reach the lower informal groups. Other guidelines are being developed to introduce more channels to entrench financial inclusion in the country. We are collaborating with the Central Bank of Nigeria (CBN), Nigeria Communication Commission (NCC), Stock Exchange Commission (SEC) and National Pension Commission (PenCom) among others on the need to engage their regulated entities and channels for insurance products distribution. We have an MoU with CBN on Bancassurance where banks would act as referral agents to insurance companies to help drive insurance penetration and density.
To this end, we have issued a circular to all Ministers; Ministries; the Head of Service; Secretary to the government; Permanent Secretaries; Head of MDAs, including the Chief of Staff to the President, highlighting to them the role of NAICOM in ensuring that the insuring public are insured properly.
The unit will assist the MDAs in structuring their insurances properly. We have given them a template on information to give, such as; how we can access government assets that need insurance, and we are going to work jointly with the Minister of Finance and the Budget office to ensure that these assets, when identified and valued appropriately, are provided for in the budget and paid for the purpose of insurance.
On other classes of business, we are working with the Federal Road Safety Corporation (FRSC) on motor insurances; we are also working with the Fire brigade on public buildings. These are initiatives that would help penetration and we are making efforts to ensure that we properly see that all the initiatives work.
Risk based supervision?
We are getting near the period of Risk Based Supervision as the transition has been identified as one of the key regulatory priorities of the Commission in 2017. There are process components to be wholly operated by the regulator and the risk based capital component which is jointly itinerated by the insurers and validated by the regulator. Going by the draft roadmap that we released late last year, the full adoption of risk based capital will become effective when all the implementation structures, models and capacity building for both regulators and insurers have been met. The fact is that the implementation RBS is an ongoing action and have actually commenced with the release of enabling regulatory framework such as corporate governance risk management and internal control, adoption of the International Financial Reporting Standard (IFRS) and requirement of actuarial determination of insurance reserves and other estimates.
And secondly is to strengthen corporate governance in the companies, because the responsibility of selecting the kind of insurances you get into and how you capitalised the company are all the responsibility of the board and that is what the corporate governance is.
Having done the first one, which is providing guidelines and rules, the second, is the corporate governance which we are taking up, while the next one would be the financials, which is what would lead us to consolidation.
Consolidation is inevitable. We have many players in the industry that do not add value to the services they provide, both in the intermediary and insurance sectors. Consolidation does not mean just an additional capital; it could be redefining and identifying the type of insurance business you want to operate. For instance, if you did not have as much capital as company B, you would operate within the confines of your capital. Today, we have capital as the only bases for operation and if you meet the minimum capital, you can operate.
Our legislation had structured the industry into Life, General and Miscellaneous. So, if you are licenced to do General business, it means that with N3 billion, you can attempt to insure petroleum refinery or you can claim the right to insure an Airline, which is not right if you look at the foundation of insurance. This is because, to be able to hold a risk, you must have enough assets to cover the risk. So, risk based is being able to identify what is your financial capability. If, your financial capability does not guarantee you to insure oil refinery or airline, you will not be allowed to do so. Your financial ability may be to insure a Keke NAPEP, then, you will be a specialist in Keke NAPEP insurance. That is what risk based is going to be.
It is going to, first of all, require that we review and see whether the minimum capital requirement is adequate. If not, we would require additional capital to meet that minimum. But if it is okay, we would just require the classification of companies’ assets plus the extra needed to get into the class of business one wants to undertake.
Microinsurance and takaful insurance?
We are encouraging investors to come and get smaller type of licence that will enable them operate in small areas. We hope to bring down the licence fee and issue people licences to operate either on national, state or as a unit. An operator could be issued a licence to operate within a market that would enable the operator to be close to the consumers. We are looking at this as a way to increase participation and deepen the market.
This is an area where professionals that are in the wrong side of the business can move into, because we have so many professionals that are running company limited without realising the implications of running a company limited. But they can use their professionalism now and have this single digit unit or two to three units at the local government and run them more successful, and have better cash flow than what they are doing now. We believe the microinsurance and takaful sectors can absorb a lot of professionals, because even before one operates there, he must have certain level of professionalism.
Effect of present economic situation on government insurances
Government agencies cannot shelve insurance because it is a recommendation of the law. The Ministries, Departments and Agencies (MDAs) have the responsibility to protect government’s assets; hence, they cannot shelve insurance. Government, being the owner of the law, cannot default. It is not in the interest of other consumers to see that government fails to insure. So, government will do everything it has to do to ensure it protects public assets.
For instance, my responsibility as the chief executive of NAICOM is to ensure that I abide by all the laws of Nigeria and ensure the enforcement of all the laws, whether they are my responsibility or not. Sometimes, operators take it unkindly when I ask them questions that are not insurance-related. I do ask companies if they are making returns to the Corporate Affairs Commission (CAC)? They may ask; what is my business with their returns? If I licenced a company, it is my duty to ensure that it obeys the laws of Nigeria. It is my business to ensure that companies pay their taxes and meet the requirements of other regulators. So, it is interwoven, and I cannot see any responsible officer sitting on top of an MDA and say insurance should be relegated. We are trying to sensitise them not to do so and we are arranging a retreat for top level officers to appreciate their responsibilities under the insurance market.
State governments comply with group life policy
Group life is one of the seven compulsory insurance classes. We have a joint committee with the National Pension Commission (PenCom) for the enforcement of group life cover. We are taking an initiative to enforce it. As I said earlier, we have created an in-house committee for the enforcement of compulsory insurances and management of public insurances. The committee is liaising with the government officers to ensure compliance. We are making sure the laws are enforced. Look at the pension, which came out of insurance, but due to enforcement, it is making some remarkable progress.
NAICOM’s position on tenure for managing directors
We issued the code corporate governance guidelines, even, before the banking sector. The code of corporate governance for the insurance sector was issued in 2009, and the bankers have enforced theirs.
At the Insurers’ Committee meeting we had in Lagos, we agreed that the code would be implemented by April 1st. The code was silent on the tenure of executive managements, but not clear about non-executives. So, by April 1st, you will find nobody with more than nine years on the board of any insurance company.
The exposure draft we released, that contains the second level, which is the executive management and other requirements, was downplayed because a week after we released the draft, the Financial Reporting Council (FRC) released another one which applies to all operators in the financial sector. So, we decided to wait for the implementation of theirs. But if theirs is taking too long to come out, we will review ours and continue with it. But the aspect of limited tenure for executive management is vital.
In all economic plans, including the developed countries, after the financial crisis in 2008, it was realised that it was the stay-put of managements that caused the crisis. It is the interest of investors to have a succession plans in whatever one does. The time proposed in the draft is reasonable for anybody that has served twice to leave.
We have always argued that we do not have capable persons to take over, but whose faults it is? It is the fault of the Managing Directors who failed to train those below them. Why don’t them create executive structures, to groom their successors? There should be somebody capable to take over a company at any time.
