Miller: Insurance Regulator Has A Good Justification To Raise Capital Level

As an actuary, how do you suggest the nigerian insurance retail market can be expanded?

Actuarial science is not segmented into retail or corporate lines so our skills apply across the 2 lines. Actuaries monitor the cash flows of a business and make projections on the cash flows.

However, retail penetration in Nigeria has been a big issue for a long time. Right now the insurance penetration is less than one percent of the gross domestic product (GDP) and it is clear that if that ratio has to go up, it’s retail that will drive that.

That’s very clear. The deep hole in the retail market means a lot of individuals do not have insurance they should have.

For example, so many Nigerian households have no life insurance on the breadwinner so they end up easily in a situation where the breadwinner dies and everybody is back to square one, and that’s not a good situation.

The challenges however, with the retail segment has been how to reach the segment at a cost effective way. Secondly, the buying power of the average Nigerian is so low.

There’s way less than one percent of Nigerians that are earning above N200,000 monthly and most people are not earning anything at all. A person has to first satisfy the basic needs to eat and get shelter before he can start thinking about savings or insurance needs.

Then for those people that even have the ability to buy, the challenge is how to reach out to them. What we’ve seen in places like Singapore and South Africa and other similar economies that have been able to solve that problem is they have properly leveraged on bancassurance.

whereas for us here in Nigeria we are still very much reliant on the agency system where foot soldiers are used to sell insurance.

Bancassurance gives access to huge lots of people very easily because the bank already has its customers’ network running to millions of them.

I believe that solving our retail insurance problem will depend on how well we can utilise Bancassurance. I don’t see any other alternatives to solving that problem.

What’s your take on planned recapitalisation of the insurance sector considering the present economic realities?

I would say it’s a double edge sword. As you rightly mentioned, inflation makes it necessary to review the current minimum capital upward.

The last regulation was in 2003 that required that Life insurance companies should have N2 billion while non Life insurers were required to have N3Billion.

But since then, the inflation has been very high and if you adjust for inflation that N2 billion now, depending on what rate you apply at, you would get at least N10 billion, while N3 billion would get to about N15 billion.

The challenge, however, is that the premiums or the inflows that the insurance companies have been having have not been adjusting with inflation.

So, if you adjust the capital and the premium is not adjusted, there’s a mismatch and that is why you have the shareholders complaining.

It should be noted also that e historically, the return on capital in the Nigerian Insurance industry has been very low and these are the challenges surrounding a drastic rise in the minimum capital requirement..

A couple of years back, the regulator tried to institute a tier-based capital regime and some insurance shareholders sued the regulator and that process was truncated.

The argument on their side was that the return on investment had been very low In contrast to the banks, for example, they had an easier case in raising capital because they’ve been profitable.

So it becomes easier for them to retain earnings or ask shareholders to bring more money. But when you are not making money, it becomes harder for you to ask them for money.

The reality, however, is that whether your premiums are adjusting for inflation or not, the claims will definitely adjust for inflation The amount of money you repaired your car with 10 years ago is not the same cost you do repairs now.

So, in that sense, the regulator has a very good justification to say we need to raise the capital level because your exposure is a lot higher now than it used to be for the same level of risk, expenses are higher, every other thing is higher so it does make sense to think capital increase.

From your professional perspective does it really make sense to raise the minimum capital now?

Yeah, the capital needs to be raised but the issue is by how much?. I feel for the regulator because no matter which direction they go, there will always be views against.

Even in the banks I remember when the most serious bank recapitalisation was introduced sometimes in 2006 or so. It was very painful for the banks at the time but it had to be done.

I think it ended well because it gave the banks the opportunity to reinvent themselves. Today, I think Nigeria has one of the best payment banking systems in the world and I don’t think that could have happened without that painful recapitalisation exercise.

Today, I think Nigeria has one of the best payment banking systems in the world and I don’t think that could have happened without that painful recapitalisation exercise

Recapitalisation, however, can be a double edge sword-, it can work and it may fail. But in the banks’ case it did work generally. We saw the downside of the recapitalisation when Sanusi came in and branded five of the banks as rascals.

Sometimes too much money may encourage rascal behaviour. What do you do with the sudden excess money?

You picked some holes in the RBC draft guidelines released by the NAICOM, what are those things missing?

Firstly, I have to note that there’s no risk based capital guidelines that does not have holes including the ones in US, or UK.

It is a normal thing that there would be issues because at the end of the day, the risk based capital framework is a model and every model is a representation of reality. It would never be reality, and reality will always be different.

However, what we should strive to achieve is that that the number of holes should be minimal. I know Kenya issued their own risk based capital a couple of years ago and they had a lot of issues from it. Ghana did something like that too and they also had some issues.

So it is normal to have those sorts of issues but what is more important is collaboration to mitigate the issues. The Nigerian Actuarial Society met to review the draft guidelines and In summary, the issues we found have been sent to and discussed with the NAICOM team.

We are confident they will consider the issues raised. NAICOM has made it clear that it is a draft, it is not final so it is normal to expect those issues. They just wanted to invite comments from everybody before it is finalised.

The issues were ranging from some confusion around some communication in the document, which needs to be clarified further to avoid ambiguity. Secondly, There were also some risks that we expected to be captured that were not captured.

Another issue is what the charges or penalties for those risks should be. And that is always the most contentious issue with any risk based capital. Unfortunately there’s no right answer to that question.

What’s usually more important, however, is ensuring that everybody believes that those numbers came from the actual experience of the market.

But right now it is hard to see that connection but we are hoping that as we go through that process with NAICOM and run through it with the industry together we will can resolve that.

I want you to be specific on what the minimum capital should be whether for life, non life or reinsurer…. how much is more favorable given the present realities?

The thing about the minimum capital is that there is art to it and there’s science to it. For example when the famous N25 biilion capital for banks came up in about 2006, there was no right or wrong answer to it but I think the regulator wanted to take out a lot of small banks and they wanted to focus on a few.

So their reason was largely to streamline the operators. Also they were getting a lot of failures at the time and they wanted to reduce that risk. I believe that the NAICOM’s objective at the moment is to reduce the chances that companies are failing.

So to that extent they thought to raise the capital to a point that companies that can raise that level of capital are likely to have a better governance structure. Because when somebody gives you N20 billion to manage it’s different from giving you N2 billion to manage.

With N20 billion, he’s going to be on your neck for updates and reports to be sure that you have a good governance structure. So, I think that that’s what they are trying to achieve.

The science to it, however, tries to ensure each company can operate at the level of risk appetite it has and that is where the Risk Based Capital comes in.

So, typically, worldwide, we see a minimum capital requirement within the range of 25 per cent to 45 per cent of the risk based capital. What some regulators would do is to do the RBC study for the industry to determine what the average number of capital would be under the risk based status and then apply a ratio of that to it. That’s the science side of it.

What will be useful is what the regulators objectives are and that is likely to determine what that number will be. But I believe that their objective is to reduce the number of failures and ensure that insurance companies are bigger.

When you raise capital to a high enough level, two or more companies may come together to form one and become bigger. I think that makes sense for Nigeria as it is right now so that companies can afford to have good IT, and make investments in people.

Going by the provision of the Consolidate Insurance Bill 2024 before the National Assembly, which stipulates N15 billion, N25 billion and N40 billion respectively, do you consider this adequate for companies to run and meet their traditional obligations?

I think this is where the government’s policies can be conflicting at times. But that’s the way life is. What will be useful would be to understand what the objectives are.

N15 billion, N25 billion or N40 billion could be right or not depending what the objectives are or what they’re really trying to achieve.

Assuming the objective is to reduce the numbers of operators in the market then N40 billion, even higher than that makes sense because you need to raise the bar higher enough to ensure that happens. Maybe the regulators want to encourage mergers.

But if the objective is simply to ensure that companies have enough capital to support the risks they are underwriting then the number should be driven more by a robust the risk based capital.

There’s this notion that life and general business companies should have separate licences and the capital base of reinsurers should be much higher.

What do you have to say about this? Separation of life from general business has been a thing of debate in a long time. I am aware that the regulators are keen on seeing that separation and I know they do not issue new composite licences.

I can see the reason they would want to do that for better management and more focused management. I think however that there are advantages and disadvantages of that approach. The disadvantage is the synergy that may be lost.

So, a company that was operating as a composite breaks up in two companies, now you need two managing directors, two boards, two CFOs and all of that. In a market where the return on capital is already poor now, loading extra expenses on the business could worsen that and discourage new investments.

The advantages are that the life board will be able to ask more specific questions and the non life board will be able to ask more specific questions. But the issue is whether the market is big enough for that.

My personal view is to allow the companies to operate the way they want to whether Life, General or Composite. The accounts are separated so the regulators would be able to still monitor them separately The reinsurance is the insurer of insurance companies so logically one would expect that they will be a lot bigger than insurance companies.

But right now the capital requirements for them is very close to what the insurance companies are required to hold. I’m not sure what the rationale for that is andhat’s one of the things we needed to clarify with NAICOM.

Recently a company was taken over by NAICOM on account of insolvency and failure to meet its commitments to annuitants. At what point, in your assessment, this company went down to a level of default in its obligations?

Annuity portfolios are a very technical one but unfortunately a lot of people are not aware how technical it could be when they go into that business. Normally no company should be writing that portfolio if they don’t have an actuary.

The Actuary has to regulatory monitor if the pricing is right and whether or not the assets were invested in the right kind of assets to march the liabilities. I’m aware that NAICOM is trying to correct that.

They are now requiring that the company should demonstrate that they have the actuarial capability to write annuity. But what has gone wrong in the past with the failed company would be the series of events starting from the pricing.

The pricing was not dynamic enough to reflect the current market realities and clearly because they had no actuarial support. The annuity payments to customers are fixed.

You have to pay that money on a monthly basis but where was that money being invested to ensure the returns are sufficient to fund the annuity payments as they fall due?

Again without the actuarial support, they would have gotten that wrong. Finally, assuming that the asset allocation is correct, when the interest rate moves, are the assets and liabilities moving in the same direction at the same amount? Clearly again, that would have been impossible to figure out, without the needed actuarial support.