Nigeria unexpectedly cut its Monetary Policy Rate (MPR) by 100 basis points from 12.50% to 11.50% in an attempt to boost the economy by providing cheaper credits. Analysts, who see the rate cut as suppressing bond yields, aren’t exactly confident this will work.
Nigeria increased insurance capital rules attract foreign firms
Higher capital requirements for insurers in Nigeria are set to provoke a wave of consolidation, with foreign players in the driver's seat.
The National Insurance Commission (NAICOM), which regulates the industry in Nigeria, increased the minimum capital for insurance and reinsurance firms across the board in May.
- The new rules take effect immediately for new entrants, while existing players have until June 30, 2020 to comply.
Deji Olatoye, a partner at The Lodt law firm in Nigeria says that the new requirements are an indication that NAICOM is “strongly motivated” by the objective of forging consolidation in the industry.
- Insurers backed by foreign investment are those who are currently in the best position to meet the new requirements, he says, adding that foreign players are very unlikely to pull out of the country.
- The most likely scenario, Olatoye says, is that insurers such AXA Mansard, NSIA and Old Mutual will find themselves “well-placed to acquire a few minnows.”
Kunle Ahmed, chief executive of AXA Mansard, agrees that there will “certainly be some consolidations and fund raising amongst insurers in the coming months.” He says, however, that capital requirements are not “the only or even the biggest factor in consolidation decisions . . . consolidation decisions are strategic and usually made by Shareholders in conjunction with management. ”
- Axa Mansard will continue to write both P&C and Life & Savings policies, he said.
A fragmented market
François Jurd de Girancourt, head of financial institutions Africa at McKinsey, expects to see some consolidation, especially in the fragmented general insurance sector where the top five players acccount for less than 40% of premiums.
- Olatoye argues that the large domestic insurers like Leadway and Zenith will not be under much pressure during acquisition discussions, since they both currently exceed the new capital requirement significantly. They would be interested in new acquisitions, he says.
- The capital markets currently hold less prospects for fund-raising than, for example, was the case during Nigeria’s banking consolidation, Olatoye says.
Both indigenous and foreign-owned insurers in Nigeria tend to be privately held.
- “It is doubtful that they would be significantly pressured to conduct IPOs to meet the requirements,” Olatoye says.
- For that to change, Olatoye argues, the stock exchange, working with NAICOM for example, would need to take measures to specially attract them.
Jurd de Girancourt argues that while higher capital standards aim to tackle insolvency and fragmentation, Nigeria will also have to tackle the enforcement of compulsory insurance, win the trust of consumers and increase investment into distribution for insurance in the country to reach its potential.
Bottom Line: Consolidation rather than capital raising is the most likely route for Nigeria’s insurers to meet the new rules.