Nigeria must allow weakest insurers to fail under new rules
Nigeria’s National Insurance Commission (NAICOM) has said that it may oblige insurance companies struggling to meet higher capital requirements to merge, rather than allow the weakest to fail.
Experts question whether such moves are the best approach – or even a practical one.
It is “very doubtful” that NAICOM will be able to force mergers through, says Ekerete Ola Gam-Ikon, a consultant in insurance and entrepreneurship based in Abuja. NAICOM already has five insurance companies under its management for which it has not been able to find interested investors. “When they offer no special value, it is difficult to force them onto others,” he says.
NAICOM is raising the minimum capital requirements for insurers in an attempt to raise their financial strength and improve Nigeria’s low insurance penetration rate. The deadline has already been postponed as insurers struggle to comply: the new rules, originally planned for the end of June, will now not come into effect at the end of December.
Bringing weak or failed insurers together would be a “Herculean” task, Ola Gam-Ikon says.
- Any insurer going through such a process would have huge unpaid claims already known to the premium-paying public, and there is no reason why people would want to give such an outfit their business, he says.
- “Those weakened insurance companies should be allowed to go. They remain unable to meet their obligations to policyholders, shareholders, employees and suppliers.”
Lessons of the Past
“Just as forced marriages don’t last, forced mergers may not stand the test of time,” says Johnson Ajani, a digital financial services expert in Lagos. Forced mergers carry dangers such as the falsification of records, risk concentration, possible collapse of the company when the risk crystallizes, operational inefficiencies and internal reconciliations issues, he says.
Increased capital rules for Nigerian banks in 2004 led to a wave of consolidation.
- But the global financial crisis of 2009-2010 showed that some of the new institutions were not as strong as projected, Ajani says.
- Some banks went under, and Ajani warns that “a hurried consolidation arrangement” could lead to a repeat scenario in insurance.
- Ola Gam-Ikon points to a previous insurance recapitalization exercise in 2007, arguing that it failed because there was no verification by NAICOM that the required levels of capital in fact existed.
- That led to the failure of some insurers to honour their obligations, he says.
NAICOM needs to “strategically approach the enforcement of compulsory insurances as other financial regulators have done to make insurance a strong contributor to Nigeria’s economic growth”, he argues.
According to Ajani, “well planned, supervised and well communicated” mergers are the best way to strengthen the industry. He wants to see mergers based on risk exposure lines, for example life insurance companies merging with specialists in fire, marine and agricultural risks.
- The importance of continued supervision of the new entities by NAICOM after the mergers “cannot be over-emphasized”, he adds.
- The aim of the exercise, he argues, should be to create more diversified risk portfolios, rather than simply focusing on financial strength.
- The situation where Nigeria’s insurance companies are not financially capable of handling some types of contract, such as marine, aviation and large oil and gas risks, should become a thing of the past, “provided the mergers are properly executed,” Ajani says.
Bottom Line: Forcing through mergers would simply transfer the existing problems at weaker insurers into new structures. The weakest should be allowed to fail.