Business Journal


Nigeria Abolishes Capital Levels for Insurance Firms

Mohammed Kari

The National Insurance Commission [NAICOM] and operators have jointly agreed to abolish capital levels for insurance companies operating in Nigeria as part of measures towards transmitting to risk-based supervision.

The decision was taken at the 2nd Insurers Committee held in Lagos and attended by the Commissioner for Insurance, NAICOM and chief executive officers of insurance firms.

However, the committee maintained that the existing minimum capital requirement for life, general and composite insurance business will still remain the minimal benchmark in the industry.

Mr. Oye Hassan-Odukale, the Chairman, Publicity & Communications Sub-committee said henceforth, each insurance company will determine the level of capital it needs to operate maximally in the market.

He said the committee also agreed to enforce the Code of Corporate Governance with effect from April 1, 2O16 to enhance market and professional transparency in the industry going.

Odukale, who is also the Managing Director/CEO of Leadway Assurance Company Limited, added that certain contending issues between NAICOM and operators were equally discussed for the purpose of resolving same in the interest of all parties, and sustainable growth of the insurance market.

He promised that a Roadmap on the risk-based supervision model would be unveiled later when the various committees set-up for the purpose must have submitted their reports.

Reprinted below is a treatise on Risk-based Supervision by Tony Randle of the World Bank Group:

· Risk-based Supervision for Insurance Supervisors
The role of supervisory authorities undertaking prudential supervision is to promote the maintenance of efficient, fair, safe and stable insurance markets for the benefit and protection of policyholders.

An effective supervisory authority is able to require an insurer to take timely preventive and corrective measures if the insurer fails to operate in a manner that is consistent with sound business practices or regulatory requirements.

Traditionally, authorities have performed this role by way of compliance based supervision. Under this style of supervision, insurers must comply with a set of prudential rules generally written into the law or the subordinate legislation.

The role of the supervisory authority is to ensure that insurers do, in fact, comply with these rules. In recent years, supervision has been evolving and moving from a style that is compliance based to one that is risk based. This progression has also been a feature of the activities of bank supervision and pension supervision.

· What is Risk-based Supervision?
Risk is the exposure to loss or injury. There is a degree of risk attached to every activity which people undertake. Risk based supervision (RBS) requires supervisors to review the manner in which insurers are identifying and controlling risks.

1: It requires supervisors to assess system and IAIS Insurance core principles (2003)
2: Individual firm risk and to respond with the supervisor’s own processes and interventions in line with the assessment. This, in turn, allows supervisors to allocate resources to the insurers with the greatest risk and areas within individual insurers that are high risk.

RBS involves supervisors assessing four factors: inherent risk, controls, residual risk and additional support. A simple example of a pedestrian crossing the road explains these concepts. Inherent risk is the risk of an adverse event occurring.

The inherent risk may not be the same for identical activities undertaken in different circumstances. In the example, one of the inherent risks for the pedestrian is the risk of being hit by a car. The inherent risk would be different if the pedestrian crossed a major road compared with a minor road, crossed during a rain storm or crossed at peak hour rather than some other time.
Insurers face a large number of risks that are of concern to the supervisor and which will be explored further on. Controls are those actions that are put in place to lessen the probability, the severity or both of inherent risk.

Controls to mitigate the risk of being hit by a car may be to cross only with green lights at intersections where there are traffic lights or to look both ways before crossing the road. The degree to which these controls mitigate the risk is different for each control.

Residual risk is the risk of an adverse event occurring even though the controls are in place and are working or being applied correctly. A very cautious pedestrian who only crosses at green lights may still be hit by a car, because the car itself went through a red light.

Additional support refers to any additional factor that may be in place to deal with the outcome of an event occurring and which would lessen the overall impact of that event. The unfortunate pedestrian in the example may have accident insurance in place which will lessen the financial impact of the event if it occurs.

While the pedestrian’s medical bills will be the same, the economic loss suffered by the pedestrian is lessened if the insurer pays the medical bills and provides income support while the person is recovering. There is one further important concept that has to be considered in relation to risks and controls.

Each risk has both a probability of the event occurring and a severity if it does occur. RBS considers both the probability and the severity in making the assessment.

Looking at both is critical to an assessment of controls—controls can mitigate the probability of an event occurring (for example crossing on green) or the severity of the event occurring (for example wearing protective clothing may lessen the impact of being hit by a car), but generally individual controls do not mitigate both the probability and severity in the same way or to the same extent.

· Summary
In summary, a risk based supervision approach assesses the probability and severity of the material risks to which insurers are subject; it assesses the effectiveness of the controls in reducing the probability of risk events occurring or the severity if they do occur.

It further considers what the insurer has in place to deal with an event occurring even though the controls are in place and are functioning properly.

The risk of failure can be approximated as the combination of all the risks (being the product of the probability of an event happening and the severity if that event happened) less the value of the additional support.

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