|In a bid to build a stronger and more stable industry, a little over a year ago, the National Insurance Commission (NAICOM) began the transition from a compliance based regulatory framework to the Risk Based Insurance Solvency Regime (RBISR).
Unlike the former, risk based supervision places less emphasis on compliance with rules, regulations and policies and focuses more on the insurer’s risk management approach.
This model which is fast becoming the widespread regulatory approach across financial institutions the world over, is expected to achieve solvency in the industry and ensure that insurers have the adequate financial capacity to meet their obligations with respect to the insured.
What is Solvency II? And why should we adopt it?
Solvency II is a directive that was put together to harmonize insurance regulations in the European Union (EU) but has gradually become the leading global standard for supervision of insurance business.
It largely entails a risk based approach for the governance, operation, capitalization, and supervision of insurance firms. The key objectives of the model include:
· To reduce the risk that an insurer would be unable to meet claims
· To reduce the losses suffered by policyholders in the event that a firm is unable to meet all claims fully
· To provide early warning to regulators so that they can intervene promptly if capital falls below the required level
· To promote confidence in the financial stability of the insurance sector
The Solvency II framework is underpinned by three pillars:
Pillar 1 Quantitative requirements
Pillar 2 Governance and Supervision
Pillar 3 Reporting and Disclosure
Standards which define valuation of assets and liabilities and the calculation of capital requirements.
Governance and Supervision
Guidance on effective monitoring of risk management systems and supervisory roles
Reporting and Disclosure
Directives on requisite transparent public disclosures and regulatory reporting
Implications of Solvency II Implementation in Nigeria
The implementation of Solvency II in Nigeria will present a true picture of the risk profiles of the insurers while fostering an improvement in the culture of risk management.
According to NAICOM, the RBISR should moderate the possibility of consumer loss, enhance the efficiency of insurance companies, optimize their use of resources, and help them make better informed decisions.
Although the regulator has left the minimum capital base in the industry unchanged for now, the yet-to-be-released RBS Guidelines will shed more light on the modifications if any. Currently, insurance companies must maintain a capital base of NGN2bn for underwriting life business, NGN3bn for non-life, NGN5bn for composite insurance companies, while NGN10bn is required for re-insurance companies.
The framework of Solvency II introduces a new definition of eligible capital, which is grouped into three levels of quality:
Tier 1 (ordinary share capital, non-cumulative preference shares and relevant subordinated debt)
Tier 2 (cumulative preference shares and subordinated debt with a shorter duration)
Tier 3 (capital that does not satisfy the tier 1 and tier 2 requirements, must have an original maturity of at least 5 years)
As a result of increased risk coverage, there will also likely be an increase in capital requirements and potential reduction in qualifying capital of insurance companies.
We expect this to lead to further consolidations in the industry and subsequently an influx of foreign investment. Barring hindrances such as high costs of implementation, paucity of requisite data and skills and political obstacles, we posit that the implementation of Solvency II in Nigeria will boost the overall performance of the industry and position it as one of the foremost in the region.