As the deadline for recapitalisation draws near and capital raising gets tight for insurance companies, the operators are agitating that the regulatory authority considers the billions of naira that has accumulated in their contingency reserves as part of capital for recapitalisation, Omobola Tolu-Kusimo reports.
Insurance operators are aggrieved over the recapitalisation requirement of minimum paid up share capital demand by the regulatory authority, the National Insurance Commission (NAICOM).
Reason: They want NAICOM to consider the billions of naira that has accumulated in their various contingency reserves as part of capital for recapitalisation.
Contingency reserve, in the context of insurance, is the amount of money insurers set aside above the legal requirements to cover unexpected or unforeseen losses. It may be used to pay out claims or other underwriting expenses in the event that the money brought in from premiums and the loss reserves are not enough to cover costs.
The contingency reserve is saved from three per cent of Gross Premium Written (GPW) of insurance business or 15 per cent of Profit After Tax (PAT) whichever is higher.
The Nation gathered that many insurance companies have billions in their contingency reserves that can enable them meet the recapitalisation mandate if the regulator allows them add the money to their current minimum paid-up capital.
NAICOM on May 20, 2019 gave the existing 58 insurance companies a 13-month ultimatum to recapitalise or lose their licences.
The recapitalisation raised the minimum paid-up share capital of a Life insurance company from N2 billion to N8 billion; Non-Life insurance from N3 billion to N10 billion and Composite insurance from N5 billion to N18 billion. Re-insurance companies were directed to raise their capital base from N10 billion to N20 billion.
Following the directive, the insurers began mulling the idea of taking the money in the contingency reserve as additional capital to make up their minimum paid up share capital. According to the insurers, it has been difficult raising money due to challenging economic situation.
But the commission turned them down, positing that contingency reserve has to remain to cover unexpected or unforeseen losses that may occur in any of the companies at any time.
People seem to be aggrieved with the issue of contingency reserve because if they have money somewhere, why can’t they be allowed to use it now that they are looking for money to recapitalise.
Speaking during a Director’s Conference organised by NAICOM, the President of the Chartered Insurance Institute of Nigeria (CIIN), Eddie Efekoha, appealed to the regulator that the monies in the contingency reserves of insurance companies be allowed to count in the recapitalisation of their companies.
He argued that the International Financial Reporting Standard (IFRS) way of presenting accounting statements has ensured proper evaluation of unexpected or unforeseen losses through the actuaries as against the era when evaluation was done by mere ‘rule of tongue’.
He said: “Investors are weary and at a time like this when we talk about recapitalisation, there cannot be a better time to talk about profitability of insurance business. Before the introduction of IFRS way of presenting accounting statements, most managers use the ‘rule of tongue’ to estimate risk and liabilities into the future. And because the rule of tongue was not scientific and not likely to address this issue, we had in most of our accounting presentation the issue of contingency reserve, which was to address the risk that will emerge. But with IFRS, there was a formal and scientific way of determining contract and liabilities, which involved actuaries.
“Today we are presenting our account using the IFRS format. Our contract liabilities are being well evaluated by specialists, the actuaries, and we are equally making contingency reserve in addition. But how do we equally return dividends to the shareholders. I am concerned because our liabilities are properly evaluated, yet we are still making provision for contingencies as though they are not evaluating our liabilities very well. This contingency we are making are appropriations from profit made by the companies, which is what should be going to shareholders.”
The Managing Director, Saham Unitrust, Yetunde Adenuga, said she is also worried about the contingency reserve that has been growing but they cannot utilise it.
“I am worried and concerned about the contingency reserve because the real reason for it is to be used to pay outstanding claims that may be in our books.
“I am saying this because most times, we have outstanding claims that are almost 10 years in our books but we don’t have a guideline from the Commission on when we should close our books as regards outstanding claims. I think we need to be guided”.
One of the top chief executives, who spoke on condition of anonymity, stated that the provision of contingency reserve requires you to continue to set aside money from your profit until the amount becomes equal to your paid-up capital. So it is an amount you keep setting aside until you have stayed long in operation and it is equal to your paid-up capital.
“What this means now, under the new recapitalisation regime, is that if you are a composite company that is meant to raise capital to N18 billion, you will continue to build up your reserve until it is N18 billion before you will stop. And who has the N18 billion that you cannot touch and would just be there? It is not in the interest of our business that NAICOM refuses to count it as part of our capital.
“But we are saying NAICOM should recognise it because we will continue to increase it until it is equal to our paid-up capital because it is a statutory provision. Otherwise, a good company some times down the line will have N36 billion in its reserve for nothing. So you will just become asset managers, which we are not. We are not saying we want to take it out because it is set aside to be used in case of fluctuation in interest rate but we are only appealing to NAICOM to let it count for us at this dire moment”.
Reacting, the Acting Commissioner for Insurance, Mr. Sunday Thomas, said it is true that liabilities of insurance companies are properly valued, he, however, noted that in the actuarial profession, majority of the valuations are based on estimates.
“One of the things that contingency reserve is to do is that where the estimate is not exactly what the actual looks like, the difference is to be accounted for by contingency reserve. So it is not just about whether portfolios are properly valued. If it gets to certain limit, you stop reserving at that point. So it has been properly taken care of by the law and I don’t think that it should be a source of concern for the operators. Contingency reserve is beyond what they are saying. What they are saying is that the evaluation of their liabilities is so adequately carried out to the point that it is close to the real liabilities that they have. But they have forgotten that in actuarial evaluation, there are still some gaps between the estimate and the real experience.
“What about if there are fluctuation in interest rate, which will affect their investment? For example, if they increase oil pump price, expenses will go up and cost will go up. The contingency reserve is the shock absorbers that will cover them. They have raised issues in respect of content of their balance sheet and the question is go ahead and capitalise it, retain earnings for example, go ahead and capitalise it, it is acceptable to us and if you don’t want to capitalise, go and raise fresh funds. We know it is difficult but consolidate. Where you don’t have the muscle, come together and consolidate. This is our message to the operators”, he added.