Inflation threatens insurance industry

By Omobola Tolu-Kusimo

The National Insurance Commission (NAICOM)  at the weekend in Lagos identified risks arising from macro-economic environment, which include high inflation and interest rates and foreign exchange instability as some of the factors threatening the industry.

It said these factors and others were responsible for some ailing insurers.

Acting Commissioner for Insurance, Sunday Thomas spoke during the Chartered Insurance Institute of Nigeria (CIIN) 2020 Business Outlook in Lagos, said the foreign exchange rate which stood at N120 to N153 in 2007 and N306 to N360 in 2019 had consequential effect on the value of insured assets over the years.

He said this necessitated the call for recapitalisation, adding that assets liabilities mismatch was identified and needed to avoid imminent systemic collapse and solvency crisis in the insurance sector.

He identified other causes of ailing insurers to include investment and financial risks; poor risk analysis; impairment of certain investments; effect of International Financial Reporting Standard (IFRS) on fair value assessment; mismatched assets and liabilities and insufficient liquidity.

He said: “Also in the course of supervisory review and analysis of the sector, we found the issue of effect of risks from governance and risk management structure: underpricing – inadequate premium; under-provisioning and reserving; poor record keeping – paucity of data and inadequate IT infrastructure; poor corporate governance and ineffective risk management practices.

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“Quality of human capital, for instance inadequate human capital for underwriting, claims and investment management; insufficient actuarial services – inability to recruit and retain quality personnel; inadequate training and manpower development.’’

He said another issue was the emergence of insurance holding companies and conglomerates, noting that this brings about the existence of insurance groups, subsidiaries and affiliates without adequate capitalisation and corporate governance.

The holding companies also brought the issues of group risks – contagion, transparency, autonomy and arbitrage which are rarely reflected in consolidated financial statements.

“The identified needs made it expedient to increase the paid up share capital of insurance and reinsurance companies from the existing level of N2.0 billion, N3.0 billion, N5 billion and N10 billion to N8 billion, N10 billion, N18 billion and N20 billion for life, non-life, composite and reinsurance companies,” he added.

The insurance industry chief said the recapitalisation and stability of the insurance sector is crucial as it will bring soundness and profitability; support stability of the financial system; build confidence in the insurance sector; and improve liquidity and ability to settle claims.

He said this would further improve resilience of the sector; create supply side capacity for local content utilisation; enable the industry to support big infrastructural projects; restructure market fundamentals; and reposition the industry for the greater benefit of  stakeholders.