Home Insurance Digest ‘Understanding Risk-Based Supervision’

‘Understanding Risk-Based Supervision’

CHRIS EBONG, Asst Bus, Editor

Determined to reposition insurance industry for better performance and make significant contribution to the economy, the National Insurance Commission (NAICOM), has moved from Compliance Regulation to Risk-Based Supervision (RBS).
The RBS, which is a globally induced regulation, came to Nigerian insurance industry in 2009, but was not formally introduced to the mainstream insurance industry until now.
Experts are of the view that its enforcement would help stabilize the industry, reduce unhealthy competition among the operators and allow an operator to focus on its area of strength based on its capital level, and risk appetite.
In addition it would trigger further merger and acquisition among the firms.
Indeed, NAICOM defines RBS as “the probability or threat of damage, injury, liability, loss or other negative occurrence, caused by external or internal vulnerabilities which may be neutralized through pre-meditated action.”
It adds that RBS is a structured supervisory approach that aims at identifying the most critical risks that face each company and through focused review by the supervision to assess the company’s management of those risks and its company’s financial vulnerability to potential adverse experience.
According the Commission, it is a veritable regulatory tool to measure operators’ solvency level against their risk appetite. It stressed that by so doing, new capital level for individual firms would be prescribed to match their risk exposure and business portfolios.
RBS is an emerging trend for insurers and brokers across all jurisdictions and induced by the “International Association of Insurance Supervisors (IAIS) and Europe’s Solvency II who are driving much greater sophistication and risk sensitivity in prudential supervision with the result that risk-based systems are gradually being introduced outside Europe”, it explained.
At the 2016 annual seminar organized for journalists in Abeokuta, Ogun State, the Director of Inspectorate, NAICOM, Mr. Barineka Thompson, who made the explaination, said the Commission has so far implemented eight stages leading to the full enforcement of RBS in Nigeria’s insurance industry. He added that the introduction of Corporate Governance code in 2009 ushered in, the RBS structure in the industry.
Thompson stated that RBS requires the supervisor to review the manner in which insurers are identifying, measuring, and controlling their risks and assess system of risk response of a firm with the supervisors’ own processes and interventions in line with the assessment.
He outlined RBS objectives to include a supervision system that is in accord with international best practices, risk focused -supervision, adding that the new business operational model helps to strengthen the risk management system of insurers, and carry out preventive control.
The Commissioner for Insurance (CFI), Alhaji Mohammed Kari, disclosed that the Commission has since commenced implementation up to eight stages with Corporate Governance structure as one of the steps to actualize RBS, adding that the full time table will be out in the second quarter.
The NAICOM boss assured that the exercise will not involve re-issuing of licenses to operators but their solvency and capital levels would determine their level of participation and business portfolios.
Kari said; “Eight stages have already been gone through. When we met with Insurers Committee in Ikeja we told them that the corporate governance structure is one of the steps and we told them that we will be out with the final time table and the financials by the second quarter of the year. So the full time table is coming out in the second quarter.
The time table will include what companies need to do internally, externally, the kind of team in place and who heads the team, that is how details are going to come. Also to consider is the MCR (Minimum Capital Requirement). We are reviewing what we have at the moment and if we find N3billion to be adequate we will make it the MCR.”
“I can assure you that for companies that have solvency issues of N3billion, we have to down grade their participation. We are not going to reissue licenses but we will tell them that your capital you have as Risk -Based Capital (RBC) cannot take you beyond doing Motor insurance and until you capitalize, until you reduce your risk exposure, liability wise and your asset differential increases, we cannot consider you for other classes.”
The Commissioner explained further that review by NAICOM will be periodical starting from the company’s Board using the framework given to the operators.
He said the Board and the actuarial team, in terms of what the company is coming to the Commission, if agree, will be their benchmark of the risk going forward.
He said that until that deteriorates then they will be stepped down from one class of business to another, thereafter merger with other companies may be recommended or they specialize on micro insurance.
“Micro insurance is affordable but you will be surprise that a company with N3billion will then be doing a micro insurance with N300million and that is serious erosion. So it is a progressive thing, company’s status will change depending on the periodical review, the average we can do is every year and we will come out with that in the programme when released in the second quarter.” he said.

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