…Many insurance companies face hostile merger, acquisition
After its failed attempts to categorise insurance companies in Nigeria based on their share capitalizations, National Insurance Commission (NAICOM) has come up with a hybrid minimum share capital policy for insurance and reinsurance companies in Nigeria.
Industry analysts are of the view that the enforcement of the new minimum capital adequacy will precipitate unprecedented level of mergers, acquisitions and possible shut down of many insurance companies in the market.
The revised paid-up capital requires life Insurance business operators to raise their capital from the present level of N2 billion to N8 billion; General business from N3 billion to N10 billion while that of Composite business has been jacked up from N5 billion to N18 billion.
For Reinsurance business, the revised minimum paid-up share capital has also been reviewed upward from N10 billion to N20 billion.
This was contained in a circular issued on Monday by NAICOM with Ref: NAICOM/DPR/CIR/25/2019, entitled “Minimum Paid Up Share Capital for Insurance and Reinsurance Companies in Nigeria”.
The circular was signed on behalf of the Commissioner for Insurance Alhaju Mohammed Kari by the commission’s Director, Policy and Regulation Directorate, Pius Agboola and addressed to all insurance and reinsurance companies.
The Circular reads in part “In 2005/2007, the insurance witnessed its last recapitalization and despite the astronomical increased in value in insured assets, consequent exposure to higher level of insured liabilities and operating cost of insurers, the same capital continued to rule in the insurance industry.
“In the exercise of the powers conferred on the Commission by the enabling laws, the minimum paid-up share Capital requirement for insurance and reinsurance companies in Nigeria is hereby reviewed.
“This circular shall apply to all insurance and reinsurance companies other than Takaful operators and microinsurance companies.
“The new minimum paid-up share capital requirements shall take effect from the commencement date of this circular for new applications while existing insurance and reinsurance companies shall be required to fully comply not later than June 30, 2020.
“The provision in respect of requirement of statutory deposit as stipulated in Part III, Section 10 of the Insurance Act 2003, shall apply on the effective date of commencement of this circular.
”All Insurance and Reinsurance Companies are required to ensure strict compliance with this circular. The commencement of this circular shall be May 20, 2019.”
Reacting, the Managing Director/Chief Executive Officer, Law Union & Rock Insurance, Mr. Ademayowa Adeduro, said that the industry is fragmented and the regulator is trying to force consolidation.
He said NAICOM, going by its circular, based its decision on the fact that the industry was last recapitalized over ten years ago and as a result of that is due for another round of recapitalization.He expressed worry that insurance stock is not attractive enough to investors.
According to him, “But if you look at the return on investment in the industry, nobody will like put his money where it will not yield adequate result. That amount they are asking for is on the high side in terms of return on investment.
“Be that as it may, let us look at the merit of it, if it will force consolidation and we have a reduced number of players then we have to look at the angle of maybe there will be better yield. Because it is all about where will you put your money? Will you rather put your money in the bank? Or put it in insurance? Or will you rather put your money in saving account or in investment account? So it is a question of choice.
“The return on equity in the industry is lower than five per cent even as it stands currently. It’s not a sin for the industry to look for ways of raising additional capital but if it will force consolidation that will bring about a reduced number of players which to me I will say that is the objective of NAICOM.
“This will entail smaller players coming together to raise capital for a strong capital base, with this, NAICOM would have been able to achieve their objective at the end of the day.
“As it is, it is difficult for the industry to go to the capital market to raise money because insurance share are not attractive to new investors. To a new investor, if you one to buy stock today, insurance stock is the least that you will think of buying and that is why some of them are even trading below their par value at the stock market. So you rather put your money even in the ordinary saving accounts rather than invest in insurance industry. But if it’s going to force consolidation and if consolidation is going to bring enhanced performance, so be it,” Adeduro said.
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