Nigeria’s insurance sector recapitalisation: When regulation falls short

When the banking sector recapitalisation ended without any fuse, it was widely applauded. But the same cannot be said of the insurance sector, which needed the Ministry of Finance intervention to quiet the storm; BENJAMIN UMUTEME writes.

For Nigeria’s insurance industry, recapitalisation was supposed to be more than another regulatory exercise. It was expected to mark a decisive break from years of weak balance sheets, poor claims-paying capacity, inadequate risk retention and declining public confidence.

In an economy characterised by inflation, rising operating costs and increasingly complex commercial risks, a strong insurance industry is not a luxury. It is part of the financial infrastructure required to protect businesses, households and public investments against shocks.

Capital is important, but also important is how the quality of regulation determines how that capital is raised, invested, deployed and protected. This is where concerns about the National Insurance Commission (NAICOM)’s handling of the process become significant.

NAICOM is legally mandated to regulate, supervise and ensure the effective administration of insurance business in Nigeria. Its responsibility, therefore, goes beyond setting capital thresholds. It includes ensuring that insurers remain solvent, assets are properly valued, policyholders are protected and companies operate within sound risk-management principles.

The experience surrounding the recapitalisation exercise suggests that while the policy itself may be necessary, the implementation exposed weaknesses in communication, stakeholder engagement and regulatory coordination.

An insurer whose balance sheet is dominated by property valuations, difficult-to-liquidate investments or doubtful receivables may appear strong on paper but become vulnerable when a major claims event occurs.

The communication problem

One of the clearest lessons from the recapitalisation exercise is that regulatory directives cannot substitute for effective stakeholder engagement.

In a chat with Blueprint Weekend, financial analyst Adefolarin Olamilekan acknowledges that recapitalisation was a welcome development but argued that shortcomings in communication created unnecessary friction.

“The recapitalisation of the Nigerian insurance sector was a welcome development…However, the issues about sector regulators not doing enough in terms of communication portray it in a bad light,” he said.

According to him, disagreements that emerged towards the end of the process demonstrated that issuing formal guidelines was not necessarily the same thing as adequately engaging those expected to implement them.

This distinction is crucial as regulation is not simply about producing circulars, guidelines and deadlines. It is also about anticipating the practical consequences of those rules for companies operating in an environment where access to capital is already difficult. In this aspect the Commission failed.

The friction surrounding issues such as capital-injection fees and escrow requirements illustrated the problem.

In the case of Nigeria Re and other operators, disagreements over aspects of implementation became sufficiently serious to require intervention from the Ministry of Finance.

Lessons from banking sector recapitalisation

Economist and financial analyst Dr Aliyu Ilias, speaking with this newspaper, drew attention to the contrast with the banking sector.

He said, “Ordinarily, what we see in bank recapitalisation, the commitment from CBN, the commitment from the stakeholder, we cannot expect such from NAICOM. We must not use one-size-fits-all to judge two of them.”

His argument is not necessarily that the insurance regulator should copy the Central Bank of Nigeria (CBN). Banks and insurance companies have different business models, balance-sheet structures and risk profiles.

But the comparison highlights an important issue: the level of institutional ownership and stakeholder alignment can determine whether a recapitalisation exercise becomes a smooth transition or a prolonged confrontation.

Ilias added that NAICOM did not take stakeholders along as much as expected, contributing to the disaffection surrounding the exercise.

“The NAICOM really did not take the stakeholder as long as expected. So, and that’s why most of you know, disaffection is actually getting its way,” he told this reporter.

His expectation, however, was that the differences would eventually be resolved.

“I’m sure they will come to settle it and it will become a story over time,” he added.

That may happen. But the fact that disagreements emerged at such a critical stage should not simply be dismissed as an episode that will disappear with time. It should be treated as a regulatory lesson.

The danger of paper capital

Perhaps, the greatest danger facing the insurance sector is not insufficient capital but poor-quality capital. Nigeria’s history of asset-price volatility makes balance-sheet valuation particularly important.

An insurer may present substantial real estate holdings, investments or receivables as part of its financial strength. But if those assets cannot be quickly converted to cash, their usefulness during a claims crisis is questionable. This creates what can be described as the paper-capital trap.

Property may be revalued upwards. Unquoted investments may appear valuable but have no ready market. Premium receivables may remain outstanding for long periods. Funds may also be tied up in assets that cannot readily be converted into cash.

In normal circumstances, such weaknesses may remain hidden. A catastrophe changes everything, an analyst quipped.

A major industrial accident, aviation disaster, oil-sector loss or natural disaster can generate claims running into billions of naira. At that point, the real test of an insurer is not its accounting capital but its liquidity and claims-paying capacity.

This means recapitalisation should be accompanied by forensic asset-quality assessments.

Experts say regulators should ask difficult questions about every major asset used to satisfy capital requirements: What is its market value? Is it independently verified? Is it encumbered? Can it be liquidated? How quickly can it generate cash?

Regulatory uncertainty, credibility problem

A regulator’s authority depends not only on the strength of its legal powers but also on the predictability with which those powers are exercised.

Frequent changes in deadlines, uncertainty over interpretations and prolonged disputes can undermine regulatory credibility. There is also a fairness issue.

An insurer that spends heavily to comply with a recapitalisation requirement may find itself competing against a weaker company that delays compliance, challenges regulatory decisions or survives through repeated extensions.

Such a situation creates a moral hazard as companies may begin to believe that non-compliance has few immediate consequences.

The ultimate victim is the compliant operator and, more importantly, the policy holder.

The regulator therefore has to balance flexibility with firmness. There may be legitimate reasons for extensions or transitional arrangements, but these must not become mechanisms for indefinitely protecting chronically weak institutions.

What recapitalisation means for investors

For investors, the recapitalisation exercise presents both an opportunity and a warning. The opportunity is obvious, a stronger insurance industry can support larger risks in sectors such as oil and gas, aviation, construction, infrastructure and agriculture. It can also reduce excessive dependence on foreign reinsurers and deepen domestic capital formation.

If rules are perceived as uncertain, if disputes routinely escalate to ministerial intervention, or if compliance requirements change without adequate consultation, investors attach a higher risk premium to the market. That can discourage the very capital the recapitalisation exercise is designed to attract.

What does it mean for policyholders?

For the ordinary Nigerian policyholder, the real measure of success is simple: Will my claim be paid promptly and fairly when I need it?

Many Nigerians view insurance as a product that companies eagerly sell but reluctantly honour when claims arise. Recapitalisation can help address that perception if stronger companies have the financial capacity to settle legitimate claims. But capital alone will not restore trust.

NAICOM must enforce claims standards, punish habitual defaulters and ensure that policyholders have accessible mechanisms for resolving disputes.

The regulator must also tackle the unhealthy practice of premium under-pricing. When insurers compete primarily by offering unsustainably low premiums, they may win business in the short term but create future claims problems.

A strong regulatory framework should encourage insurers to price risk properly rather than engage in destructive competition for market share.

“NAICOM should deepen the transition towards risk-based capital and supervision. Capital requirements should reflect the actual risks carried by each insurer, including underwriting, investment, liquidity and operational risks,” Adefolarin said.

‘Regulatory maturity’

The insurance recapitalisation exercise should therefore be viewed as more than a question of whether companies met new capital requirements. It is a test of regulatory maturity.

NAICOM may have legitimate reasons for pursuing higher capital thresholds. Indeed, the need for a stronger insurance sector is difficult to dispute.

But a regulator’s job does not end when companies raise money.

Its real responsibility begins after the capital has been raised: ensuring that the money is genuine, that assets are sound, that risks are properly priced, that claims are paid and that weak institutions do not undermine the credibility of the entire market.

As Olamilekan observed, “the exercise should ultimately become an opportunity to reposition the insurance industry and deepen its contribution to households, businesses and government.”

Experts opine that the central lesson from the current experience is that recapitalisation is necessary, but it is not sufficient.

Nigeria does not merely need insurers with bigger balance sheets; rather, what it needs is insurers with stronger governance, better risk management, liquid assets and a demonstrable commitment to policyholders.

And it needs a regulator willing to enforce the rules consistently, communicate clearly and intervene before problems become crises.

Otherwise, the industry may achieve the appearance of reform while leaving its underlying weaknesses intact.

The danger is that Nigeria could end up with an insurance sector that is better capitalised on paper, but not necessarily more trusted, more resilient or more capable of protecting the economy when it matters most. That is the real test facing NAICOM.