Thompson profiles 9 regulatory model ways proportionate solvency capital in insurance business

The Insurance Regulatory Commission recently introduced the Tier-Based Minimum Solvency Capital (TBMSC) policy for insurance companies which have been termed controversial by some operators.

In trying to address the issue through media, the National Insurance Commission (NAICOM) came up with an event named the media editors & insurance correspondents’ awareness workshop on the reclassification and recapitalization of insurance companies, in Abuja

Barineka Thompson, Director, Supervision National Insurance Commission during his paper presentation tilled “Achieving a seamless implementation of tier-based minimum solvency capital policy of insurers” to the few selected media editors & insurance correspondents at the 2nd awareness workshop on the reclassification and recapitalization of insurance companies; he listed nine (9) steps for effective insurance operations in Nigeria as follows:

  1. a) The TBMSC Model – is a regulatory model designed for the application of proportionate solvency capital that support the nature, scale, complexity and risk profile of the business conducted by insurers.
  2. b) The classification of business according to the present level of capital that an insurer possesses in relation to the risks that the capital can effectively be deployed to.
  3. c) Enabling soundness and profitability of insurers through optimal utilization of capital
  4. d) Encourage insurers to focus on the area of their strengths, encourage innovation and deepen market penetration, build investors’ and public confidence in the industry.
  5. e) To create capacity for bridging insurance gap, optimize local retention and minimize capital flight.
  6. f) To limit significant systemic risks and build confidence in the insurance industry
  7. g) Support the stability of the financial system and increase insurance contribution to the nation’s Gross Domestic Product
  8. h) Achieved the above without a mandatory injection of capital.
  9. i) No cancellation of licence, but insurers will be subject to solvency control level.


Thompson cited said the Commission recently introduced the Tier-Based Minimum Solvency Capital (TBMSC) policy for insurance companies, via Circular No: NAICOM/DAPCIR/14/2018, dated August 27, 2018; was taken as “Series of misinformation circulated in the media and amongst Insurance Institutions, Journalists and Financial Analysts, giving mischievously construed facts on the policy since its announcement;  The purpose of this awareness session is to give clarifications and explain details of the policy framework as contained in the released Circular, to the Media; This presentation will attempt to recap the background and policy concept, and examine the transition arrangements that will enable the successful implementation of the Commission’s policy action; and

The Two main classifications and their sub-classifications are:

 For Life Insurance Business;

1)Individual life insurance business

2)Group life insurance and pension business

3) Health insurance business

For General Insurance Business

1)Fire insurance business

2)General accident insurance business

3)Motor vehicle insurance business

4)Marine and aviation insurance business

5)Oil and gas insurance business

6)Engineering insurance business

7)Bonds, credit guarantee and surety ship insurance business

8)Miscellaneous insurance business

The Classification of Insurance Business – Insurance Act, 2003

*The last capitalization programme of insurance companies was carried out in 2005/7

*An offshoot of general resolve to recapitalize the industry at the Insurers’ Committee Retreat held on 15th& 17th February, 2018 in Abeokuta

*Effect of macroeconomic and institutional factors on Insurers

*Effect of 2008 global financial crisis and recent economic recession in Nigeria, on Insurers

*The inability of some insurers to honour contractual commitments they have made to the insured and other stakeholders

*Improper capital structures can lead to the extinction of the insurance industry

*Companies take too much risk with their capital, with additional risks of increasing incidence of emergence of holding companies

*Insolvencies become more common, public confidence in insurance erodes, and the insurance industry declines

*ICP 24.1 states that “the supervisor identifies underlying trends….; develops and applies appropriate tools that take into account the nature, scale and complexity of insurers, as well as non-core activities of insurance groups, to limit significant systemic risk”

*The TBMSC is a complimentary measure to the ongoing implementation of the Risk-Based Supervision (RBS) programme by NAICOM.

The TBMSC – N/B: Composite Insurers: A combination of Tiers in Lf & N-Lf OR any combination arising from the choices made by Board of Directors of an Insurer.

Basis of Assessment  

The basis of assessment of TBMSC shall be consistent with the provisions of:

  1. a) The provisions of Section 24 of the Insurance Act 2003;
  2. b) The Prudential Guidelines for Insurers and Reinsurers in Nigeria 2015; and
  3. c) Other Regulations and Circulars, issued or shall be issued by NAICOM.

*The assessment shall apply to both Life, Non-Life and Composite Companies

*Companies shall be assessed in the first instance on their approved Financial Statements (FS) for 2017; or the last approved FS where 2017 is not yet approved

*All Companies shall be assessed and graded to the equivalent Tier that its capitalØ can accommodate

*Subsequently, request for change of Tier-Level shall be subject to the filing of anØ application, and approval by NAICOM, on satisfactory fulfilment of set conditions

*If in the event items are missing from the computation, insurers may bring up such cases and provide supporting documents in evidence of your claim.

The TBMSC – Assessment Parameters

It shall be the responsibility of the Board of Directors of each Insurer to determine the risk category it wishes to operate within, provided that the insurer meets the Minimum Solvency Capital of the particular Tier.


*At all times, an insurer shall not underwrite insurance policies or undertake risks outside the Tier Level of a risk class or combination thereof in the case of a composite insurer, that is authorized by the Commission. Any case of violation shall attract penalty equal to the sum of the advised gross premium involved and in addition, the CEO and other relevant Officer(s) of the insurer shall be penalized as the Commission may determine.

*The sanction above will similarly extend to a broker that may be found to be culpable on the advised gross commission involved.

*All insurers that do not meet Tier 1 or Tier 2 minimum solvency capitalu requirements but presently underwrites businesses in those Tiers, may however continue to participate in existing specific policies on facultative insurance basis up to December 31, 2019.

Transition Arrangement

  1. A composite insurers who chooses to operate as wholly Life Company, shall continue to service all existing obligations on its Non-Life portfolio until such liabilities are exhausted, on a run-off basis.
  2. A composite insurers who chooses to operate as wholly Non-Life Company, shall incept transfer of its existing life portfolio (except for group life) within six (6) months of re-categorisation, or such other period as the Commission may determine, to a qualified life insurer, and advice to the PenCom. The insurer shall continue to service all existing obligations on the group life portfolio until such liabilities are exhausted, on a run-off basis.
  3. Annuity operation – In case of a solvency assessment re-categorising a life insurer below Tier 1, the life insurer shall be required to commence transfer of its Annuity portfolio not later than six (6) months from October 1, 2018, to another qualified Life insurer with the approval of the Commission and advice to the PenCom.
  4. Details of portfolio transfer and run-off procedures are contained in para.6.2 of Circular

Transition Arrangement   

No Mandatory requirement for injection of fresh capital

1)“No Mandatory Injection of Fund” by insurers and at the close of the initial certification date, there shall be no cancellation of license of any insurer.

2)Aimed at minimizing possible attempt to stampede shareholders to inject fresh capital.

3)Going forward, the Commission will re-certify companies that may be willing to beØ reclassified to higher Tier level, semi-annually.

4)Insurers have perpetual period to exercise whatsoever capital raising option(s) that they may deem appropriate in each of their circumstance and still operate in a desired level after the initial classification.

Capacity support

  1. Insurers may provide reinsurance support to higher tier categories on the provision to the Commission of an acceptable Reinsurance treaty.
  2. Insurers are free to subscribe to any local and regional pooling arrangement, in any class of business irrespective of their tier categorisation.
  3. Licencing of new companies in the Tier 1 category is open to encourage further capacity support


Licencing Requirements for New Companies

a)The Commission shall from time to time pronounce the availability of license in specified Tier(s).

b)The rules relating to registration and operations of New Insurance Companies as prescribed in the Insurance Act and any other relevant legislations shall apply.

c)New Companies shall be required to meet the Tier-Based Minimum Solvency Capital of the declared category of business it intends to underwrite by full injection of capital fund, at the point of registration and licensing.

Conduct of Business by Insurance Institutions

  1. a) Publication of Insurers’ Tier Level: The Commission shall have the sole responsibility to publish the list of insurers and their qualified Tier levels, before the commencement of this policy and from time to time, subsequently.
  2. b) All insurers that are certified to operate in a specified Risk Class by the Commission shall be viewed and treated by insurance institutions and the insuring public as having the same and equal opportunity, rights, obligations and qualifying financial capacity as any other insurer in the same risk class, until an insurer is declared otherwise.
  3. c) The Tier-Based policy or any inference thereof shall not be used by an insurance institution in any form of public advertisement, commentary, presentation and/or communication whatsoever, without the prior approval of the Commission.
  4. d) No Insurance institution shall use the Tier-Based classification as a demarketing tool against an insurer, within and outside the institution.
  5. e) No insurance institution shall qualify or re-categorize an insurer against the certification issued by the Commission in this policy.
  6. f) Where a client is having series of businesses that cut across different Tier levels or a combined policy (that is, different risk covers integrated into one policy), the Underwriters/Brokers shall sensitize their client(s) or sectionalize the policy into separate covers for other Risk Tiers. Subsequently, the business shall be allocated to qualified insurers in a lower Tier category.
  7. g) Insurers in a Tier shall have the same privilege to participate in the covers attributable to its Tier category notwithstanding the participation of an insurer in a higher Tier of the same client or in a combined policy.
  8. h) Where the client chooses not to accept the proposal, only insurers in the higher Tier can underwrite the business.
  9. i) All insurance institutions shall have an obligation to report all market abuse involving the operation of the Tier-Based policy to the Commission, immediately on the occurrence of a violation by an insurance institution.
  10. j) No insurance institution shall withhold, return or cease the sum of premium arising on or designated for the procurement of cover for a client on account of the operation of this policy where the insurer is certified as possessing the capacity to underwrite the risk in the category of business on which the premium was received or payable
  11. k) No discrimination or inferior/superior adjectives shall be allowed by an insurer/broker of an insurer that qualify to underwrite business of a specified class of risk.
  12. l) Insurance institutions shall ensure compliance with this Circular as any breach of any part thereof shall attract sanctions as specified in this circular and in addition, in accordance with the relevant provisions of the Insurance Act 2003 and NAICOM ACT 1997.
  13. m) Any case of violation shall, in addition to previously stated sanction, attract:

1 Sanctioning of the CEO and other relevant Officer(s) of the insurance institution, and/or

2 Suspension of operational license for a period of six (6) months, and

3 Where the violation persists, the withdrawal of the operating license of the insurance institution, as the Commission may determine.


Reference should at all times, be made to paragraph 9 on conduct of business by insurance institutions in the Circular, when executing any part of the policy.July 2018:Before the proposed recapitalization; October 1, 2018 After Reclassification and Recapitalization

“A clarion call to Insurance Institutions to be properly guided by the rules of ethical practice and professionalism when dealing with insurers and clients.”

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