The National Insurance Commission (“NAICOM”), which is the principal regulator of the Insurance sector in Nigeria, in exercising its statutory capacity as provided for in the National Insurance Commission Act of 1997 (Sections 6, 7, 8, and 64) and the Insurance Act of 2003 (Sections 86 and 1) recently revised the minimum paid-up capital threshold for all categories of insurers (i.e. insurance and reinsurance undertakings, with the exception of Takaful operators and micro-insurance undertakings).
The explanation for this upward adjustment is to encourage insurers to meet the substantial increase in the value of insured assets since the last 2005/2007 recapitalisation exercise.
Life insurers are expected to raise minimum paid-up capital from ₦2 billion to ₦8 billion; general underwriters from ₦3 billion to ₦10 billion; while composite and reinsurance companies have new minimum paid-up share capital requirements of ₦18 billion and ₦20 billion, up from ₦5 billion and ₦10 billion respectively. According to NAICOM, the new regulation takes effect immediately (May 20, 2019) for new applications while existing operators have until June 30, 2020, to comply.
Brief History
After the passage of the Insurance Act in 2003, there was a first study of the insurers ‘ capital base in 2005. The review came hot on the heels of banking industry restructuring and was kick-started by an announcement from the Federal Government through the Honorable Minister of Finance, mandating the insurance industry to increase their capital base. Furthermore, NAICOM released a Guideline in September 2005 defining the established minimum paid-up share capital requirement for different categories of insurance operations and setting a time frame of eighteen (18) months for full compliance by all insurers between 5 September 2005 and 28 February 2007.
The recapitalization of 2005/2007 saw a substantial decrease in the number of players from 103 direct insurers and four re-insurers operating as of 31 December 2005 with a total core capital of some 30 billion to 49 re-certified firms (7 life, 23 general, 18 composite and 1 re-insurer) with a total capital base of some 150 billion as of 31 December 2007.
Another attempt by NAICOM to increase the capital base across industry was through a risk-based capitalization scheme communicated vide a circular dated 27th August 2018 titled: “Tier Based Solvency Capital Policy (TBSC Policy) for Insurance Companies in Nigeria” which was subsequently withdrawn following protests from stakeholders and an order of the Federal High Court restraining the TBSC Policy from being enforced.
Application of The Directive
This requirement is for all insurance groups (i.e., insurance and reinsurance undertakings, excluding Takaful operators and micro-insurance undertakings). Takaful operators and micro-insurance undertakings were excluded because they are small by their nature and need to develop to a certain standard before such substantial demands can be made of them.
Takaful Insurance is an Islamic insurance scheme based on principles of mutuality and co-operation, encompassing the elements of shared responsibility, joint indemnity, common interest and solidarity; it is a co-operative system of reimbursement or repayment in case of loss, organized as an Islamic or sharia compliant alternative to conventional insurance. Under takaful, people and companies concerned about hazards make regular contributions (“donations”) to be reimbursed or repaid to members in the event of loss, and managed on their behalf by a takaful operator.
Micro-Insurance on the other hand, is the protection of low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved. It typically refers to insurance services offered primarily to clients with low income and limited access to mainstream insurance services and other means of effectively coping with risk.
Departure from The Tier-Based Minimum Solvency Capital Requirement
This new requirement is a clear departure from the Tier Based Minimum Solvency Capital (TBMSC) which was cancelled in October 2018, a few months after its July 2018 release. The primary reason for the cancelation was the short time-frame within which insurers had to comply as well as the tier-based model which discriminated against smaller insurance companies.
The new directives are much stricter than the tier-based model, it addresses the deficiencies of the tier-based model and capital requirements across the board are now much higher. This is similar to what the industry witnessed in its last recapitalisation between 2005 and 2007 when capital requirements for life companies increased from ₦150 million to ₦2 billion, general insurers from ₦200 million to ₦3 billion, composite underwriters from ₦350 million to ₦5 billion and re-insurers from ₦350 million to ₦10 billion.
Under NAICOM’s new approach, insurance companies are not graded into tier-based groupings. Alternatively, the minimum capital requirement is dependent on the type of insurance business the company operates.
Legal Implication of the Directive on Section 10 of the Insurance Act, 2003
Section 10 (1-3) of the Insurance Act provides thus:
“(1) An insurer intending to commence insurance business in Nigeria after the commencement of this Act shall deposit the equivalent of 50 percent of the paid-up share capital referred to in Section 9 of this Act (in this Act referred to as the ‘Statutory Deposit’) with the Central Bank;
(2) Upon registration as an insurer, 80 per cent of the statutory deposit shall be returned with interest not later than 60 days after registration;
(3) In the case of existing companies an equivalent of 10 per centum of the minimum paid-up share capital stipulated in section 9 shall be deposited with the Central Bank”.
This section provides for insurance companies to deposit a portion of their paid-up share capital with the Central Bank of Nigeria. The section further provides that on the registration of the insurance or reinsurance company as an insurer, 80% of the statutory deposit shall be returned with interest not later than 60 days after registration. The statutory deposit for insurance undertakings in Nigeria is 50% of the minimum required paid-up share capital, while the statutory deposit for new insurers is 10%.
Thus, the new Directive impacts 50% of the paid-up capital legally required by section 10 of the Insurance Act (statutory deposit) to be deposited with the Central Bank of Nigeria by insurance companies.
Measures to Actualise the New Benchmark
Most insurance companies now need to raise additional capital with this latest development to accommodate the Revised Minimum Share Capital Requirement. Therefore, any new application to NAICOM for the registration of insurance undertakings must be followed by proof of the statutory deposit, i.e., a sum equal to 50 per cent of the New Minimum Capital Requirement for the particular class of insurance undertakings from the start of the circular.
Consequently, to remain in business, current insurers have only thirteen (13) months from the date of commencement on 20 May 2019 (until 30 June 2020) to increase their respective capital base from the existing minimum paid-up share capital to the Revised Minimum Capital Requirement as set out in the Circular.
Some ways by which insurers can achieve this benchmark before the deadline for compliance are as follows:
- Mergers: A merger may take the form of an amalgamation of two or more companies into one of them. It may also take the form of an amalgamation of two or more companies into another one. This option is the most feasible in the light of the current circumstances; two or more Insurers who wish to stay in business while meeting the new threshold stipulated by NAICOM can come together to either form a new company or take the place of one of the insurers. As provided for under section 119(2) of the Companies and Allied Matters Act, 1999: the merger may be achieved vide the purchase or lease of shares, interests or assets of the other company (ies) (‘insurers’) in question or amalgamation or other combination with the other company (ies) (‘insurers’) in question. The merger transactions are organized in practice as either a direct or indirect merger. In a direct merger, the acquiring company merges directly with the target company to become a single entity; the acquiring company directly assumes the assets and liabilities of the target company. In the case of an indirect merger, the acquiring company usually creates a wholly-owned subsidiary called the merge sub; then the merge sub merges with and into the target company. An indirect merger would either result in the target company existing as a wholly-owned subsidiary (reversed subsidiary merger) or the target company being subsumed or surviving as a wholly-owned subsidiary (forward subsidiary merger) of the acquiring company. A good example of this type of restructuring method is the merger of AIICO INSURANCE PLC and NFI INSURANCE PLC in 2006 after NAICOM released its new recapitilisation requirement for insurance companies.
- Acquisitions: In the case of an acquisition, this could either be a direct purchase of a share or a purchase of an asset. In a direct purchase of a share, the acquirer will acquire from its shareholder(s) all the shares of the target company that were made available for sale. Under Nigerian law, an acquisition of any number of shares amounting to 30%-50% of the shareholding of the company will allow the shareholder to make a compulsory takeover bid for the company’s outstanding shares pursuant to section 131 of the Investment and Securities Act 2007 (ISA). In the case of an asset purchase, the acquirer acquires all or some assets which are fundamental to the business of the target company. In general, the assets are transferred through contractual agreements. This option is also open to insurers who wish to acquire controlling shares in other insurance companies. A good example is AXA’s acquisition of 100% of Assur Africa Holdings, which held a 77% stake in composite insurance company Mansard Insurance Plc, for a total consideration of €198 million, this acquisition gave AXA a majority stake in Mansard Insurance Plc.
- Takeovers: A take-over is defined as the acquisition by one company of sufficient shares in another company (often referred to as the target company) to give the acquiring company control of that other company. An acquisition is distinct from a merger in that the business remains in operation but as a subsidiary of the acquiring company. It could be classified as an ‘acquisition’. Typically, the company taking over holds a large shareholding unit of at least 75% of the new company’s shares, while the smaller company owns 25% of the shares as negotiated between the parties. In most cases, it is only the name of the company taking over that will be expressed as the company name. A good example of a take-over is; Sovereign Trust Insurance which took over Confidence Insurance Company in 2007 and Sovereign Trust Insurance was retained as the new name of the company.
Conclusion
The new policy is a welcome development and it is hoped that it will contribute to a strengthening of Nigeria’s insurance industry. Therefore, existing insurance firms are obliged to begin making preparations to comply with the regulation prior to the June 30th 2020 deadline by either raising the additional capital themselves or seeking business partnerships with other insurance players in order to shore up their finances.
However, there are indications that the NAICOM may extend the deadline for the recapitalisation of insurance and reinsurance companies due to the impact of the COVID-19 pandemic.
Insurers are therefore enjoined to consult law firms with top notch experience in restructuring and recapitalization to prevent impending mishaps, once the economic terrain becomes favourable.
The information provided in this article is for general informational purposes only and does not constitute legal advice. If you require specific legal advice on any of the matters covered in this article, please contact lawyers@mcphersonllp.com