All you need to know about Insurance in Nigeria – Series 3

Regulatory Environment of the Insurance Industry

Preamble

TheInsurance Industry in Nigeria isregulated by two pieces of legislations: the Insurance Act, No. 1 of 2003 and the NationalInsurance Commission (NAICOM) Act, No. 1 of 1997. The following are their mainprovisions.

The Insurance Act No. 1 Of 2003

The Insurance Act, No. 1 of 2003 governs the licensing and the operation of insurers, reinsurers, intermediaries and other providers of related services as well as the regulatory environment of the industry. Although this Actreplaced the Insurance Act of 1997, it draws copiously from that piece of legislation. The2003 Insurance Act applies to all insurance businesses and insurers. Other Associationsand cooperative societies that provide some element of insurance protection for theirmembers are not covered by the Act. The main provisions of the Insurance Act no. 1 of 2003 are as follows:

Classes of Insurance

Section 2(1) of the Act divides Insurance business into two main classes:(a) Life insurance business; and(b) General insurance business.

The Act further sub-divided Life Assurance business into 3 categories (individual lifeinsurance business; group life insurance and pension business and health insurancebusiness) and General Insurance into 8 categories(fire insurance business; generalaccident insurance business; motor vehicle insurance business; marine and aviationinsurance business; oil and gas insurance business; engineering insurance business;bonds, credit guarantee and suretyship insurance business ; and miscellaneous insurancebusiness. Insurers and other players interested in these classes of insurance need toappreciate the thrust and uniqueness of these categories in designing their products.

Who can be an Underwriter?

In line with the provisions of the Companies and Allied Matters Act (CAMA) 1990 (as amended), only a duly incorporated limited liability company or a body duly establishedpursuant to any other enactment to transact the business of insurance and reinsurance,can carry on the business of insurance in Nigeria. This position is reinforced by Section 3 of this same Act. It can also be inferred from this same Section 3 that unincorporated andother entities limited by guarantees cannot carry on the business of insurance. One keyreason is that they are not often set up to make profit and even when they recordoperational surpluses, they are statutorily precluded from distributing those surplusesor profits.

As provided in Section 4 of the Act, all insurance companies are mandatorily required toregister with NAICOM before they can carry on the business of insurance in Nigeria. This requirement is in addition to being duly incorporated as a limited liability companyas well as meeting the minimum share capital stipulated by law or NAICOM. 

The share capital is the minimum amount that an insurer must have if it desires to undertake a particular class of insurance business. Thus, Section 9(1) of the Actexpressly provides the minimum paid-up share capital required of all underwriters, based on their class of business. However, thespecified figures were reviewed upwards by NAICOM as part of the reforms of the Sector in 2007. The old and new minimum capitalization requirements are as follows:

Statutory Deposit with the Central Bank of Nigeria (CBN)

All prospective underwriters are mandatorily required, by Section 10 (1-3), to deposit 50% of their paid-up share capital with the Central Bank of Nigeria (CBN) immediatelyafter commencement of business. The CBN is however required to return 80% of suchdeposit, with interest, to the new insurer not later than 60days after the insurer had beenregistered by NAICOM. In the case of existing companies, an equivalent of 10 per cent ofthe minimum paid-up share capital is required to be deposited with the CBN.

Although an underwriter is allowed to draw down on the statutory deposit with theCBN, it must make up such withdrawal within 30days. Failure to do this, shallconstitute a ground for suspension from business and such suspension shall bepublished in the newspapers” by NAICOM. Indeed, failure to make the statutory depositshall constitute a ground for cancellation of the certificate of registration by NAICOM. This is to underscore the fact that the solvency of the underwriter is crucial in insurance business.

Appointment and Independence of Key Staff

The Act, at Section 12 (2), clearly forbids any insurer from appointing, in its full timeemployment, any director or partner in a firm of loss adjusters or insurance brokers. In other words, no partner or director of any loss adjusting firm or insurance broking firmshould be employed on full time or non-executive director. No full time employee of aninsurance company can simultaneously be a broker or loss adjuster. This is to ensure thatnot only the independence of these key players are obviated the possibility of conflict ofinterests in the industry but also to promote professionalism. More importantly, noinsurer, according to Section 13, can appoint any person as a Chief Executive, ManagingDirector or Executive Chairman without the express approval of NAICOM. Anychanges in such employment, for instance, by resignation or other exit methods, mustalso be brought to the attention of the Commission 30days before the final exit date.

According to Section 14 (1), “a person who becomes or ceases to be the Chief Executive of an insurer shall, before the expiration of a period of 30 days beginning with the day onwhich he does so, notify the insurer in writing and send an advanced copy to theCommission on such matters as may, from time to time, be prescribed. This is designed to prevent conflict of interest. NAICOM is able to assess the quality of persons who aspire to lead underwritingcompanies. Indeed, NAICOM requires such persons to be professionally qualifiedinsurers because, you cannot give what you do not have.

New Product

In order to ensure that all products in the market meet prescribed standards and they do not make unreasonable, unrealistic and unethical promises, the Commission is requiredby Section 16(1) of the Act to approve a product before it is introduced into any class orcategory of insurance business by any insurer. Such prior approval ensures complianceto best practices in the industry.

Records to be Maintained

In the true spirit of transparency, an insurer is required by Section 17(1) to maintain the proper records at its principal office. These include, the Memorandum and Articles of Association or other evidence of theconstitution of the insurer;a record containing the names and addresses of the owners of the insurancebusiness whether known as or called shareholders or otherwise; the minutes of any meeting of the owners and of the policy-making executive(whether known as or called the Board of Directors or otherwise); a register of all policies, in which shall be entered in respect of every policyissued, the name and address of the policy-holder, the date when the policy waseffected and a record or any transfer, assignment or nomination of which theinsurer has notice; a register of claims in which shall be entered every claim made together with the date of claim, the name and address of the claimant and the date on which theclaim was settled, or in the case of a claim which is repudiated, the date ofrepudiation and the grounds for the rejection or in the case of litigation, theparticulars of the litigation and the decision of the court in the matter; a register of investment showing those which are attributable to the insurance funds and those which are not, and also any alteration in their values from timeto time; a register of its assets; a register of reinsurance ceded showing separately those ceded in Nigeria andthose ceded outside Nigeria; a cash book; a current account book;a register of open policies in respect of marine insurance transactions; and management report by external auditors.

An insurer shall in respect of its life insurance business maintain and keep thefollowing additional records, that is-

(1) a register of assured persons under group policies; (2) a register of loans on policies;

(3) a register of cash surrendered values; and(4) a register of lapsed and expired policies.

Arguably, Section 17 is a very important provision which underwriters must payparticular attention to because of its regulatory implications as well as its external auditvalue. Non-compliance to these provisions by any insurer is a punishable offence by theapex regulator.

Separation of Accounts and Reserve Funds

The Act, at Section 19(1), requires an insurer which carries on the two classes of insurance business, to maintain separate and distinct accounts for each class of business. Such an insurer is also to create a separate insurance fund with the appropriate name sothat in case of life insurance there shall be: (a) the individual life insurance business fund; (b) the group life insurance business and pension fund; and(c) health insurance business. Each insurance fund shall represent the liabilities in respect of all contracts of insurance of that class.

Provisions for Unexpired Risk and Claims

To remove the possible ambiguity in revenue recognition by an insurer and incompliance with International Financial Reporting Standards (IFRS) 18 on RevenueRecognition, Section 20(1) of the Act requires that an insurer shall, in respect of eachclass of its general insurance business, establish and maintain provisions for unexpiredrisks which shall be calculated on a time apportionment basis of the risks accepted in theyear. The insurer shall also make provision for outstanding claims. Such provisions shallbe an amount representing 10 per cent of the estimated figure for all outstanding claims.

The point of emphasis here is that premium income is different from revenue earned bythe organisation in the ordinary course of business. Premium is revenue received inadvance and as the period covered by policy and the risk elapse, revenue is gradually earned. Since the periodof coverage may span two financial years, provisions must be made to cover theunexpired risks calculated on a time apportionment basis of the risks accepted at the endof the year.

Reserve for Life Insurance Business and Contingency Reserves

A Life Assurance underwriter is required by Sections 21 and 22 to establish andmaintain contingency and general reserve funds to enhance its solvency and insulate itfrom fluctuations in securities and variation in statistical estimates. Inability to meetobligations due to insolvency is the greatest threat to the existence of an insurer. This explains why insurance companies are not allowed to substantially invest in real estates as it is very difficult to sell properties. This difficulty will affect the underwriter’s liquidity and ability to meet emerging obligations.

Solvency Margin

As provided in Section 24(1) of the Act, an insurer shall in respect of its business otherthan its life insurance business, maintain at all times a margin of solvency being theexcess of the value of its admissible assets over its liabilities in Nigeria. In other words, the amount with which its admissible assets in the country exceed its liabilities is definedas the solvency margin.

This value is subject to the minimum value set in subsection 2below. In this case, the liabilities includes-(a) provisions for unexpired risks; (b) provisions for outstanding claims; (c) provisions for claims incurred but not yet reported; and(d) funds to meet other liabilities.

The solvency margin referred to in subsection (1) of this section shall not be less than 15 per cent of the gross premium income less reinsurance premiums paid out during theyear under review or the minimum paid-up capital, whichever is greater. In other words,the solvency margin must be at least 15% of the gross premium income retained by theinsurer or of its minimum paid-up capital, whichever is greater.

Where the Commission finds that the solvency margin of an insurer has fallen below themargin stipulated in this section, it shall forthwith direct the insurer to make good thedeficiency by way of cash payment into its accounts and satisfactory evidence of suchpayment shall be produced to the Commission within 60 days of the receipt of thedirective. If satisfactory evidence of payment is not produced to the Commission withinthe 60days time stipulated, the insurer shall not undertake a new insurance businessuntil it produces satisfactory evidence of payment to the Commission. Indeed, failure tomake payment and produce satisfactory evidence of the payment as required under thissection, within a period of 60 days of the receipt of the directive, shall constitute a groundfor the cancellation of the registration of an insurer under Section 8 of this Act.

Solvency Margin and Responsibility of External Auditors

In appreciation of the importance of solvency margin, a third-party confirmation isstatutorily required. Indeed, in line with Section 24 (9), an external auditor who auditsthe financial statements of the insurer as provided in section 28 of this Act shall issue acertification stating the extent to which the insurer has satisfied the margin of solvencystipulated in this section. If the Commission is not satisfied with the certification issuedunder subsection (9) of this section by the external auditors, it may conduct anindependent investigation on the matter with a view to determining what action to takeagainst the insurer and or the external auditors.

Investments

TheAct provides for a defined investment structure which must be complied with by insurers. Section 25 provides that an insurer shall, always, in respect of the insurancetransacted by it in Nigeria, invest and hold investments in asset equivalent. However, itmust not invest more than 35 percent of its policyholders’ funds in assets prescribed bythe Act and or approved by NAICOM notwithstanding whether it is involved in generalinsurance business or life assurance business. The point must be made that references toreal property in this section of the Act include references to an estate in land, a lease or a right of occupancy under the Land Use Act. The reason for this provision should beobvious. An insurer must invest in such assets that can easily be converted to cash tomeet the needs of policyholders in the event of the occurrence of the unexpected. Uncoordinated investment activities might lead to solvency challenge. Hence insurersmust invest in assets prescribed by NAICOM. Therefore, breach of the provision oninvestment structure shall attract some sanctions, e.g., a fine.

Statement of Accounts and Investments

In line with CAMA 2004 and Section 26 of the Act, all registered insurers are required toprepare financial statements, cause them to be audited and submit such audited financialstatements, within six months of year-end, to NAICOM. Theseaudited financialstatements must be presented to the shareholders during the annual general meeting.

The said financial reports shall include consolidated accounts where the insurer has a subsidiary or subsidiaries. The financial reports referred to include balance sheets,statement of profit and loss, revenue accounts for each of the classes of insurance and astatement of investment of insurance funds in a form as may be prescribed by NAICOMfrom time to time. With the nation’s adoption of International Financial ReportingStandards (IFRS) from January 1, 2012, the names of some of these financial statementshave changed: Balance Sheet is now Statement of Financial Position while Profit and Loss Account is now Statement of comprehensive income.

The statutory responsibility of an insurer to prepare audited accounts is further reinforced by Section 28 of the Act. Such audited financial statements shall be publishedin a national newspaper by the insurer after obtaining the approval of NAICOM. An insurer which fails, neglects or refuses to file the returns and accounts under this sectioncommits an offence and is liable on conviction to a fine of N5,000 per day for each day ofdefault. Above all, no insurer shall distribute any dividends until the Commission hasapproved the annual returns of the insurer within 30 days of its submission to theCommission.

Actuarial Valuation of Life Assurance Business

ThisAct requires underwriters of life assurance business to mandatorily submit actuarial valuation of such policies to NAICOM once every three years. Indeed, Section27(1) expressly provides that an insurer transacting life insurance business shall submitto the Commission every three years in the prescribed form, the following:

(a) an abstract of the report of an actuary and valuation report of the lifeinsurance business;

(b) a summary and valuation of the life policies;

(c) a table showing premium, policy reserve values and guaranteed surrendervalues together with the relationship between premium paid and suchguaranteed surrender values; and

(d) a certificate of solvency signed by an actuary stating that the value of theassets representing the funds maintained by the insurer in respect of the lifeinsurance business exceeds the value of the liabilities.

The above is reinforced by the provisions of Section 29 of the Act which additionallyrequires that, “for the purpose of an investigation under this section, the value of anyasset and the amount of liability shall be determined in accordance with applicablevaluation regulations”. Based on the valuation report, the actuary is required to show“sufficient evidence that not more than 40 per centum of the actuarial surplus declared isappropriated for shareholders”. This section effectively puts a ceiling on the maximum percent of profits that can be distributed as dividends to shareholders.

Insurance Agents, Brokers and Loss Adjusters

The Act, at Sections 34-49, expressly specifies the responsibilities of insurance agentsand brokers particularly in prospecting for insurance business, collection of premiumon behalf of the insurer and maintenance of records of transaction undertaken on behalfof the insurer. The responsibilities of loss adjusters in the event of the occurrence of theunexpected misfortune were also specified. What is clear is that these players, in theinsurance business, except the agents, must be Insurance professionals certified by theChartered Insurance Institute of Nigeria and must be formally appointed by an insurerto play the specified role. The Commission is also required to approve suchappointments. In other words, these players must be registered with NAICOM. Onevery significant provision here is that brokers can only hold premium on policy receivedon behalf of insurers for not more than 30days. In the previous legislation, the time was90days. Also, a brokerage firm is required to maintain an Indemnity Insurance in the sum of N10million or 50% of its preceding year brokerage income, whichever is higher. Breach of these provisions will attract severe sanctions from NAICOM.

No Premium, No Cover

As provided in section 50(1), the receipt of an insurance premium is a condition precedent to a valid contract of insurance. And therefore, there shall be no cover inrespect of an insurance risk, unless the premium is paid in advance. No contract ofinsurance would be validly consummated except the appropriate premium is paid. Forthis provision, an insurance premium collected by an insurance broker in respect of aninsurance business transacted through the insurance broker shall be deemed to bepremium paid to the insurer involved in the transaction. This simply means that the insurance broker can collect premium from policyholders on behalf of the insurer. Asnoted above, the broker can hold the premium so collected for not more than 30days. Itis important to stress that the rate of premium to be charged for any class of insurance business is as determined by the Commission. Similarly, any increase in the rate must receive the prior approval of the Commission before it becomes effective. Any breach ofthese provisions will attract the sanctions of NAICOM, e.g., fine.

Statutorily Compulsory Insurance Policies in Nigeria

Insurance of Buildings

In line with Section 64 (1), no person shall cause to be constructed any building of more than two floors without insuring with a registered insurer his liability in respect ofconstruction risks caused by his negligence or the negligence of his servants, agents orconsultants which may result in bodily injury or loss of life to or damage to property ofany workman on the site or of any member of the Public. Simply put, before you cancommence the construction of a building with two or more floors, you must procure abuilding insurance policy in course of erection to protect you against construction risksarising from your negligence or that of your employees and agents. The duty to insure shall arise when a building of more than two floors is under construction. This is one of the compulsory insurance policies which must be enforcedto grow the Insurance Industry particularly in the light of the spate of collapsedbuildings in different parts of the country. This insurance policy will provide protection for members of the public as well as all workers on the site and their property. Althoughnon-compliance with this provision is an offence punishable by the state, thelaw has mostly been observed in the breach due to lack of enforcement by the State.

Given the high human traffic expected at public buildings, Section 65(1) provides that every public building shall be insured with a registered insurer against the hazards ofcollapse, fire, earthquake, storm and flood. Public building, in this section, includes atenement house, hostel, a building occupied by a tenant, lodger or licensee and anybuilding to which members of the public have access for the purpose of obtainingeducational or medical service, or for the purpose of recreation or transaction ofbusiness.

Third Party Motor Vehicle Insurance

All moveable vehicles are required to be insured and have cover for third parties before it can be used or driven on the nation’s roads. Indeed, Section 68(1) states unambiguouslythat “noperson shall use or cause or permit any other person to use a motor vehicle on aroad unless a liability which he may thereby incur in respect of damage to the property of third parties is insured with an insurer Registered under this Act”.

Miscellaneous and Supplementary Provisions

As part of its contributions to the development of Local Content in the Insurance Industry, Section 72(1) provides that no person shall transact an insurance orreinsurance business with a foreign insurer or reinsurer in respect of any life, asset,interest or other properties in Nigeria businesses classified as domestic insurance unlesswith a company registered under this Act. In order words, only local insurancecompanies registered under this Act can underwrite the classes of insurance businessspecified at Section 72(2) below and these include:

(a) fire insurance and reinsurance business;

(b) motor insurance and reinsurance business;

(c) liability insurance and reinsurance;

(d) life insurance and reinsurance business;

(e) accident insurance and reinsurance business; and

(f) such other insurance and reinsurance business as the Commission may fromtime to time prescribe.

This provision is designed to help to develop and increase the depth and breadth of the insurance market in Nigeria.

Code of Conduct for Insurance Practitioners

A distinguishing hallmark of a profession is the existence of a Code of Conduct to which its members must subscribe and adhere to always. Pursuant to this, Section 79 states thatevery registered insurer, reinsurer, insurance agent, insurance broker or loss adjustershall subscribe to and conform to the Code of Conduct of the insurance profession. As aprofession built on the philosophy of utmost good faith, compliance to the provisions ofthis Code is non-negotiable. The choices and decisions made by players in the industry must promote the public interest. This Code is to be reviewed from time to time by the Professional body as part of its regulatory functions.

Summary of Insurance Act

The Insurance Act is the piece of legislation which gives direction to the Insurance Industry. It specifies the framework for the conduct of Insurance business in Nigeria. The Act reinforces not only the value of insurance to stakeholders but also the standard of professionalism expected of practitioners. The seed for building a vibrant Insurance Industry would be sown, if everyone plays by the rules, regulations and laws governing the sector.

Funmi Babington-Ashaye