Recently, the Director, Policy and Regulation at National Insurance Commission (NAICOM), Pius Agboola disclosed that six insurance companies out of 44 that were reviewed have notified the regulator of their plans to merge as part of their efforts in meeting up with the regulator’s recapitalisation requirements.
The Director also highlighted that the commission has barred the industry players from borrowing money to meet their recapitalisation requirements. He further pointed out that while some of the companies that borrowed money after the last recapitalisation in the industry were doing well, most of them had been bought over by foreign investors.
In May 2019, NAICOM re-introduced the previously suspended recapitalisation exercise albeit with more stringent capital requirements. Under the new capitalisation provisions, life insurance firms are required to have a minimum paid-up capital of N8.0 billion from N2.0 billion previously while general insurance companies must now have a new minimum paid-up capital of N10.0 billion from N3.0 billion previously.
Composite insurance firms must have a new regulatory capital of N18.0 billion from N5.0 billion previously while reinsurance businesses are now required to have a minimum capital of N20.0 billion from N10.0 billion previously.
This development did not come as a surprise to us as we anticipated a wave of mergers and acquisitions and capital raising activities in the industry following the new capital requirements. According to data from the National Insurance Commission (NAICOM), there are 59 registered insurance companies in Nigeria with 24 of these listed on the Nigerian Stock Exchange (NSE).
We highlight that a number of the listed firms are trading below the 50k par value of shares, suggesting that mergers with bigger players may be their only chance of survival. Like the Nigerian banking sector which witnessed consolidation in 2005 (25 banks emerged from the 89 that existed pre-consolidation), we think the insurance industry is poised to witness the same as we kick off the new decade.
While we think the impending consolidation in the industry would likely result in the emergence of bigger, stronger and more resilient players that will be better placed in underwriting risks, absorbing macroeconomic shocks and contributing to financial system stability, we are concerned that the major growth barrier in the industry-low Insurance penetration estimated at about 0.3% may hinder the players from unlocking the potentials of the industry.