WHY FIX WHAT IS NOT BROKEN – NAICOM INCREASED INSURANCE PREMIUM RATE ON THE EVE OF NEW YEAR v3
There are various classes of Insurance summarized under the two MAIN Grouping of insurance policies across the Globe, which entail LIFE INSURANCE BUSINESSES AND THE NON-LIFE (OR GENERAL) INSURANCE BUSINESSES.
A 10-year analysis, (see link below for analysis) revealed the profitability status of all the Insurance Classes between the 2011 and 2020 fiscal years. The data is sourced from the NAICOM Website.
On 22nd December 2022, the National Insurance Commission (NAICOM) issued a Circular referencing NAICOM/DPR/CIR/46/2022 to All Insurance Institutions with the Subject “New Premium Rates For Motor Insurance”.
The circular references Section 7 of the NAICOM Act, 1997, and other extant Laws (which were not explicitly spelt out in the Circular) stating the Commission’s issuance of the New Rate for Motor Vehicle Insurance in Nigeria, beginning 1st January 2023.
But, a swift perusal of the provision of Section 7(b) of the NAICOM Act, 1997 states that NAICOM shall “Approve rates of insurance premiums to be paid in respect of all classes of insurance business”. By the foregoing, the following pertinent questions are begging for adequate answers:
Does NAICOM have the Power to Fix the Rate, Set the Rate to Minimum Standard, or somewhat Approve the Rate provided by the underwriter or the Insurer?
Does the action of NAICOM with respect to setting a generalized minimum threshold of Motor Vehicle Insurance Premium Rate to 5% (net all forms of rebates and discounts) of the Sum Insured not inconsistence with the requirement equally spell out in Section 51, subsection 1 of the Insurance Act, 2003?
Has NAICOM jettisoned the Basic Principles of Insurance Pricing of insurance risk with respect to the nature of the insurance risk assumed by the Insurer (severity, frequency, and the like), claims experience, and the pool of insurance coverage unique to the insured as assessed by the Insurer through its internal actuarial model(s)?
Does NAICOM consider various factors associated with the sudden increase in the motor insurance premium rate, including macroeconomic variables and the like?
Does NAICOM consider the data within its reach? The DATA provided on the NAICOM website (https://www.naicom.gov.ng/publications/) regarding the performance of various classes of Insurance in the Insurance Sector over 10 years revealed that within the Non-Life Businesses, Motor Insurance has the highest contribution and profitability! Hence, WHY FIX WHAT IS NOT BROKEN
The Timing – A Disadvantage to the Insuring Public and Businesses One of the critical factors essential in decision-making is TIME (or TIMING). Time is of the essence and is a vital factor in making information, communication, and regulation RELIABLE (i.e. RELEVANT and FAITHFUL)!
The concern also by the broader stakeholders is “Is the TIMING Right”? What Role does effective Planning play in the life of a business or an individual? The best practice anywhere in the developed and developing world is that a framework is drawn collectively between the Regulator and the Stakeholders as this will allow all parties ample time to an effective plan for the transition.
Change Management requires a process and not creating a conundrum in the broader business environment and an avoidable spike in businesses’ operational costs leading to higher inflation.
A sudden directive by NAICOM (though contentious and can be challenged as being argued by this Article) for the minimum motor insurance premium rate (net of all rebates and discounts) to be set at 5%, effective from 1st January 2023 as pronounced at the eve of entering into 2023 Fiscal Year negates the “Fair Principle” of sound regulation and good intention!
The Need To Boost Insurance Confidence and Trust – A Means to Penetrating the Un-Insured and Under-Insured in Nigeria I believe the focus of NAICOM, Insurers, and its affiliated associations is on increasing insurance penetration in Nigeria.
The least or last resort in all trajectories to increasing insurance penetration worldwide is increasing the premium rate(s). Then, Why is NAICOM trying to break what is being Fixed in momentum?
To boost trust and confidence in the Insurance Community and, most significantly, the policyholders, the following are considerations for the Insurance Regulator:
The Role of the insurance regulator should be developmental.
The goal of the Insurance Regulator is to widen the insurance drag net, i.e., increase the number of insureds through increasing penetration by agreed percentages yearly, rather than focus on what may be required at a matured stage of the insurance life cycle in Nigeria, which is rising insurance premium rate.
Risk-based pricing should be encouraged to avoid punitive measures or disincentives for good driving records.
The major laws are there, but not usually followed through in the implementation and enforcement, which the current motor insurance motoring lacks. Hence, the Insurance Regulator needed to enhance and build capacity to ensure compliance in conjunction with similar government agencies and stakeholders. It is expected that with more governmental enforcement and checks, insurance performance will improve significantly. Also, enforcement could be outsourced by the Regulator for a fee gotten from defaulters of the motor insurance laws, i.e. those not insured as required by the Law
The Insurance Regulator needs to harness technology via automation of the existing system to identify defaulters and makes insurance coverage easy to subscribe to, thereby leading to more people pooled into the insurance net.
What’s Next? – A Candid Advice to the NAICOM I appreciate the old and current Management and leadership of the National Insurance Commission (NAICOM) for their efforts towards rejuvenating insurance businesses and as an industry that measures up with international best practices.
Also, this does not mean there are no areas of improvement that the stakeholders can bring to the attention of the Insurance Regulator. One of which is the total rejection of the intention and approach to which the Insurance Regulator, without a more comprehensive consultation of the stakeholders, had “Single-handedly” increased the premium rate of motor insurance to the floor of 5% (net of all rebates and discounts).
The Stakeholders considered this action inconsistent with the principle of insurance pricing, which is premised on various risks and other actors through actuarial measurements and pricing models. Invariably, NAICOM is advised in the spirit of principle to reverse its action regarding the increment in the minimum insurance premium rate(s).
Doing so will enhance the trust and confidence of the insurance public, improve insurance penetration, and avert possible court actions by the concerned stakeholders who may seek redress.
The Stakeholders await NAICOM’s positive response to this Clarion Call to determine the next course of action(s).
Note: This article is an excerpt of a detailed report responding to the recent hike in insurance premiums by the National Insurance Commission NAICOM. See the link to the report below.