‘All you need to know about Insurance in Nigeria’ – Series 4

Regulatory Environment of the Insurance Industry

Preamble

The second important legislation which regulates the operations of stakeholders in the insurance Industry is the National Insurance Commission of Nigeria (NAICOM) Act No. 1 OF 1997.

The NAICOM Act No. 1, 1997

TheNAICOM, which was established by the NAICOM Act no. 1 of 1997, is the main regulator and supervisor of the InsuranceIndustry in Nigeria. The object, functions and powers of the Commission, according toSection 6, Part 2 of its enabling Act, are to ensure the effective administration,supervision, regulation and control of insurance business in Nigeria.

According to Section 7, Part II, it is the responsibility of the Commission to: a) establish standards for the conduct of insurance business in Nigeria;b) approve rates of insurance premiums to be paid in respect of all classes of insurance business;c) approve rates of commissions to be paid in respect of all classes of insurance business;d) ensure adequate protection of strategic Government assets and other properties;e) regulate transactions between insurers and reinsurers in Nigeria and those outside Nigeria;f) act as adviser to the Federal Government on all insurance related matters, etc.

As the clearing house for all players in the industry, the Commission is empowered to establish a bureau to which complaints, against any insurer, reinsurer, insurance brokeror loss adjuster may be submitted by members of the public. It can also request or call forinformation from Federal Ministries, Extra-Ministerial Departments, statutory bodiesand other Government agencies on matters relating to insurance; and can do such otherthings as are necessary for the successful performance of its functions under the Act.

Above all, it is the responsibility of the Commission to ensure adequate protection of strategic Government assets and other properties through insurance cover. The extent to which this onerous responsibility is performed in the light of the pipeline vandalism inthe Niger Delta and destruction of public property by terrorists is a matter forconjecture. From available evidence, these strategic assets are rarely insured andtherefore, not adequately protected.

Some Guidelines/Regulations Issued by NAICOM Pursuant to its Act

In pursuance of its statutory responsibilities, NAICOM carried out the consolidation exercise in the industry in 2007 and issued a Code of Corporate Governance for thesector in 2006. Regularly, NAICOM also issues circulars to address practice andoperational issues. The following are some of the guidelines it has issued overtime:

• the adoption of common financial year-end of December 31 by all insurers;

• all annual returns are to be filed not later than June 30 of the following year;

• requirements for the payment and classification of all outstanding claims;

• review of the basis for computing solvency margin;

• Insurers are to forward a copy of the external auditor’s management report and the response thereon to NAICOM;

• all off-balance sheet items for insurance and reinsurance business are to be fully disclosed;

• Insurers must comply with the Local Content Act or be sanctioned for not complying;

• Investment of shareholders’ funds in subsidiaries should not exceed 25% of such funds;

• No insurer should invest more than 25% of the proceeds of public offers and private placements of shares in non-insurance related companies or ventures;and

• all insurance and reinsurance companies are required to appoint compliance officers who will monitor and ensure compliance with money laundering laws,regulations and guidelines. The compliance officer is required to submit anannual report to the Commission.

These guidelines have helped to promote best practices in the industry.

Leadership of Insurance Companies

In line with the regulations issued by NAICOM, only professionally qualified insurance practitioners can head insurance companies. The implications of this directive are fairly obvious. Technical competence and professionalism will be brought to bear on the underwriting activities of insurance companies. Policies will be driven by well analysedrisks and the risk absorptive capacity of underwriters. Secondly, compliance with theethics of the profession will be non-negotiable as non-compliance will be met withsanctions. Players in the market will now play by the rules.

(i) Commission’s Sources of Finance

The Act, at Section 16, provides that each insurer and reinsurer shall contribute one percent of its premium income as levy to the Commission. In the same vein, allregistered brokers and loss adjusters are to pay one per cent of their gross commission. These levies are to complement the grants from governments, fees and penalties payable by underwriters for proven breaches. These levies must be paid on or before 30September of each year. For the purpose of these levies, the Commission is required bySection 27 to assess and furnish the insurer, reinsurer, broker and loss adjusters theamount payable at the beginning of the year. However, this assessment may be amendedor varied based on the actual audited financial statements at year end. The Act provides for an appeal process if the insurer, reinsurer, broker or loss adjuster is dissatisfied with the assessment.

(ii) Use of Moneys Received

With the moneys realised from various sources, the Commission is required to establish and maintain the following funds: (a) an operating fund; (b) an education fund;(c) a security and insurance development fund; and(d) a general reserve fund (net operating surplus).

To enhance the technical competences of players in the industry, the Act, at Section 19, requires the Commission to apply the proceeds of the education fund established aboveto support:

(a) the Chartered Insurance Institute of Nigeria; (b) the West African Insurance Institute; (c) such other insurance educational institutions as the Board may, from time to time, determine, to assist the institutions in the education of professionalsrequired for the Insurance Industry.

Powers of the Governing Board

As provided in sections 23 and 24, the Board is to consider and approve, among others,the annual budget of the Commission and cause its financial records to be audited by anexternal auditor appointed from the list and in accordance with the guidelines providedby the Office of the Auditor-General for the Federation. The Board is required to submitan annual report of its activities including the audited financial reports to the Minister not later than 30 September each year.

Supervision and Inspection

It is imperative for the market to be given direction by a well-resourced regulatory body. Accordingly, to ensure compliance to best practices, the provisions of this piece oflegislation and the Insurance Act, Section 31 of this Act, established an InspectorateDepartment which will carry out the supervisory functions of the Commission inrespect of Insurance institutions. Inspectors appointed in pursuance of this provision have access to all the books and records on insurance institutions and must treat suchinformation with utmost sense of confidentiality. In exercising his powers, an inspector shall take reasonable care to avoid undue hindrance to the day-to-day activities of an insurance institution. All insuranceinstitutions must cooperate with the inspectors to ensure the discharge of their duties.

Any refusal or failure by any insurer to cooperate with the inspectors will attract severe sanctions from the Commission. Indeed, Section 33(3) provides that, “an insuranceinstitution which is guilty of an offence under subsection (2) of this section is liable onconviction to a fine of N250,000 and in the case of a continuous offence, to an additionalfine of N1,000 for each day during which the offence continues.” An inspector is requiredto submit his report through the Commissioner of Insurance to the Board of theCommission.

Power to Wind-up an Insurance Institution

The Act empowers the Commission to withdraw the registration certificate of an insurance institution for breaching the provisions of this piece of legislation. Where theCommission makes an order revoking the certificate of registration of an insuranceinstitution and requiring the business of the insurance institution to be wound up, theinsurance institution shall within 14 days of the date of the order, apply to the Court foran order winding up the affairs of the insurance institution and the Court shall hear theapplication in priority to all other matters.

Merger and Consolidation of Insurance Institutions

As provided in section 47 and subject to the approval of the Minister, the Commission shall have power, notwithstanding the provisions of sections 44, 45 or 46 of this Act, to direct that – (a) a failing insurance institution shall merge or consolidate with any otherinsurance institution, subject to such conditions as it may deem fit to impose; (b) an insurance institution merged or consolidated with a failing insuranceinstitution shall settle the financial liabilities of the failing insurance institution; (c)any asset of the failing insurance institution shall be transferred to and be vested in the insurance institution concerned with the merger or consolidation.

Without prejudice to any actions that the Commission may desire to undertake to dealwith the failed or failing insurer, the Commission, may with the prior approval of theMinister, refer the insurer and persons connected therewith to the Economic andFinancial Crimes Commission or other extant agencies of government with a view torecovering all debts as well as sanctioning persons found to be guilty of any malfeasance.

Ethical Standards for Operators and Players

Sections 52-55 are particularly important as they specify the standards of conduct for operators of insurance institutions like directors, partners, officers or employees of aninsurance institution. According to these sections, they must

(a)take all reasonable care to secure compliance with the provisions of this Act andthe Insurance Act, 2003;

(b) authenticate any statement, information, book or any document whatsoever submitted, pursuant to the provisions of this Act;

(c) not knowingly, recklessly, negligently, willfully or otherwise, approve or pay or in any way connected with the approval or payment of an insurance claim which isfalse;

(d) not receive or participate in sharing, for personal gratification, any money, property or other benefits, towards or after the approval or payment of aninsurance claim which is false;

(e) not offer, pay, give, receive or participate in sharing, for personal gratification, any money, property or other benefits towards or after the acquisition, transfer,merger or consolidation of an insurance business; or as an inducement forprocuring any insurance business; and

(f) not knowingly, recklessly, negligently, willfully or otherwise make an insurance claim which is false.

Thebreach of these ethical codes constitutes offences for which they can be prosecuted and if found guilty are liable on conviction to a fine and or term of imprisonment or both fine and imprisonment. Where an insurance institution is failing or has failed, any person who, being a director, partner, officer or employee of the insurance institution, isfound to have contributed in any way whatsoever to the failing or failure of the insuranceinstitution, is guilty of an offence and liable on conviction to a fine or imprisonment or toboth fine and imprisonment.

In line with the provisions of these sections, all players are required to exercise due and reasonable care to comply with the provisions of this Act, ensure that the information communicated to the regulator are accurate and reliable and that no approvals are given for the payment of false claims. They must not also partake in the sharing of illegaleconomic benefits arising from the payment of false claims. These standards of conductare designed to raise the profile of the industry. Clearly, failure to ensure compliance to the provisions of the Act is a grievous offence punishable under this law.

The expected standard of conduct is not lowered by the fact that an insurance institution is involved. In fact, any insurance institution which fails to make a report to theCommission of a claim which it knows to be false or has reason to suspect is false is guiltyof an offence and liable on conviction to a fine of N500,000. Given the image of theindustry and the need to raise the confidence of the insuring public, these statutoryprovisions are strategic and must be enforced by the relevant supervisory agency ofgovernment, the National Insurance Commission.

Funmi Babington-Ashaye