by Chiamaka Ajeamo, [email protected] 08060655687
As the Nigerian insurance industry joins its counterparts across the world to embrace the Risk Based Supervision, a financial expert Mr Pius Apere, has taken some time to focus the searchlight on some areas the industry needs to look into in order to achieve effective implementation for optimal results.
Risk based supervision (RBS); a system where a supervising authority allocates time and resources to companies based on the level of risk inherent in their balance sheet, is gradually becoming the dominant approach to regulatory supervision of financial institutions around the world.
According to Pius Apere, an Actuarial Scientist and Chartered Insurer, the introduction of RBS regime in the Nigerian insurance industry would improve financial and operational efficiency of insurance companies and their ability to underwrite large volumes of business and material risks going forward.
Apere who is also the Chairman/CEO Achor Actuarial Services Limited, in a recent article titled “Risk-Based Supervision with Effective System of Risk Governance is the Panacea for Nigerian Insurance Industry”, equally stated that an RBS regime will enable the industry compete globally and contribute significantly to the country’s economy.
It is worthy of note that the Nigerian insurance regulator, the National Insurance Commission (NAICOM), has been planning since 2015 to move from a compliance-based supervision to risk-based supervision (RBS) of insurers by 2017.
However, this laudable plan and timeline did not materialise, even after preparative and proactive steps for take-off of the RBS including the release of guidelines for RBS with feedback mechanism from insurances companies, enterprise risk management and code of corporate governance, and also conducted a verification exercise of capital resources within individual insurance companies have been carried out.
Apere while explaining how the RBS works, said the supervisor which is the regulator is expected to assess systemic risk that affects the industry as a whole (e.g. credit risk, market risk, operational risk etc.) and then analyse the level of risk specific to each firm (e.g. insurance underwriting risk). It takes a holistic approach by studying the business units within the enterprise, each of which may carry varying levels of risk.
“In other words, the RBS approach requires supervisors to review the manner in which insurers are identifying, analysing and controlling risks (i.e. assessing the probability and severity of the material risks to which insurers are subjected to and the effectiveness of the controls in reducing the probability of risk events).
“The RBS is contrasted with compliance-based supervision where the latter involves applying the same minimum standards across the industry, checking for and enforcing compliance with rules, legislation, regulations or policies that apply to an entity. The risk-based capital (RBC) methodology is an integral part of the RBS framework and the former requires actuarial expertise/inputs in its determination.
“RBS focuses on the link between risk management and the management of capital adequacy and solvency. This requires an insurer to address relevant and material risks by recognizing the importance of an Enterprise Risk Management (ERM) framework in underpinning robust insurance enterprise-wide solvency assessment with the aim to enhance confidence in assessing the insurer’s financial strength. The solvency assessment would require each insurer to identify the risks to which it is exposed, to identify the risk management process and controls in place and quantify its ongoing ability to continue to meet the regulatory capital requirements.”
He added that the principle of proportionate risk-based approach is also an important consideration for the application of RBS, especially in markets with conventional insurers, small insurers or micro-insurers and insurance products with lower risk profiles.
This requires that supervisors assess compliance with a regulatory framework in a manner proportionate to the nature, scale and complexity of the risks inherent in the business of insurers, as there is no “one-size-fits-all” approach for the application of RBS, he noted.
The Actuarial scientist said that ideally, the insurance regulators are expected to develop a strategy for implementing the RB in consistent and/or compliance with the Insurance Core Principles (ICPs) of the International Association of Insurance Supervisors (IAIS).
Apere said a prerequisite for good and effective RBS is that an insurance regulator needs to have a good knowledge of the insurance companies, the industry and operating environment. These can all be observed by creating a risk profile of an insurance company by considering the company’s activities, the risks in those activities, quality of risk management process and the capital required to support operations.
“The current management of NAICOM has a good knowledge of the critical problem facing the insurance industry, the dearth of actuarial professionals that is likely to hinder the successful implementation of the RBS. Thus, NAICOM has already put in place a training programme for building actuarial capacity for the insurance industry ahead of commencement of the RBS policy in August 2021 as being announced by the Commissioner for insurance (CFI) during 2021 seminar for insurance Journalists held on 3rd June 2021.”
Apere said that if RBS is implemented with an appropriate RBC methodology, even without adopting stochastic modelling techniques to determine the RBC at the initial stage of RBS regime, there will be no need to re-introduce the suspended Tier-Based Minimum Solvency Capital (TBMC) in the future, since an insurance company would not be able to underwrite large risks without the required capital. However, a new Insurance Act has to be introduced to provide the legal basis to support the implementation of the RBS framework.
“For effective implementation of RBS, there is need to bridge the insurance and/or risk management knowledge/experience gap that exists within the Non-Executive Directors (NEDs) in some Boards of the Nigeria insurance industry. This is because the presence of NEDs without insurance and/or risk management expertise in a board may create an environment where decisions are made in a manner not so well thought-out, thereby making it difficult for the Board’s effective oversight functions without bias or compromise and communication with executive management and stakeholders. The limited insurance training programmes organised by the regulator for Directors in the industry might not be sufficient in the RBS regime. Thus, it would be appropriate to have at least one insurance professional as a NED (e.g. probably the Independent NED) on the Board of an insurance company, going forward.”
On the challenges the industry is likely to face with the introduction of RBS regime, he said there might be apprehension among the insurance players/stakeholders (i.e. pushback from insurers, clients and brokers) especially at the initial stages of implementation of RBS, particularly in the areas of risk management and governance, data collection, and actuarial expertise; RBC being viewed as a compliance item rather than a business tool.