Blowing hot & cold

Nigeria does have some issues—Boko Haram in the north continues to pose a major security risk and the forthcoming presidential elections in 2015 also pose a risk of political uncertainty. However, earlier this year, Nigeria became Africa’s largest economy, overtaking South Africa to gain the number one spot. With a population of 160 million and a blossoming economy, the country is enjoying a wave of enthusiasm from investors eager to take advantage of the opportunities presented. Even the recent Ebola virus outbreak has failed to dampen enthusiasm, particularly after Nigeria managed to contain an outbreak within its borders and be declared Ebola-free a couple of months later. However, it is not necessarily that straightforward for insurers as Fola Daniel, Commissioner for Insurance at the Nigerian insurance regulatory authority Naicom, looks to create opportunities for homegrown insurers too.hidePraveen Sharma, Senior Vice President, Global Practice Leader—Insurance Regulatory & Tax Consulting at Marsh, says: “Non-admitted insurance is not permitted because the law provides insurance must be purchased from locally-authorised insurers. There are no exceptions specified in the legislation, other than permission may be sought from the regulator to effect such a placement.” Andrew Lewis, Chief Executive Officer of One Re, adds that it goes one step further. “In fact, according to the Act no insurance business should be placed offshore,” he says. “Except in terms of Section 72 (4) of the Insurance Act, No 1 of 2003, which states in particular circumstances by reason of exceptional nature of the risk emanating from Nigeria, the risk cannot be placed with an insurer or reinsurer registered in Nigeria, dispensation can be obtained from the Commission in writing, to permit such cover outside Nigeria.” Richard Robinson, Partner Manager, International Insurance Solutions AGCS, adds: “The regulations are very clear; non-admitted insurance is not permissible in Nigeria.” Alasdair Walker, Head of Marine and Energy AGCS Africa, agrees: “The Nigerian market has a large number of local markets, but for a number of the larger industrial risks (particularly oil and gas), 30% is typically fronted to international markets and/or captives, with the 70% balance either retained or reinsured by local insurers.” Mr Robinson adds: “In theory, Naicom can give permission for business to be placed outside of Nigeria but I believe the market has a wide appetite and I can’t envisage any circumstances where this will happen.” From a tax perspective, Mr Sharma says: “There are no premium taxes payable on insurance premiums in Nigeria—whether on an admitted or non-admitted basis. The admitted insurer is required to pay premium taxes on its total gross premium income at various percentages. Whether or not the local insurer will pass on the cost to the local insured will depend on their philosophy and negotiations.” AGCS’s Mr Robinson says: “We work with our partner in Nigeria for local tax compliance and advice. It is our understanding there are levies applicable and also VAT on broker commission.” Mr Walker confirms that, for oil and gas business, “we will typically see a 1% tax levy on behalf of Naicom.” Other fees and taxes are: Business property insurance—0.25% Supervisory Levy—1% on gross premium, with a minimum of NGN 100,000 ($638) Information Technology—1% Withholding tax is not applied on reinsurance or insurance premiums paid externally. Mr Lewis stresses the need to comply, warning: “Offences outlined in the Insurance Act may result in fines of up to NGN 500,000 ($3,190) or even, in some circumstances, the possibility of a three-year prison sentence.” Mr Lewis adds: “A tougher stance is being taken on compliance with regulatory and tax authorities and the market is being more stringently monitored for non-compliance.” Agreeing, Mr Walker stresses: “The local content requirements are strictly enforced and we will not support any placements that contravene the local structure. The ramifications, both from a financial and reputational standpoint, would likely be longstanding.” And this is only likely to get tougher according to Mr Sharma, who believes: “It is generally understood regulators in Africa are becoming increasingly tougher and are taking various steps to enforce their respective regulations. Naicom has now toughened its stance since early this year and now requires risks to be offered to the entire local insurance market. “It is clear Naicom is unlikely to be lenient towards breaches of local insurance regulations, as it may have done in the past. Although I am not personally aware of any fines and penalties being imposed by Naicom, I do understand Naicom has indicated it will examine the insurance arrangements being put in place much more closely than ever before.” Mr Sharma explains: “A number of issues collectively are likely to lead to change in the structure of the global programmes: (1) tightening of the regulations and stricter enforcement thereof; (2) cost constraints, capacity and coverage provided by insurers; and (3) the multinational group’s desire for claims to be paid in country rather than at parent company level overseas.” Mr Lewis stresses: “Local capacity must be used before any external cessions will be considered.” Global programmes or fronting is forbidden for the following classes of business: Fire Motor Liability Accident Oil and energy Marine hull Aviation Any other classes as the commission may decide from time to time. Mr Sharma adds: “A foreign insurer intending to conduct the business of insurance is required to apply for a licence and, depending on its business plan and its ability to meet the requirements set by Naicom, it should not create any regulatory barriers.” According to Mr Robinson: “In 2013 the authorities started to enforce Premium First regulations, although these were actually codified in the 2003 Insurance Act. In 2014 regulations were introduced to control the use of overseas reinsurance. There is every indication there will be further regulations implemented.” Adding to the earlier discussion around foreign insurers operating in Nigeria, Mr Robinson says: “To operate locally, foreign insurers are formally required to establish an insurance company structure in compliance with local regulations (which would include solvency and capital requirements).” At the moment, the leading non-life insurer in Nigeria is Leadway with a market share of 11.9% and second is Custodian and Allied with a 6.1% market share. However, the market could be seeing some new blood in the next year or two as other insurers eye up the market and look for ways to comply with the regulations. For example, last year Old Mutual completed the acquisition of a majority stake in Oceanic Life, the life assurance operations of the former Oceanic Bank in Nigeria. And last month AXA entered into an agreement to acquire 100% of Assur Africa Holdings2, which holds a 77% stake in Mansard Insurance. Mansard is the fourth largest insurance provider in Nigeria with operations in both property and casualty (5% market share) and life and savings (4% market share). AXA says: “This transaction would allow AXA to enter the highly attractive Nigerian market through a very reputable local company, led by a talented management team. Moreover, Mansard would be able to capitalise on AXA’s distribution knowledge, product skills and actuarial knowhow, to accelerate further its development and leverage its competitive advantages. The closing of the transaction is expected before the end of 2014.” Despite such deals, however, Nigeria is becoming a trickier destination for those involved with global programmes. As Mr Lewis sums it up: “It is becoming more difficult to incorporate Nigerian risks into a global programme.” Mr Robinson agrees, adding: “There is little doubt the heightened level of regulatory enforcement in Nigeria coupled with a stated aim by Naicom that at least 70%-80% of all risks should be retained locally present a renewed challenge for global programme providers—clients and brokers may adopt their own legitimate security requirements in respect of their insurance carriers, which may not necessarily be satisfied through a predominantly local placement. “In addition, the rules regarding overseas reinsurance cessions with which global insurers must now comply are dependent upon RI approvals being turned around quickly by the regulator—failing which the risk of an incomplete placement is increased.” However, AGCS’s Alasdair Walker stresses: “While the local content requirements do pose a challenge for some global programme placements, we continue to support our clients in the Nigerian market, including Nigerian cedants, with capacity and technical expertise in strict accordance with the local laws and regulations.” –This article first appeared in sister publication International Programme News.

Blowing hot & cold

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