No Compliance Summary

The objective of the Financial System Strategy 2020 (FSS 2020) initiative launched by the Nigerian government is to reform the financial system in Nigeria in order to make the country the financial hub of Africa by the year 2020. A number of documents prepared for the 2007 conference on the implementation of the FSS 2020 pointed out that the insurance sector is the "weakest link" in the Nigerian financial system. Inadequate supervision and regulation, a negative image of the insurance sector, low awareness of the public, poor financial reporting, and weak management and technology were identified as the major challenges facing the industry. Yemi Soladoye, in his presentation at the 2007 Financial System Strategy 2020 International Conference, outlined the main strategic objectives of the reforms in the insurance sector. The authorities plan to revise existing insurance laws in order to bring them in line with the "internationally recognized legal system" by 2010; introduce International Accounting Standards, best practices in corporate governance, and stringent solvency rules; and strengthen protection of policy holders, along with other measures. Further, there are plans to integrate financial sector regulation in a single regulator, the Financial Services Commission, and to implement Solvency II by 2010.

General Overview

The Nigerian government has launched the Financial System Strategy 2020 (FSS 2020) initiative to reform its financial sector and make Nigeria the financial hub of Africa by the year 2020. The FSS 2020 involves significant reforms of the major sub-sectors of the financial system: the banking sector, capital markets, insurance, and pensions. In a 2007 speech, Remi Babalola, the Minister of State for Finance, announced that the Nigerian insurance industry faces many serious challenges. He pointed out that, in addition to inadequate supervision and regulation, the sector is plagued by the issues of negative image, low awareness of the public, poor financial reporting, and weak management and technology. Further, staff resources are also not up to the standard due to low remuneration. Babalola puts forward several suggestions to overcome the challenges mentioned above and revamp the industry. He calls for stronger management and better corporate governance practices in the insurance companies; better financial positions, capital adequacy and solvency, and claims payment ability of the insurers; more robust investment management; adequate reinsurance arrangements; more competent manpower with better underwriting skills; and technological advancement. Reiterating the discontent with weak insurance sector supervision, Babalola points to the need for strengthening the National Insurance Commission (NAICOM), the Nigerian insurance supervisor, and benchmarking supervisory practices not only with other domestic regulators in the banking and securities sectors but with international peers as well.

Y. Soladoye, in his presentation at the June 2007 Conference on the FSS 2020, outlines the main strategic objectives of the reforms in the insurance sector which are as follows: (1) become the safest insurance market in Africa; (2) obtain a strong positive image of the insurance sector: (3) become the fastest growing market in Africa; (4) make the Nigerian insurance market the first choice in Africa; and (5) build a single West Africa insurance market. Soladoye envisages increasing the capacity, safety, and efficiency of the Nigerian insurance sector, which is financially sound, profitable, and customer driven. Once the legal and regulatory roadblocks are removed, the insurance industry will be geared to be able to contribute up to 4.8 percent in 2010, 8.9 percent in 2015, and 15.91 percent in 2020, Soladoye envisions. Further, Soladoye discusses the main initiatives with a defined time frame for implementation. These initiatives include, but are not limited to, the revision of existing insurance laws in order to bring them in line with internationally recognized legal standards by 2010; the introduction of International Accounting Standards, best practices in corporate governance, and stringent solvency rules; and the strengthening protection of policy holders. Solvency rules will be made risk based and Nigeria plans to adopt Solvency II by 2010, Soladoye explains. The reform agenda also includes creating some new regulatory authorities and structures. There are plans to create a unified financial sector regulator, the Nigerian Financial Services Commission. Other bodies to be created include the Insurance Ombudsman, the Insurance Mediation Agency, the Offshore Insurance Development Agency, the Nigerian Insurance Consumer Association, and the Customer Complaint Agency.

The insurance sector in Nigeria, per Soladoye, germinated in 1921, although its regulation started only in 1961. After an indigenization process that the industry underwent in the 1970s, it was opened to foreign competition in the 1980s. Soladoye notes that the reform of Nigeria's insurance industry started in 2005 with the announcement of new capitalization requirements for insurance companies. This led to the consolidation of the industry and 71 companies were recertified in February 2007. These recertified entities were verified by a Technical Committee (comprising technocrats, representatives from the insurance industry, and the NAICOM commissioner) set up for the verification process and to advise on the reform of the NAICOM. In his 2007 speech, Finance Minister Babalola notes that the release of the report by the Technical Committee was a "defining" moment for the sector, stating that it would form the basis for further reforms in line with FSS 2020. The minister announced that "at the end of the day, we are going to have an Insurance sector that will actually have its own share in the FSS 2020."

The main laws and guidelines governing the insurance sector include the NAICOM Act of 1997 (as amended in 2003), the Insurance Decree of 1997, which was repealed by the Insurance Act of 2003, and the Consolidation and Recapitalization Guidelines of 2005. NAICOM was established in 1997 by the NAICOM Act of 1997, thus replacing the Nigerian Insurance Supervisory Board (NISB). The NAICOM reports to the Federal Ministry of Finance (FMF) and its main functions include supervision, regulation and control of insurance business in Nigeria. The 2003 Insurance Act made some key changes in the regulatory framework. It classified insurance business into life and general categories; increased paid-up share capital of insurance companies; and provided for "better supervision and control of the insurance industry in Nigeria" (Insurance Act No. 1, 2003, p. A52).

According to Soladoye, the Nigerian insurance industry's contribution to the GDP is a mere .32 per cent. Furthermore, the annual gross premium income in 2005 was N76.32 billion ($587 million), and the industry is ranked 65th worldwide and 6th in Africa. As of 2007, there were 69 insurance and 2 reinsurance companies in Nigeria. As a 2008 report on Nigeria by the Inter-Governmental Action Group Against Money Laundering in West Africa (GIABA) adds, of the 69 insurers, 26 are life insurers, whereas the remaining 43 are non-life insurance firms. Furthermore, there are five actuarial firms operating in Nigeria, 515 insurance brokers, 3700 insurance agents, and 41 loss adjusting firms. The insurance sector, as Soladoye notes, is not concentrated, and the largest insurer has 21 percent of the market, the top five firms have collectively cornered only 39 percent, while the top ten firms account for 61.6 percent of the total market share. Soladoye notes that FSS 2020 aims to make Nigeria the insurance market of "first choice" in Africa and attain the 15th position internationally in terms of premium generation by the year 2020. Nigeria is not listed as a member on the International Association of Insurance Supervisors (IAIS) website.

The Principles

IIICP 1 Conditions for effective insurance supervision

There is insufficient information publicly available as to Nigeria's compliance with this principle.

IIICP 2 Supervisory objectives

There is insufficient information publicly available as to Nigeria's compliance with this principle.

IIICP 3 Supervisory authority

There is insufficient information publicly available as to Nigeria's compliance with this principle. NAICOM is responsible for the administration, supervision, regulation and control of the business of insurance in Nigeria. It reports to the FMF. Per the Soladoye presentation of 2007, the NAICOM Act established the NAICOM and charged it with "inspectorate and sweeping powers" (p. 25). The supervised entities are subject to a 1 percent industry supervisory levy.

IIICP 4 Supervisory process

There is insufficient information publicly available as to Nigeria's compliance with this principle.

IIICP 5 Supervisory cooperation and information sharing

There is insufficient information publicly available as to Nigeria's compliance with this principle.

IIICP 6 Licensing

There is insufficient information publicly available as to Nigeria's compliance with this principle. The Insurance Act lays down the licensing conditions for each operator. Each insurance class – life and non-life – is subject to distinct application and registration process and requirements. The capital base for life insurance firms, per the 2007 presentation by Soladoye, has been increased to Naira 2 billion, for non-life insurers, Naira 3 billion, and for reinsurance companies, Naira 10 billion. The capital deposits are parked in Escrow Accounts with the Central Bank of Nigeria (CBN). Insurers are also required to maintain a 10 percent statutory deposit in the CBN. Soladoye reveals that starting April 2007, life and general business will be separated.

IIICP 7 Suitability of persons

There is insufficient information publicly available as to Nigeria's compliance with this principle. However, per the 2008 GIABA mutual evaluation report, the 2003 Insurance Act spells out the fit and proper criteria for directors and key officials. It stipulates that if a person has been involved in any criminal conduct he/she may not be employed as a principal officer in an insurance corporation. All directors of insurance companies are also required by new authorization procedures outlined by NAICOM to complete a personal history form as part of NAICOM's fit and proper testing.

IIICP 8 Changes in control and portfolio transfers

There is insufficient information publicly available as to Nigeria's compliance with this principle.

IIICP 9 Corporate governance

There is insufficient information publicly available as to Nigeria's compliance with this principle.

IIICP 10 Internal control

There is insufficient information publicly available as to Nigeria's compliance with this principle.

IIICP 11 Market analysis

There is insufficient information publicly available as to Nigeria's compliance with this principle.

IIICP 12 Reporting to supervisors and off-site monitoring

There is insufficient information publicly available as to Nigeria's compliance with this principle. According to the World Bank's 2004 report, NAICOM regulates financial reporting practices of insurance companies under the Insurance Act of 2003. The report further adds that audited financial statements are submitted within 6 months of the year end date to NAICOM and also published in newspapers. However, NAICOM does not have sufficient resources to enforce compliance with reporting requirements, concludes the report. The 2007 presentation by Soladoye also mentions that financial information is "always very stale" (p. 45), and the disclosure levels vary widely. This makes decision making and risk analysis largely a guess work. With the implementation of the FSS 2020 initiative, reliable research, database, and statistics on insurance operations will be made available.

IIICP 13 On-site inspection

There is insufficient information publicly available as to Nigeria's compliance with this principle.

IIICP 14 Preventive and corrective measures

There is insufficient information publicly available as to Nigeria's compliance with this principle.

IIICP 15 Enforcement or sanctions

There is insufficient information publicly available as to Nigeria's compliance with this principle.

IIICP 16 Winding-up & exit from the market

There is insufficient information publicly available as to Nigeria's compliance with this principle.

IIICP 17 Group-wide supervision

There is insufficient information publicly available as to Nigeria's compliance with this principle.

IIICP 18 Risk assessment and management

There is insufficient information publicly available as to Nigeria's compliance with this principle. The presentation by Soladoye in June 2007 points out the unscientific risk classification by insurers. They do not classify risk based on geographical location or risk management efforts. Hazard classification is also non-existent. Insurance management is premium-income focused rather than risk focused. This leads to large avoidable losses and fraudulent claims. Soladoye elaborates that under the FSS 2020, senior management of the insurance companies will be provided technical assistance in applying risk-based management principles.

IIICP 19 Insurance activity

There is insufficient information publicly available as to Nigeria's compliance with this principle. The 2007 presentation by Soladoye notes that foreign reinsurers provide the bulk of the reinsurance cover, with domestic reinsurers taking up only 5 percent of the risk. Soladoye also points to "foreign exchange leakage in form of reinsurance" (p. 49).

IIICP 20 Liabilities

There is insufficient information publicly available as to Nigeria's compliance with this principle.

IIICP 21 Investments

There is insufficient information publicly available as to Nigeria's compliance with this principle.

IIICP 22 Derivatives and similar commitments

There is insufficient information publicly available as to Nigeria's compliance with this principle.

IIICP 23 Capital adequacy and solvency

There is insufficient information publicly available as to Nigeria's compliance with this principle. The Nigerian government raised the capitalization thresholds of all insurance companies in 2005, and companies were recertified based on the new requirements in 2007. The capital base for life insurance firms, per the 2007 presentation by Soladoye, has been increased to Naira 2 billion, for non-life insurers, Naira 3 billion, and for reinsurance companies, Naira 10 billion. The capital deposits are parked in Escrow Accounts with the CBN. Insurers are also required to maintain a 10 percent statutory deposit in the CBN. However, solvency requirements for insurers are performance-based, rather than risk-based. Insurers are obliged to maintain 15 percent of their premiums as reserves. Soladoye also finds that approximately 50 percent of the insurance policies end up becoming bad debt, and policy lapse rate is high; therefore, solvency of the companies is weak. As a matter of fact, most insurance companies are operating on negative capital and "will collapse in the face of proper supervision" (p. 49). NAICOM does not adjust capital requirements for insurers periodically based on business, market, liquidity, asset-liability mismatch, or technical risks. It also subjects all underwriters to the same level of capital requirement. However, Soladoye notes that as part of the insurance sector reforms under FSS 2020, solvency rules will be made risk based and Nigeria plans to adopt Solvency II by 2010.

IIICP 24 Intermediaries

There is insufficient information publicly available as to Nigeria's compliance with this principle. According to the Nasarawa state website, the insurance industry comprises life, non-life, and reinsurance firms. These firms mobilize long-term funds and act as financial intermediaries. The presentation by Soladoye in 2007 reports that the Insurance Act provides for professional qualification of insurance managers; however, undue emphasis is placed on certification, rather than ability, and "the scope and horizon of most managers is low" (p. 44).

IIICP 25 Consumer protection

There is insufficient information publicly available as to Nigeria's compliance with this principle. NAICOM is responsible for the protection of policy holders. The 2007 presentation by Soladoye outlines that under FSS 2020, consumer protection in the insurance sector will be strengthened and insurance awareness among the general public enhanced. A Nigerian Insurance Consumer Association, Customer Complaint Agency, and Insurance Customer Service Bureau will be created to improve the image of the insurance industry and provide redress to consumer complaints and concerns. The policyholders' protection will be further strengthened by the setting up of the Insurance and Pension Protection Fund and the Insurance Benefits Guarantee Corporation.

IIICP 26 Information, disclosure & transparency towards the market

There is insufficient information publicly available as to Nigeria's compliance with this principle.

IIICP 27 Fraud

There is insufficient information publicly available as to Nigeria's compliance with this principle.

IIICP 28 Anti-money laundering/ Combating the Financing of Terrorism

There is insufficient information publicly available as to Nigeria's compliance with this principle. The Money Laundering Prohibition Act (MLPA) of 2004 obliges insurance companies to comply with anti-money laundering/combating the financing of terrorism (AML/CFT) requirements. It also makes NAICOM responsible for AML/CFT oversight. The 2008 GIABA mutual evaluation report for Nigeria finds that the NAICOM is revising its existing regulatory framework to make AML/CFT compliance more pervasive among insurance entities. A number of guidelines, including the Insurance Industry Policy Guidelines (IIPG) of 2004, and Customer Due Diligence (CDD) and Know Your Customer Guidelines (KYCG) for insurance companies, have been revised to move closer to the MLPA requirements. The KYCG provides guidance to insurers on how to verify customers' identification, recognize and report suspicious transactions, and fulfill their record-keeping requirements as prescribed in the 2003 Insurance Act. Further, the Inspectors' Operational Manual is being reviewed by the NAICOM to highlight AML/CFT areas to be covered during inspections. The NAICOM inspectors were also trained by the Economic and Financial Crimes Commission (EFCC), Nigeria’s central agency for combating economic and financial crimes that also houses the financial intelligence unit.

Per the 2008 GIABA report, the Insurance Act requires entities to identify customers and beneficiaries, and prohibits the opening and maintenance of fictitious accounts. However, the law does not explicitly prohibit numbered/anonymous accounts. Information about beneficial ownership is also not diligently collected in the insurance sector, and more broadly there are doubts as to ongoing due diligence procedures. Customers are required by insurance companies to provide CDD information within 24 hours of opening an account, after which the account is closed. The insurance industry relies upon the licensed agents to conduct proper CDD measures for their customers, and this practice fails to meet the FATF requirement. The IIPG requires insurance operators to monitor large, complex, or unusual transactions, and to report suspicious transactions. It also requires the appointment of compliance officers, and the NAICOM has issued circulars requiring that they be independent and have access to all accounts, transactions, and information about clients. A "fit and proper" testing for senior management by the NAICOM is also provided for in the Insurance Act. Internal control measures in the insurance sector were found to be weak, with failure to appoint compliance officers, lack of in-house training, low levels of suspicious transaction reporting and cash transaction reporting, and inadequate screening of high-risk customers. Internal control was especially weak in branches of major companies due to local capacity constraints. Further, the law does not require AML/CFT measures at foreign branches and majority owned subsidiaries. The regulator, NAICOM, has unrestrained access to all books, records, documents, and other information from the insurance entities. Sanctions for non-compliance range from fines, suspension and cancellation of license to imprisonment. However, as the GIABA report noted, sanctions had not been consistently used due to the process of transition in the industry related to its recapitalization and consolidation that "significantly reduced AML supervision" (p. 131). Terrorism and terrorist financing have also not been sufficiently criminalized under the legal framework.

According to the 2007 U.S. Department of State (DoS) report, the Financial Action Task Force (FATF) placed Nigeria on its list of non-cooperative countries and territories in combating money laundering in June 2001. The DoS report notes, however, that the FATF conducted an evaluation of the reforms in the Nigerian anti-money laundering regime in May 2006 and recognized the progress Nigeria had made in implementing AML policies, namely the establishment of a financial intelligence unit and the progress on money laundering investigations, prosecution and convictions. As a result, the FATF removed Nigeria from the non-cooperative list in June 2006, but enhanced monitoring of the country's compliance efforts. The formal monitoring process ended in June 2007.