Berkeley Legal | The New Minimum Capital Requirement for Insurance Companies in Nigeria
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07 Nov The New Minimum Capital Requirement for Insurance Companies in Nigeria

The National Insurance Commission (“the Commission” or “NAICOM”) is the principal regulator of the Nigerian Insurance Industry. The National Insurance Commission Act of 1997 (Sections 6, 7, 8, and 64) and the Insurance Act of 2003 (Sections 86 and 101) both empower the Commission to administer, supervise, regulate and control the business of insurance in Nigeria. The Commission establishes the standards for the conduct of insurance business, including stipulating and reviewing the minimum paid-up share capital for insurance companies.

On 20th May 2019, NAICOM published a circular titled “Minimum Paid-up Share Capital Policy for Insurance and Reinsurance Companies in Nigeria”. The circular reviewed the minimum paid-up share capital requirement for all classes of insurers excluding Takaful operators and micro-insurance companies.[1]

The reason for this upward review is to enable the insurers to match the significant increase in the value of insured assets, since the last recapitalization exercise in 2005/2007. Details of the review are as stated below:

S/N Class of Business Existing Minimum Paid-up Share Capital Revised Minimum Paid-up Share Capital
1 Life Insurance Business 2 Billion Naira 8 Billion Naira
2 General Insurance Business 3 Billion 10 Billion Naira
3 Composite Business 5 Billion Naira 18 Billion Naira
4 Reinsurance Business 10 Billion Naira 20 Billion Naira

The new paid up share capital requirement is applicable with immediate effect to all new companies applying to NAICOM for the registration of insurance business in Nigeria.  Existing insurance and reinsurance companies must also comply with the new requirements no later than June 30, 2020.

The changes also affect the amounts statutorily required to be deposited with the Central Bank of Nigeria by insurance companies under Section 10 of the Insurance Act (statutory deposit). The statutory deposit for companies intending to commence insurance business in Nigeria is 50% of the minimum required paid-up share capital, while the statutory deposit for existing insurers is 10%.

Many Insurance businesses are largely under-capitalized and this has been a barrier to taking on big risks in sectors such as Oil & Gas, Marine and Aviation. Therefore, existing insurers must increase their share capitals to the current capital requirements.

Evidently, another consolidation of the insurance sector is imminent. Some of the companies may require mergers or acquisitions by bigger insurance companies in order to comply with the new minimum capital requirement.

In recognition of the foregoing, amongst others, NAICOM issued a further Circular dated 23 July 2019. This Circular stated that existing companies can achieve the new minimum share capital requirement through any of the following or a combination of some of them:

  • Existing share capital (where the insurer has already met the share capital requirement);
  • Cash payment for new shares;
  • Retained earnings (capitalization of undistributed profits);
  • Payment in kind for new shares which must be converted to cash within 3 months to the recapitalization deadline; and
  • Share premium (where the company sells its shares at a price higher than its par value, it may use the difference between the par value and the selling price to pay up unissued shares of the company to be issued to members as fully paid bonus shares).

The Circular also recommended mergers and acquisitions, but stated that all mergers and acquisitions must be concluded not less than 60 days to the deadline for recapitalization.

In consonance with its Recapitalization Roadmap, NAICOM directed all insurers to submit their recapitalization plans on or before 20th August 2019. So far, about 26 insurance companies out of 47 are noted to have met the necessary requirements.

It is hoped that the recapitalization activities will result in bigger and stronger insurance companies, capable of competing and taking highly rewarding risks in the global or international environment.

It is important that new or intending entities and existing insurance companies seek legal advice on how to comply with the new capital requirement, so that they can take maximum advantage of the best options to emerge successful and build stronger insurance businesses.

[1] Takaful & Micro-Insurance companies are specially established to service sharia compliant and low-income segments of the market. They are also significantly new industry and can be considered to still be developing in comparison to other insurance businesses.

The information provided in this article is for general informational purposes only and does not constitute legal advice. If you require specific legal advice on any of the matters covered in this article please contact info@berkeleylegal.com.ng