The regulatory oversight function which framed the 1997 Act that birthed the National Insurance Commission did not envisage that regulator would one day begin to inch towards making itself a party in the insurance contract by setting rates for the purely commercial transactions of insurance companies. The law only recognizes the commission as an arbiter in cases of complaints brought to it by the policyholder in a contract dispute. By insisting that insurers implement a motor insurance rate and at the same requiring all insurance contracts to have a NAICOM policy number in addition to the insurers’ policy number, it has dragged itself into play.
The two words that empower NAICOM’s crucial intervention powers in the ordinary insurance business are ‘approve’ and ‘establish.’ Certainly, the leadership of the Commission should be concerned about issues of unhealthy competition, underhand dealings and other malpractices in the industry. However, its instruments of supervision through the inspectorate division empower it to have access to the books of insurers. It has not been stated clearly what value ‘NAICOM ID’ adds to a policy issued by an insurance company.
Now, NAICOM gravitating towards becoming a party in the insurance contract is exemplified in the commercial motor insurance new rates where it has set 5% as the commercial rate for comprehensive insurance. In addition, it has also superimposed a parallel policy number (NAICOM ID) on all policies issued by insurance companies to policyholders. These are avoidable offside regulations and the basis for these are not clearly stated. One part of the reason said to be adduced by NAICOM is the worrisome deterioration of rates in the market and the need to track such policies. Ordinarily, these concerns can be sufficiently addressed by technology.
How the Law Sees NAICOM
The National Insurance Commission Decree No. 1 of 1997, (although needing massive amendments) set out the functions of the agency thus; “the principal object of the Commission shall be to ensure the effective administration, supervision, regulation and control of insurance business in Nigeria.” And these comprise the following principal areas of its activities;
▪ “Establish standards for the conduct of insurance business in Nigeria;
▪ approve rates of insurance premiums to be paid in respect of all classes of insurance business;
▪ approve rates of commissions to be paid in respect of all classes of insurance business;
▪ ensure adequate protection of strategic Government assets and other properties;
▪ regulate transactions between insurers and reinsurers in Nigeria and those outside Nigeria;
▪ act as adviser to the Federal Government on all insurance-related matters;
▪ approve standards, conditions and warranties applicable to all classes of insurance business;
▪ protect insurance policyholders and beneficiaries and third parties to insurance contracts;
And then, “carry out such other activities connected or incidental to its other functions under this Decree.”
Can it be said that decreeing a commercial rate for insurance business is incidental to the above-enumerated functions and powers of the Commission? Certainly not in this case! The law clearly uses the words – approve, establish and other such words appropriately to set off the types of incidental governance corollary to the regulatory roles of NAICOM. Simply, it means that an entity other than the Commission must approach it for approval. In this instance, the body of insurers or reinsurers should agree on rates based on the market experience and then go to the regulator for support.
Although the Motor Third Party Act of nearly a century requires a reworking to reflect the times and the environment of today, still it remains the law that spells out the commercial rate of 10% for comprehensive insurance. In the 40s and 50s of that period, the number of vehicles on the roads is very few and majorly new cars. The ‘tokunbo’ or used cars of today were strange to the law. However, with a higher volume of vehicles and a profitable portfolio, the rates ought to go down. At 5% or half the established legal benchmark, NAICOM seems to have vaulted the game at the expense of the players themselves instead of allowing itself to approve and supervise the outcomes of market agreements.
Motor as compulsory insurance
The area reserved for NAICOM, even with input from the industry practitioners, to set rates is compulsory insurance and motor among such. Based on the accident experiences in the country and increasing third-party claims on motors, the regulator had rightly increased the rates. But it went overboard to fix commercial rates that are dependent on individual underwriting company’s portfolio mix and experience as well as overall market experience which are both historical and present. Where a negative market experience supersedes that of an individual company’s experience, a possible rate increase is agreed upon and the regulator is approached for approval.
It should have been the place of NAICOM to bring more vehicles into the net through the enforcement of compulsory insurance as the agency of government empowered to carry out such activity. Instead, it prefers to pass the financial burden to individuals and corporates whose vehicles are already insured.
Expectedly the revolt against the hike in commercial rates portends to be phenomenal. The Q1 industry report which is being awaited will prove if the right decisions had been taken in this respect.
Insurance Profitability and Motor
According to NAICOM’s insurance industry Q4, 2022 performance report, “the market recorded 47.2% net loss ratio during the period under review, suggestive of a workable, cost-effective and profitable business in the industry. This is mostly attributable to the Life business sustaining its positive course at 46.5% net loss ratio in the current period while the Non-Life portfolio recorded about 48.1% during the same period”.
“Motor Insurance continued its lead as the highest retained portfolio with a retention ratio of about ninety-four per cent (93.5%) also a point higher than its standing in the prior quarter”’, the report noted. Although Motor Insurance at 14.9% premium output of the total last quarter result, lagged behind fire and marine and aviation class, it still posted overall best in terms of portfolio profitability in the non-life category.
Undoubtedly, both NAICOM and underwriters need to keep a close watch on the motor business with a view to identifying the fleets that mostly account for the large claims payout and deal with it at the commercial level and not at the wider market level. The ripple effect is the price resistance that companies and individual motor policyholders have demonstrated.
During the last quarter of 2022, motor insurance led in claims settlement which the regulator attributed to consumer awareness and market expansion. Increased claims pressure arising from awareness should not be the basis for increasing rates. Rather, it should serve as a brand-building and consolidation tool for the industry and subsequently help to bring the uninsured to the table.
A Step at a Time
In order to stem the tide of growing resentment by a larger swathe of motor policyholders, NAICOM may consider convening an industrywide meeting to discuss and agree on a minimum base price for motor and other rates that are considered uneconomic for the market survival. Starting at 3% would be ideal for individual car policies while fleets may vary at between 2.5% and 3.5% depending on the claims experience of each underwriter. Competition often enforces a rating that is premium income-based rather than a mix of claims experience and portfolio premium mix.
The fact that many underwriters were taken unawares or a confirmation that there was no concrete agreement between insurers and NAICOM before the new rates became effective, is indicated by the many variants of 3rd party and flexible comprehensive insurance being churned out by insurers and the regulatory approval for them. If the regulator could bend over backwards to accommodate these hasty measures that have the potential to suck the motor business the more, in conjunction with players, it could have taken a step time – devise a strategy to enforce motor insurance compliance, agree with insurers on small steps to curb anti-market rates, agree 50% or so increase on 3rd party and then adjust the commercial rates, if necessary, to the minimum proposed here.
Moreover, when all the steps have been taken, a robust and efficient communication strategy would then be deployed to win the consumers’ confidence in the plan through a cost-and-benefit rationalization campaign. The value added to the price increase ought to be communicated unambiguously.