The Impact Of The Prudential Guidelines In The Insurance Industry

THE IMPACT OF THE PRUDENTIAL GUIDELINES IN THE INSURANCE INDUSTRY

The ultimate justification for prudential guidelines is the failure of the market not only to reflect a depository’s risk exposure but more importantly to control such exposure.

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The objectives of prudential regulations are therefore to protect the interest of the insured (depositors) and macro economic interest of the financial system.

The “Public interest” theory on regulation, for instance, identities off-setting of market failures as one major role regulation.  Extending the reasoning further, the efficiency consideration comes up as another justification for prudential regulations.

The change in Nigeria’s environment occasioned by the economy’s new philosophy of deregulation and the introduction of a deposit insurance scheme makes the need for such guidelines imperative.

Deregulation makes the industry to be more competitive and therefore there is the likelihood for depositories to get into.  More risky and unfamiliar undertakings.

Also, the operation of the insurance scheme has the potential to reduce market discipline from depositors.  If experiences from the other countries are any things to go by.

Also, the primary purpose traditionally of insurance is to spread the financial losses of insured members over the whole of the insuring uncertainty by compensating the unfortunate from the found set up from the contribution of all members.

Premium charged by the insurance company is its primary sources of making income, therefore the insurance companies rely on premium for its substance.

However, the financial compensation promised by the insurer is what is caused the subject matter of the contract.

Insurance contract is subject to the general principles of Nigerian law of contract as in any other commercial activity.  It these principles that makes for its validity.  Not only does it affect insurance but it operates ever other commercial espect of life.

2.1    OBJECTIVE OF INSURANCE REGULATIONS

Before going into a surgery of the insurance decree, it is important to discuss in brief the reason for the insurance regulation.

There are two principal types of regulation:  Viz. Self regulation and State or government regulation.

As the name implies examples of body that involved in the former are the Nigeria Insurance Association (NIA), Corporation of Insurance Brokers (CIB) and the corporation of loss Adjusters respectively.  However one common features of these bodies is that membership though advisable is not all practitioners are members.  Undoubtedly the more effective form of regulations are binding on all members and sanctions are provided by law appropriately.

Indeed Bickel Hampt in 1979 stated the major dimension as follows:-

The general purpose of insurance regulations is to protect the public against insolvency or unfair treatment by insurance.

It has also been suggested that in rotation to insurance business regulation is necessary to protect the Public against incompetent or fraudulent insurance.

Further more by the basic nature of insurance transaction a strict fiduciary duty is imposed on the insures for the obvious reason that they are the technocrat’s with the know how the trade.

The state sees it as a duty to protect the harmless insured and in fact innocent party whose interest are likely to be at stake against the incompetence or possible fraud by insurers, brokers and agents.

2.2    THE INSURANCE DECREE OF 1976

This decree otherwise known as decree No 59 of 1976 is undoubtedly the most for once it was believed that the decree would bring sanity into the practice of insurance.

However, with time it has now become manifestly clear that some of the provision are infact inadequate to satisfy the aspiration of the decree.

2.3    INSURANCE DECREE NO 58 OF 1991

This decree was prorogated on 27th December 1991.  The provision for this decree are aimed at:

1. To protect the good image of the industry.
2. Improve performance
3. To ensure discipline
4. To promote the solvency of insurance companies.
5. To enhance the security offered to policy holders being complemented by some of the provisions of the decrees setting in Nigeria insurance, the national insurance corporation and the Nigeria insurance Decree No 58 of 1991.

2.4    INSURANCE ASSOCIATION

Insurance association comprise organization of professionals, insurers and individuals involved in insurance business.  They include”

• The Chartered Insurance Institute of Nigeria (C.I.I.N)
• The Nigerian Corporation of Insurance Brokers (NCIB)
• Institute of Loss Adjusters of Nigeria (ILAN)
• Faculty of Risk Management (FARIM)
• The Nigerian Actuarial Society
• The Nigeria Insurance Law Association of Nigeria (PRAN).

Chartered Insurance Institute of Nigerian

In accordance with the memorandum of Association, the CIIN exercises professional supervision and control over the conduct and development of insurance education and research in Nigeria.  The institute has a code of ethics binding on all insurance practitioners in Nigeria.

It is the education aim of the Nigerian Insurance Market.

The Nigerian Insurance Association

This is an association of registered insurance companies in Nigeria.

NIA was established in 1971 with the following objectives;

1. The protection, promotion and advancement of common interest of insurers transacting any class of insurance business in the Federal Republic of Nigerian
2. The taking of such concerted measure as may within the limits set out in (a) above be deemed expedient where the business transacted by members of the association may be affected by the action or proposed action of the government or any other activity.
3. The guidance and assistance of any member of the association in complying with statutory regulations and lying down minimum standards of ethics for members.

The association functions through the following six

technical committees.  They are:

1. Accident officers committee
2. Accounting Technical Committee.

• Fine office committee.

F       To encourage self regulation

HIGH LIGHTS OF THE DECREE

• No one person can own more than 25% of insurance company.
• Technical department must be headed by qualified persons and non-life companies must transact not less three classes of insurance business.
• Director of insurance approves registration of insurance companies, while that of reinsurance companies must be approved by minister of finance.
• Prescribed minimum paid-up share capital are as follows:-

Life insurance = N5m

Non life insurance business = N5m

Reinsurance business = 10 time the amount.

Stipulated for direct insurance business.

• All insurance Policies must be delivered to the insured not later than 30 days after payment of premium.
• Loss adjusters are required to make statutory deposits.
• Minimum professional indemnity cover required of brokers has been increased from N50,000 to N500,00.
• Broker must remit premium to insurer immediately.
• Section 37 makes provision for “No premium No cover” The Nigerian Insurance decree 58 which repeated that of 1976 is now operational.

But the legal frame work required to provide guidelines to investors in this sector is yet to be released.

This might be responsible for the non registration of new insurance and reinsurance companies in Nigeria since 1991 when the number of registered insurance companies was 127 and 5 for reinsurance companies.

In November 1992, the Federal Military Government established the National Insurance supervisory Board (NISB) under decree 62 of 1992.

It is to take over the new function of the new defunct insurance department of the federal ministry of finance.

Among other things, the NISB is the supervise the business of insurance in the country.

Consider its approve rate of insurance premium as well as determine to be applicable to all classes of insurance business.

The Board is made up of:

1. Chairman
2. Commissioner of insurance
3. Seven members representing interest groups.

The responsibility the board are:

Iv       Legal committee

V       Life office committee

Vi      marine offices committee

The Nigerian Corporation of Insurance Brokers

This is an association of registered insurance brokers in Nigeria.

It was founded in 1962 with the following objectives:

1. To establish and maintain a central organisation for insurance brokers, and generally to do an such things as from time to time that may be considered calculated to elevate their status and safeguard and advance their interests and procure their efficiency and proper professional conduct, with a view to ensuring for the community the existence of a class of insurance brokers who are relied upon as being trust worthy and dully qualified to perform their responsible duties.

Institute of Los Adjusters of Nigeria

This is an association of loss adjusters registered in Nigeria.

It is one of the four aims of the insurance whose members provide the necessary technical services to the insurance market in the areas of claims investigations, pre-insurance risk surveys and valuations.  The institute was established in July 1981 with the following aims and objectives:

1. To encourage activities that will ensure the general welfare and public well being of insurance adjusters in Nigeria.
2. To take necessary action for the advancement of education in the field of loss adjusting.
3. These aim and objectives are to be pursued by the establishment and maintenance of institution, schools and recreational centers.

Faculty of Risk Management (FARIM)

The faculty of risk management was established in 1988 as a nation as body devoted to the promotion of risk management consciousness and thereby loss prevention, and the preservation of assets.  The aims and objectives of the association include:

1. To take reasonable steps aimed at inviting attention to the problems of risk generally and the adverse consequences of poor arrangement of risks to sectors of the national economy.
2. To take all necessary steps aimed at promoting the concept of Risk management in all its ramification;
3. To assist government by providing the necessary professional input in the formulation of polices and regulations in the areas of risk management.
4. To disseminate through the organisation of conferences, seminars, workshops and the publication of books, journals and newsletters;

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