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Tuesday, March 28, 2023

Leadway Assurance’s Capital Enough to Pay Claims as Solvency Ratio hits 960%

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Leadway Assurance Company Limited, the largest insurer by assets in Africa’s largest economy has enough capital to pay off claims even in difficult business circumstances.

The company said its solvency ratio, a gauge of financial strength, stood at 960 percent as at December 2021, albeit it was slightly lower than 2020’s 978 percent.

There has been marked improvement in the capital of Leadway in the past 3 years as the ratio was 328 percent in 2016 and 404 percent in 2018 and 439 percent in 2019.

Solvency II rules dictate the amount of capital an insurer must hold to reduce the risk of insolvency. The lower the ratio, the greater the chances of a company defaulting on its obligations.

The solvency margin under section 24 (2) IA (in pari materia with Para. 2.14, NAICOM Prudential Guidelines for Insurers and Reinsurers 2015), shall not be less than 15% of the gross premium income less reinsurance premiums paid out during the year under review or the minimum paid-up capital whichever is greater.

Analysis of the books of Leadway Assurance shows 15 percent of net premium income of N47.08 billion, which is N7.06 billion, is higher than the N5 billion minimum paid up capital.

It has the capacity to retain risk and has the capacity to manage the risk associated with writing new policies.

A strong solvency ratio means the insurer has sufficient cash-flow to pay dividend to shareholders and fund acquisition plans.

It is important to note that consistent profit and premium growth through the introduction of innovative products and income from fixed income securities are the major drivers of solvency ratio even amid a tough and unpredictable macroeconomic environment.

A lot of insurers with weak capital were not able to reward their owners from distributable profit and that is why their share prices continue to trade below N0.50 f0r so many years as investors’ apathy towards the sector heightens.

There are indications that the monetary policy rate by the central bank to tame inflation will add impetus to Leadway Assurance’s investment income which will bolster profitability and further strengthen the balance sheet.

Regulators across the globe put a keen eye on the financial stability of companies so as to avert bankruptcy and which is why they impose a ceiling on the amount that financial institutions pay as dividend from distributable profit.

The National Insurance Commission (NAICOM), the body that regulates insurance business in Nigeria, had hiked the minimum capital of sector players with a view to shore up their capital and make them more attractive to investors.

Life insurers are expected to raise minimum paid-up capital from ₦2 billion to ₦8 billion; general underwriters from ₦3 billion to ₦10 billion; while composite and reinsurance companies have new minimum paid-up share capital requirements of ₦18 billion and ₦20 billion, up from ₦5 billion and ₦10 billion respectively.

The regulator exempted takaful and microinsurance companies from the recapitalisation exercise.

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