Fidelity Gurarantee: 'Insurers are Just Waking Up'
As the disagreement between banks and insurers over the premium rate for fidelity guarantee insurance drags on, Mr. Don Agbo, Managing Director of United Trust Insurance Company Limited, says that insurers have just woken from slumber. He spoke with Nnamdi Duru.
Given the number of building that fall within this classification, do you think the industry has the capacity to write this risk?
The property liability risk cover on public buildings and other entertainment centres the interest of goverment in enforcing insurance for all these is very important and I think in recent times we have witnessed collapse of buildings under construction and may be multi-tenanted buildings collapsing. The risk that goverment had to contain on them, the death tolls that usually come out of them and loss of properties or damage to properties. So I think it is an important area of interest to the insurance industry, it is a welcome development, because ordinarily any prudent men should have known that it is important that he gets his liabilities secured by way of insurance arrangement in such area. So it is a beautiful development and the insurance industry is up to the task, I do not see any enormous risk that will go beyond the capacity of the local market for that kind of risk.
Presently how is the industry going about sensitising property owners and users on the important provisions?
Well one of the ways is by conserted effort to continue to publish, the requirement of the Act in the media both electronic and print. The media can be used for the public enlightenment campaigns in this area because it is worth the while if the public is made aware of it . When the business starts coming in for the industry will benefit from it and the public will also benefit from it, in the sense that it will provide them the necessary succour in times of disaster and I have seen some publications on it either sponsored by NAICOM or NIA. I think, from this two angles the publications or advertisements would really be invigorated. Because NIA, which is the umbrella for registered insurance companies in Nigeria will be interested in advertising it, its members will benefit from it in terms of insurance cover and NAICOM as the government organ to give the backing it requires will also do that on behalf of the country at least to enlighten the public that government has directed that they should do it. I think from this two angles and coupled with individual marketing efforts from individual insurers, of course products will now be developed along this line to go to the market and by the time you get these prospective customers in this areas, by the time you show them what the Act provided and that it is compulsory. It is another way of educating the public, creating awareness of the Act.
How do you see Nigerians keeping this law?
One thing I know Nigerians for is that they love to obey the law. So it is not a question of do you like it or not, once it is in the Act, it has become a compulsory type of insurance, just like the motor insurance. The third party aspect of motor insurance which came out just as this one is coming out today, every Nigerian has a third party insurance cover probably because police is there to check whether you have it or not but that of building, you may not have police to check. Along the line, if government sees that the law is not being obeyed, it can find a way of enforcing it. The insurance industry can also initiate moves to ensure that the enforcement is there because the purpose is to create funds to take care of any disaster that might come out of the buildings that are being used for public purposes
Still on Nigerian character, don't you forsee faking of such insurance certificates as in the case of faking third party motor insurrance certificates?
Well, I think why fake insurance papers were manipulated in the case of third party motor insurance is because people wanted to evade police arrests. But this one, I don't think police will come and check whether you have insured your building and show the certificate. It is purely going to be on what they have said and if anything happens and you don't have it, you might be convicted for not complying with the law. The buildings that is multi-tenanted and used by the public, the law orderd must be insured against third party liabilities that will arise from occupants of the building and if you do not insure it, the building collapses, kills some people and you are not able to pay the liabilities arising or in the course of collapsing damages other peoples properties and those people make a claim and you don't have it. it is an offense for you not to have obeyed the law and from there you can be taken up.
Who pay the premium for this class of insurance and how affordable is it?
It is quite simple and important that properties given out for public use, you have the responsibility of guarantee the safety of tenants and visitors to the building by ensuring that the building remains in a habitable state and all that. You should take an insurance policy which the premium is quite insignificant, it provides cover against any third party liability that may arise out of the collapse of the building and otherwise. I think any prudent and reasonable man will be interested in taking out this insurance which premium is quite insignificant compared to the kind of cover provided. Liability insurance generally, the premium charged on them is very low, by the time somebody is providing you N1 million cover, you will be surprised that your premium may not be up to N2,000. This is the reason for property owners to buy building insurance
Has your company developed any product along this line?
We are working on it but it is not yet out. We are working on it to ensure that we take advantage of the market this will offer.
At full implementation, what effect will this business have on the contribution of the insurance industry to the nation's GDP?
It will go a long way to increase the GDP and the contribution of the industry to the productivity of the nation because you can count a million and one building that is being put to public use as it is defined. As per the definition, it includes buildings given out to tenants, so to that extent there is a lot of benefits to be build up from this aspect of business.
Capitalisation of banks has just ben raised, insurers fear a spill over effect, what is your view on this?
If we look at it that because banks are now asked to increase their capital base and one believes that insurance companies too will also be asked to do the same. We should understand that insurance companies have just finished their recapitalisation, it just ended this February. This August and banks are also given their own mandate to raise their capital base.
So I don't think in a matter of six months or one year, insurance companies might be disturbed to increase their capital base. I think the basis for asking for increase in capital base should stem from deficiencies in operations and not just on the face value or because banks have just increased their capital base so insurance companies should increase theirs again.
Probably, why banks have been asked to increase their capital base is because of failures, which we have been experiencing in the market. Before you know it, one bank is not able to pay its customers for all the money they have deposited with it and it is like going from one bank to the other and it is deroding the confidence the public has in the banking sector and that will affect the industry seriously. It will affect the economy seriously too. I think that is why they are trying to beef up the capital base of banks to as much as N25 billion.
The purpose again might be that no single individual will have that kind of monopoly, that kind of ownership powers in any bank. At N25 billion, definitely people must come together, investors must come together and put in their money to be able raise that kind of capital. it will not be one family or one man and that will reduce the influence of one man coming to the bank to pull away the money and the bank goes bankrupt in a few months or thereabout to the extent that depositors money will be at risk. People will then be clamouring for government intervention, asking it to pay for the money that was deposited with privately owned banks that has gone under. These I think are the reasons why these things were done.
As long as you cannot see such reasons also being ascribed to the operations of insurance companies, it might not just go the way people are thinking that because banks capital base is increased, insurance companies capitalisation would also be increased.
Besides, insurance operations are quite different from that of banks. While banks receive deposits from public and ensure the safety of the money and that depositors get their money on demand, insurance companies operate in a different manner and they have a lot of other safeguards apart from the physical cash, they have something called reinsurance treaties.
I think where the law should emphasis so much should be on whether insurance companies have perfect reinsurance arrangement and show evidence of that to the National Insurance Commission (NAICOM) or government supervisory agencies. Once this has been done, it is enough.
There is no amount of capital that the insurance company will have that it can beat its chest and say that it can carry all the risks that comes to it alone. Even if the capital base is N25 billion, that does not mean you can carry all the risk that is coming to you. For example, if NNPC insures its oil wells with a company the value of this runs into millions of Dollars. Even with N25 billion capital, what is going to guarantee the ability of the company to pay claims if loss occurs. It is the reinsurance arrangement, it transcends the Nigerian market, an operator goes to international reinsurance companies and reinsure with them. The risks are such that you distribute them and when loss occurs, the impact of this will not be too much on the economy of the nation. So that is how insurance operates and banks does not operate that way.
Banking involves what you see physically because the people are depositing physical cash and what you want to see in the bank is th physical cash deposited and the cas the bank itself has. The assets must be higher than the liability but that of insurance companies is not so. What is needed is the reinsurance arrangement, if you are providing cover for an item valued at N100 million that your reinsurance arrangement has provided you buffer for say N200 million.
So any risk you induce within the N200 million, this reinsurance has already provided, even if your capital base is only N300 million you can provide a buffer for N1 billion. It is the reinsurance cover that really matters becasue you as an insurer you take one line of the risk only. what you are retaining in your book is just say N100 million or N50 million out of the N1 billion insured. If you are retaining N50 million, the balance of the N1 billion is going to reinsurance so what the government should concern itself more with is do you have enough reinsurance capacity to carry the risk which you have undertaken to underwrite and not the capital aspect. The capital aspect is okay to at least give managment the easy access to the funds, in terms of settlement of claims.
And taking care of the oprational expenses and getting good offices working capital and all that but is not that there is an amount of capital that will ever be provided that will be enough to cover all the risk that one would venture into, the reinsurance is the major thing.
What is your view on the disagreement between insurers and banks over fidelity guarantee cover rate, has it been resolved?
It is just that insurance companies decided to wake up, it is what they were supposed to have done years back. If you read the newspapers, you will see the volume of fraud going on in the banking industry but what you can always hear is the global fraud volume, it is difficult to hear that it happened in a particular bank because individual banks want to play it down. They don't want the public to hear that a particular bank was defrauded of so much million Naira.
But to insurance companies, the letters come to us about the problem of claims on fidelity guarantee. We that have seen the level of claims being made on insurance, we have looked at the kind of premium we have received say in the last five years and the kind of claims we have paid for the past five years and we have seen that if the risk is not well assessed and adequate premium paid, the fidelity guarantee aspect of our business especially the ones provided banks will be eating up all other premium inflow from all other classes of insurance.
With the backing of the Nigerian Insurer's Association (NIA), we want premium to be calculated based on turnover of a bank, on its annual fugures based on the financial statement at the end of every year. That is how the premium is computed and banks now know that underwriters have known how to gain enough premium from them and they are not happy but if you look at the Central bank of Nigeria (CBN) report on total fraudulent claims from the banks, it is fidelity gurarantee loses which banks have suffered from their various fraudulent employees. You will see that even the rate being charged by underwriters is a far cry from what is supposed to be an adequate contribution for what they are losing because these banks will all pretend that they are not being defrauded, they don't want public seeing them as having problems. If today public hears that a particular bank was defrauded some millions, and hear same thing tomorrow, they will start losing confidence banking with that bank because they will not be too sure whether you can pay back their deposit if the fraud continues.
What are the contemporary issues in the insurance industry today?
Well, the contemporary issue I want to draw attention to is the rating problem. In the developed countries which is what obtained back in the insurance industry say in the 80's backwards, we had a sort of regime of rate stability but today rate is no longer stable. Rate varies from one insurance company to the other and we call it competition or foces of the market. It is to the detriment of the whole industry, I believe as we continue to grow up, as we continue to mature, the maturity should come in areas of all insurance industry coming together and agreeing that yes, this rate is uneconomical and we should take it this way and nobody should go out and try to sell his colleagues. When we reach an agreement, let us all stand by it especially on rate so that the industry will not collapse overnight. If we continue to underwrite risk at such rates that are quite ridiculous and uneconomical, when the claims starts coming, we might not be able to to meet them.
Area of note is the motor insurance business, even government on its own have given us the rate. Having given us this rate, it has been proved that many insurance companies are granting various unprintable discounts to the extent that they sometimes grant as much as 25 percent of what government approved. If a report comes in that a car has been stolen and it is valued at N10 million, how much has the company you collected as premium? May be N200,000 how many N200,000 will you collect to pay N10 million? What is happening in the industry that if you say no you will not underwrite it, you will discover that another insurance company will underwrite it. So everybody in a bid to remain in the market in other to be able to generate any kind of income will continue to take it as others are taking it, but the after effect, is that the whole industry may collapse as a result of this mad system, in developed countries, when they say this is our rate, every body stands by that rate nobody goes below it, because if you shop from insurer A, B or C it is the same rate, you must take it from one of them. Let us not go for that kind of rate cutting, once it is insured in the industry let us take it, the insurance industry has benefitted and not that it must be my own company that must insure it, even at such ridiculous prices. So our maturity should go toward this area, so that this industry can be able to enjoy the confidence of the public so that when there is claims nobody will have cause to delay settlement at all but when there have been a lot of rate cutting, when you look at the premium you have collected and the kind of claim coming on it, you are bound to think otherwise before you pay such claim. You would want to investigate and extra investigate and the customer is being affected and this afects the whole industry. They call it competition, when shall this competition stop? It is just one of the areas I want to advice my colleague that the earlier we start maturing towards it, the better for the industry.
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