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Brokerage Firms Ownership: Naicom Reins in Insurance Chiefs
- By Rosemary Onuoha
- Published Wednesday 28th 2009
- InsuranceWorld
- Unrated
National Insurance Commission(Naicom) has directed that chief executives of underwriting firms, henceforth, not own or have shares in brokerage outfits so as to curtail the trend of huge outstanding premiums. Stakeholders are watching to see if this move will yeild resutts ROSEMARY ONUOHA reports
OUTSTANDING premiums have always been an issue between underwriters and brokers in the insurance industry. Prior to now, the trend is for underwriters to declare huge premium income at the close of every financial year only for the figures to turn out to be mere paper work as there is no liquidity backing up such figures.
Worried by these turn of events, the National Insurance Commission (Naicom) gave a directive that underwriters must make provision for outstanding premiums; in essence no more classifying them as profit as is hitherto the case; as well as directed that no chief executive of an underwriting firm must own or have shares in a broking firm.
The response
The mandate to make provision for outstanding premium was adhered to and for the first time underwriters suffered massive losses which was reflected in the 2008 financial results of most insurance companies.
However, stakeholders believe that the directive given to chief executives of underwriting firms to desist from owning or having shares in broking firms is one hurdle that may be difficult to overtake. This is because in practice, insurance premiums are held for more than six months. Sometimes, the premiums are not paid at all where there are no claims during the contract period. But in truth, at times, the underwriting company may do nothing for fear of being blacklisted by the brokers and the account taken away from it, or in some other cases the premium is deliberately withheld when the boss of the underwriting firm has shares or owns the brokerage outfit.
The threat
Dumbfounded by the magnitude of decay in the banking industry that led to the removal of eight banks’ managing directors, stakeholders in the insurance industry, which is referred to as the weaker cousins of the banks, mounted pressures on Naicom, the industry regulator, to pounce on insurance operators who churn out doctored returns that do not reflect their companies’ true financials.
Naicom responded by sending warning signals to that effect, threatening to sanction any defaulting company.
In a memo to chieftains of underwriting, brokerage and loss adjusting firms, the commission said it was ready to take punitive measures that may include removal of the managements, cancellation of registration and prosecution of the chief executives of companies involved in unethical practices in the conduct of insurance business.
The offence
Naicom has warned that under the current reforms taking place in the insurance industry, it would no longer condone a situation where the managing director of an underwriting company has on the sideline a private broking firm as well as a loss adjusting firm.
“This is unethical and it should not be encouraged. There are cases of chief executive of an underwriting firm having a broking firm, giving businesses to the company where he is CEO, yet there are issues of outstanding premiums,.”
Sunday Thomas, Naicom director, in charge of inspection said, adding that in most cases, the success of the managing director’s privately owned companies depend largely on at least 80 per cent of his time and energy. He said this was clearly a case of conflict of interest and divided loyalty and it is unethical.
Henceforth, he said, any managing director that must own a broking firm or loss adjusting firm would be compelled to disclose this to the board of directors of the company where he is CEO so that if there are issues of outstanding premiums arising from such broking firm, the board would be able to know the source of their problem.
He said this is a major source of unethical practice and should therefore not be encouraged.
The insurance regulatory authority is beaming its searchlight on some insider abuses which include rates that insurers use for pricing risks, the 30-day rule whereby brokers must pay premium collected from clients, outstanding premium/bad debt and payment of one per cent compulsory levy to the commission, among others.
For instance, in the case of outstanding premium/bad debts of up to three months and one year, the underwriting company must make allowance of between 25 per cent and 100 per cent in its book of accounts within the financial year. Also, it must be written off in the profit and loss account when the extent of loss has been determined.
The debate
It has been a long drawn debate on who is guilty of un-remitted premiums. While the underwriters accuse the brokers of deliberately withholding premium, the brokers accuse underwriters of instigating cheap blackmail against them to cover up for their incompetences.
According to Chief Dede Ijere, president of the Nigerian Council of Registered Insurance Brokers (NCRIB), “I regret to observe that instead of taking advantage of the system of mutual cooperation, we have had cases of certain underwriters deliberately padding their books with false premium figures to deceive Naicom that the outstandings were actually collected but not remitted by our members. This practice is not only a cheap blackmail but disgusting and unacceptable.”
For Mr. Eddie Efekoha, managing director of Consolidated Hallmark Insurance Plc, underwriters need to sit down and reconcile their books to determine who really is carrying out cheap blackmail against another as well as ascertain which companies is sound.
Naicom’s motive
Industry sources said the commission’s latest action may be intended to enthrone the law on payment of premium to insurers. Section 41 of the Insurance Act says: “Where an insurance business is transacted through an insurance broker, he shall, not later than 30 days of collecting the premium, pay to the insurer any premium collected by him.
“An insurance broker who contravenes this provision is guilty of an offence and liable on conviction to a fine of N10,000, in the first instance, N25,000 for a second offence, and N250,000 for a third offence, in addition to the certificate of the insurance broker being cancelled.”
The impact
According to experts, the guidelines on the provision for outstanding premium have impacted negatively on the profit of insurance companies, meaning that they have to return to the rule of ‘no premium no cover’ in the underwriting business. Also, it will restore discipline in the conduct of insurance business and boost the confidence of investors and customers in the industry.
Mrs. Laide Osijo, a council member of the NCRIB noted that preventing CEOs of underwriting firms from owning brokerage firms is a good step in the right direction because it will go a long way in curtailing most unethical practices prevalent in the industry today.
While accusing some underwriters of establishing broking firms just to siphon premium collected from clients, Osijo noted that Naicom’s move will help to expose who is actually defaulting in premium rendering whether it is the insurance broker or the underwriter.
But the question still remains: can Naicom wield the big stick of regulation on defaulters?
The way forward
Stakeholders are of the view that such critical times as this -when the financial sector is undergoing sanitisation, demands that Naicom must live up to its responsibilities.
Since the commission says that for insurance chiefs to own shares in brokerage outfits is unethical, the action should no longer be tolerated, hence Naicom must ensure that it has the necessary data and information on owners and shareholders of brokerage firms.
Naicom, according to expert, must demand and obtain full disclosures of transactions between the underwriters and brokers, displaying the premium rates as well as the time it was collected and remitted to the insurance company.
Naicom says it has appointed more inspectors and consultants in all classes of underwriting for the periodic return to monitor operations and evaluate compliance with guidelines, rules and regulations in order to enforce international best practice, as well as better corporate governance in the industry. According to experts, the commission must ensure that these people carry out their duties accurately.
OUTSTANDING premiums have always been an issue between underwriters and brokers in the insurance industry. Prior to now, the trend is for underwriters to declare huge premium income at the close of every financial year only for the figures to turn out to be mere paper work as there is no liquidity backing up such figures.
Worried by these turn of events, the National Insurance Commission (Naicom) gave a directive that underwriters must make provision for outstanding premiums; in essence no more classifying them as profit as is hitherto the case; as well as directed that no chief executive of an underwriting firm must own or have shares in a broking firm.
The response
The mandate to make provision for outstanding premium was adhered to and for the first time underwriters suffered massive losses which was reflected in the 2008 financial results of most insurance companies.
However, stakeholders believe that the directive given to chief executives of underwriting firms to desist from owning or having shares in broking firms is one hurdle that may be difficult to overtake. This is because in practice, insurance premiums are held for more than six months. Sometimes, the premiums are not paid at all where there are no claims during the contract period. But in truth, at times, the underwriting company may do nothing for fear of being blacklisted by the brokers and the account taken away from it, or in some other cases the premium is deliberately withheld when the boss of the underwriting firm has shares or owns the brokerage outfit.
The threat
Dumbfounded by the magnitude of decay in the banking industry that led to the removal of eight banks’ managing directors, stakeholders in the insurance industry, which is referred to as the weaker cousins of the banks, mounted pressures on Naicom, the industry regulator, to pounce on insurance operators who churn out doctored returns that do not reflect their companies’ true financials.
Naicom responded by sending warning signals to that effect, threatening to sanction any defaulting company.
In a memo to chieftains of underwriting, brokerage and loss adjusting firms, the commission said it was ready to take punitive measures that may include removal of the managements, cancellation of registration and prosecution of the chief executives of companies involved in unethical practices in the conduct of insurance business.
The offence
Naicom has warned that under the current reforms taking place in the insurance industry, it would no longer condone a situation where the managing director of an underwriting company has on the sideline a private broking firm as well as a loss adjusting firm.
“This is unethical and it should not be encouraged. There are cases of chief executive of an underwriting firm having a broking firm, giving businesses to the company where he is CEO, yet there are issues of outstanding premiums,.”
Sunday Thomas, Naicom director, in charge of inspection said, adding that in most cases, the success of the managing director’s privately owned companies depend largely on at least 80 per cent of his time and energy. He said this was clearly a case of conflict of interest and divided loyalty and it is unethical.
Henceforth, he said, any managing director that must own a broking firm or loss adjusting firm would be compelled to disclose this to the board of directors of the company where he is CEO so that if there are issues of outstanding premiums arising from such broking firm, the board would be able to know the source of their problem.
He said this is a major source of unethical practice and should therefore not be encouraged.
The insurance regulatory authority is beaming its searchlight on some insider abuses which include rates that insurers use for pricing risks, the 30-day rule whereby brokers must pay premium collected from clients, outstanding premium/bad debt and payment of one per cent compulsory levy to the commission, among others.
For instance, in the case of outstanding premium/bad debts of up to three months and one year, the underwriting company must make allowance of between 25 per cent and 100 per cent in its book of accounts within the financial year. Also, it must be written off in the profit and loss account when the extent of loss has been determined.
The debate
It has been a long drawn debate on who is guilty of un-remitted premiums. While the underwriters accuse the brokers of deliberately withholding premium, the brokers accuse underwriters of instigating cheap blackmail against them to cover up for their incompetences.
According to Chief Dede Ijere, president of the Nigerian Council of Registered Insurance Brokers (NCRIB), “I regret to observe that instead of taking advantage of the system of mutual cooperation, we have had cases of certain underwriters deliberately padding their books with false premium figures to deceive Naicom that the outstandings were actually collected but not remitted by our members. This practice is not only a cheap blackmail but disgusting and unacceptable.”
For Mr. Eddie Efekoha, managing director of Consolidated Hallmark Insurance Plc, underwriters need to sit down and reconcile their books to determine who really is carrying out cheap blackmail against another as well as ascertain which companies is sound.
Naicom’s motive
Industry sources said the commission’s latest action may be intended to enthrone the law on payment of premium to insurers. Section 41 of the Insurance Act says: “Where an insurance business is transacted through an insurance broker, he shall, not later than 30 days of collecting the premium, pay to the insurer any premium collected by him.
“An insurance broker who contravenes this provision is guilty of an offence and liable on conviction to a fine of N10,000, in the first instance, N25,000 for a second offence, and N250,000 for a third offence, in addition to the certificate of the insurance broker being cancelled.”
The impact
According to experts, the guidelines on the provision for outstanding premium have impacted negatively on the profit of insurance companies, meaning that they have to return to the rule of ‘no premium no cover’ in the underwriting business. Also, it will restore discipline in the conduct of insurance business and boost the confidence of investors and customers in the industry.
Mrs. Laide Osijo, a council member of the NCRIB noted that preventing CEOs of underwriting firms from owning brokerage firms is a good step in the right direction because it will go a long way in curtailing most unethical practices prevalent in the industry today.
While accusing some underwriters of establishing broking firms just to siphon premium collected from clients, Osijo noted that Naicom’s move will help to expose who is actually defaulting in premium rendering whether it is the insurance broker or the underwriter.
But the question still remains: can Naicom wield the big stick of regulation on defaulters?
The way forward
Stakeholders are of the view that such critical times as this -when the financial sector is undergoing sanitisation, demands that Naicom must live up to its responsibilities.
Since the commission says that for insurance chiefs to own shares in brokerage outfits is unethical, the action should no longer be tolerated, hence Naicom must ensure that it has the necessary data and information on owners and shareholders of brokerage firms.
Naicom, according to expert, must demand and obtain full disclosures of transactions between the underwriters and brokers, displaying the premium rates as well as the time it was collected and remitted to the insurance company.
Naicom says it has appointed more inspectors and consultants in all classes of underwriting for the periodic return to monitor operations and evaluate compliance with guidelines, rules and regulations in order to enforce international best practice, as well as better corporate governance in the industry. According to experts, the commission must ensure that these people carry out their duties accurately.
