Finance

At five months to the deadline for capital increase, not much fund has been raised by insurance firms of the CIMA

Wednesday, 09 January 2019 18:39
At five months to the deadline for capital increase, not much fund has been raised by insurance firms of the CIMA

(Ecofin Agency) - At just months to May 2019, the deadline for companies of the Inter-African Conference of the Insurance Markets (CIMA) to boost their equity, few of those firms are on a good way for that compliance, Ecofin Agency learnt from an official presentation.

An ambitious reform with great expectations

Gathered in Yaoundé (Cameroon) in April 2016, the ministerial council in charge of the insurance sector in the fourteen member countries of the CIMA decided that limited liability insurance companies should increase their share capital from CFA1 billion to CFA5 billion and mutual companies should increase this capital from CFA8 million to CFA3 billion.  

The limited liability companies should first increase their capital to CFA3 billion by May 31, 2019, while mutual companies should increase it to CFA2 billion within the stated deadline. They were also required to have additional equity over or equal to 80% of the share capital.

This was to boost the financial strength of insurance companies, reduce the bankruptcy possibilities and encourage mergers in the insurance sector. The council also required the increase to be made in cash and via the capitalization of reserves in some cases where the increase is strictly monitored.

An implementation far from the requirements  

A report on the implementation of the prescribed measures was presented in July 2018. It appears that there were not many improvements the way the CIMA expected. At the time, there was still 180 insurance companies, showing that fewer mergers have been realized.

In addition, out of the 180 firms, only 87 submitted reports to the CIMA. Out of those 87, twenty had a minimum capital of CFA3 billion as the CIMA was expecting at that period. Still, out of those twenty, only 14 were meeting the level of shared equity.  

Some recapitalization efforts have been noticed but since the enforcement of that regulation in 2016, only CFA38 billion has been raised by 29 firms. Out of those 29, barely 16 were compliant with the requirement of 80% additional equity.

According to the CIMA, this is due to two main facts. It indicates that first, in some member countries, it is hard to find local investors able to subscribe to a capital increase as local regulations require. Secondly, investors are discouraged by the low return equity in the sector.

CIMA says that it has taken note of the second point and that this would encourage mergers but, things could go the other way.  

Experts already warned of the difficulties in the implementation of such measure

In an analysis of that reform made in October 2016,  Finactu, a group of financial council specialized in African investments, had warned of the risks in the implementation of these reforms. The experts informed that in view of the risks in the insurance sector, the profit margin for investors would be 15% of the capital or CFA750 million. However, in a sector where net margins represent 8% (non-life) and 4% (life), minimum yearly turnover should be CFA9.4 billion for non-life and CFA18.8 billion for life insurance.

They concluded that 32 insurers (deemed too small) would disappear. However, the challenges could be more important. At the time the analysis was being written, CFA415 billion capital increase was expected. The current capital increase represents less than 10% of this amount.

Taking Nigeria (where the regulator also required a capital increase) CIMA promised to punish firms that would not comply with the regulation. However, in Nigeria, this option has been discarded and firms are breathing once again.

The next meetings of the ministerial council of the CIMA  will be decisive for the insurance sector in the member countries of that conference. In many of them, the economy worsened and the business environment is still not yet favorable for new investments, in relatively risky sectors particularly.

Idriss Linge



 
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