Cabinet’s recently approved changes to the Namibia Reinsurance Corporation Act, the per policy cession in terms of Section 39(1-3) of the Act, will require all insurance companies to cede a portion of every insurance policy issued – either in or outside to the country – to the Namibia National Reinsurance Corporation (NamibRE).
This requirement will include companies who in the past did not cede business to the corporation. Also, the cession per policy will apply to all registered insurance companies and all issued policies. However, NamibRE’s managing director, Patty Karuaihe-Martin, noted that a cession of the premium of every policy to the corporation requires that the corporation in turn pays the same percentage of the claims and acquisition cost of each policy back to the insurer. In addition, the corporation will implement the payment of over-rider commission to the insurer.
“In order to limit the impact on the most vulnerable consumers, the corporation and industry will agree on the definition of and exclusion from the cession of micro-insurance,” said Karuaihe-Martin. Micro-insurance is defined as very low cover and low cost products developed specifically for the low-income market. Karuaihe-Martin added that the corporation aims to limit the impact on the consumer by virtue of its contribution to the claims and acquisition cost and the payment of over-rider commission.
NamibRE was established by statute in terms of Section 2 of the Namibia National Reinsurance Corporation Act, 1998 and started formal operations in 2001. The corporation was established to create, develop and sustain local retention capacity in insurance and reinsurance business and to minimise the placement of insurance and reinsurance business outside the country, thereby limiting the outflow of capital from Namibia.
Karuaihe-Martin went on to explain that the corporation established three pillars for the cession of insurance and reinsurance business, with each of these pillars having a specific purpose in the overall process. Pillar 1 (Section 39 (1-3) of the Act) establishes the cession of a portion of each insurance policy issued in or outside the country for Namibian risks to be ceded to the corporation.
Pillar 1 allows for the building of the corporation’s balance sheet without further capital contribution by government. Pillar 2 (Section 39 (4-6)) establishes the cession of a portion of each reinsurance contact to the corporation. The purpose of Pillar 2 is to limit the flow of insurance capital out of the country, estimated to have reached N$1.3 billion in 2015.
Pillar 2 (Section 40) gives the corporation a right of refusal to take on reinsurance business over and above the compulsory cession of reinsurance in terms of Section 39 (4-6), as the balance sheet of the corporation grows.
Based on an initial agreement with the industry, the per policy cession in terms of Pillar 1 was postponed a number of times, and eventually in 2003, by way of Government Notice 4 of 2 January 2, 2003 set at zero percent. The cession per reinsurance contract as intended in Section 39 (4) and the right of refusal in terms of Section 40 Act will remain intact.
“The effect hereof is that Pillar 1 of the Act was never implemented, but a hybrid model was implemented that enforced only the Pillar 2 and 3 cession, and is open to abuse due to ambiguity in the model.
“For the corporation, the effect was the removal of a critical pillar of the cession model, being the pillar that builds the balance sheet of the corporation without further funding required from government. The stronger the balance sheet of the corporation, the more it is able to retain capital in the country through the enforcement of the Pillar 2 and Pillar 3 cessions of reinsurance,” Karuaihe-Martin explained.
At the establishment of the corporation, in terms of Section 23 of the Act, government contributed N$20 million as share capital of the corporation. Since commencing operations, the corporation has not required additional capital from its shareholder. To date the corporation returned a total of N$73 million, which translates into a 266 percent return to the shareholder on the initial investment. The funds returned to the fiscus include the declaration of dividends and the payment of taxes, including income tax, value added taxation and employee’s tax.
“While the corporation has been profitable, the lack of implementation of Pillar 1 resulted in the growth of the balance sheet of the corporation lagging significantly behind that of the industry. For the period 2007 to 2014, the growth of the balance sheet of the corporation lagged behind that of industry by 83 percent. The follow-on effect hereof is that market share of the corporation dropped from a high of 21 percent in 2008 to 15 percent in 2014, which resulted in the insurance capital leaving the country actually growing over the period from a low of N$211 million to the current estimated N$1.3 billion,” Karuaihe-Martin noted.
NamibRE is the only registered reinsurer operating in Namibia.