At the market forum organized by the Federation of African National Insurance Companies (FANAF), on 8 and 9 November 2018 in Cotonou, the CIMA presented a state of play of the implementation of the decision taken by the Council. insurance ministers of the Franc zone, to increase the share capital of insurance companies and the social fund of mutual insurance companies to comply with international standards and for the financial soundness of insurance companies (the full document is available on fanaf.org). FinancialAfrik went to meet Abdou Cissé, a recognized expert in the market of the CIMA zone, who participated in the forum and gives us his impressions.Mr. Cissé, you come back from the Cotonou forum where CIMA presented the situation of insurance companies on the capital increase: what are your first impressions?
Cissé Abdou: At the summary of the information provided by the companies concerned (quarterly reports as of July 31, 2018), the CIMA makes the following observation:
- 87 public companies out of a total of 180 reporting entities submitted a report to the General Secretariat of CIMA, representing a transmission rate of 48%.
- The analysis of the reports shows that out of these 87 entities, only 20 companies, including 4 life insurance companies, have the minimum capital of FCFA 3 billion required for 2019 by the new regulations. This number is reduced to 14 insurance companies taking into account the capital requirement of Regulation n ° 007 / CIMA / PCMA / CE / 2016.
- Recapitalization efforts are therefore necessary (according to the CIMA) for 73 of the 87 insurance companies that submitted their report in time to the General Secretariat of CIMA, an unsatisfactory proportion of 84%.
Moreover, in the review of insurance companies’ own funds on the basis of the annual files sent by the latter at the end of the 2017 financial year, CIMA makes the following statement:
- 42 out of 172 insurance companies that have transmitted the annual file, ie 24%, have a capital stock greater than or equal to 3 billion FCFA. However, only 33 of them respect the minimum capital ratio of 2.4 billion FCFA (80% of 3 billion FCFA)
- 3 out of 8 mutual insurance companies that have transmitted the annual file, ie 38%, have a settlement fund of at least 2 billion FCFA.
On the basis of the statistics presented by the CIMA to the forum, the conclusion is clear: the convergence of companies towards the new regulation will not be uniform because the insurance market is very far from the account; If CIMA wishes to support companies towards a solution, it must promote impact studies to review the principles of the new regulations. To fundamentally reform the CIMA zone, it is necessary to carry out quantitative and qualitative impact studies, through projects to which the senior managers of the insurance companies will be associated. Also, CIMA and FANAF must set a course to encourage African states to invest in the insurance market (by making certain guarantees mandatory); indeed, as long as the companies’ turnover has not reached a certain level, the sector will not play its role in the economic emergence.
FinancialAfrik: For reasons of the capital increase, CIMA mentions compliance with international standards and the financial soundness of insurance companies. In what way can these two reasons generate a capital requirement of 5 billion FCFA?
Cissé Abdou: For financial soundness, the capital required should not be arbitrary, but set in line with the risks incurred by insurance companies. However, to date, we are not aware of impact studies that justify the 5 billion capital.
Regarding compliance with international standards, today two standards are topical: international accounting standards, IFRS (marked by fair value) and the European project SOLVABILITY 2 (marked by a capital requirement).
At this stage of the reflection, I think it is necessary to understand the philosophy of the Solvency 2 reform. Indeed, the lack of sensitivity to all the risks inherent in the balance sheet of European insurance companies is one of the main reasons for abandoning the Solvency 1 prudential regime in favor of the Solvency 2 reform project.
It must be recognized today that the insurance market in the CIMA zone is still a variant of the Solvency 1 regime, modeled on the French model, which was built in the 1970s, revised in 2002, with the following characteristics: sufficient provisions, eligible assets recognized as historical costs and a solvency margin indexed to life insurance provisions and non-life insurance premiums and claims. The assets of the balance sheet are marked by secure, liquid, profitable and dispersed investments, allowing the full settlement of the insurer’s liabilities; the liability characterized by capital above the minimum margin, sufficient technical provisions and measured under conservative assumptions.
The European convergence of the Solvency 1 regime towards the Solvency II regime is based on the following major principles:
– an economic view of the balance sheet (fair value instead of historical cost accounting)
– principled rather than rules-based approach
– capital requirements in accordance with the risk profile of the companies
– strengthening of governance for good risk management by companies
– real control of the groups
This reform imposes on European companies a Solvency Capital Requirement (SCR) and a minimum capital requirement (MCR) in addition.
The SCR is designed as the economic capital required by an insurance or reinsurance company to carry on business and continues to do so. Technically, it must correspond to the amount of own funds to hold to limit to 0.5% the probability of ruin of the company, over a one year horizon (while the default rate over the last 150 years is 0.03% on average for the insurance sector in Europe, very far from the Solvency II standard which wants to guarantee a 0.5% environment).
The RCM is designed as a minimum level of security below which the financial resources of the insurance company should not fall; it is therefore a risk-sensitive capital requirement based on a prospective calculation (a level of alert allowing the supervisory authority to intervene in time).
Recall that under solvency 2 (as under the solvency prudential regime) the requirements of SCR and MCR will have to be covered by own funds (resources available to face the risks incurred and to absorb any financial losses if necessary).
It should be noted that for European companies, which can subscribe anywhere on the continent, the Solvency II threshold does not exceed 2.5 billion CFA francs (in non-life and reinsurance) and does not exceed 3.7 billion CFA francs (in life insurance); one more reason to review the 5 billion CIMA zone.
Solvency 2 has been in development for more than 14 years and is still unfinished (my position on this reform is detailed in my February 2017 article published in your journal).
Therefore, conforming to international standards can be heard, but taking into account the economic structure of the CIMA space and the realities of African companies.
FinancialAfrik: How do you rate CIMA’s comparison with the Nigerian market where the regulator has tripled its capital requirements?
Cisse Abdou: Personally, I am not in favor of such a comparison. Insurance is measured according to the economic, social, cultural and financial context of the environment in which it is practiced. The economic activity of the Lagos region alone generates a GDP that exceeds that of Côte d’Ivoire, Senegal and Cameroon combined.
FinancialAfrik: The conclusion of this note from the CIMA is marked by the commitment of the Council of Insurance Ministers to the implementation of the reform and reflects a possible provisional administration for companies that do not comply with the regulations on expiry , with a view to an automatic transfer of the portfolio to approved companies that request it and a liquidation for the others. It’s still disturbing?
Cissé Abdou: Indeed, such a decision can destabilize our insurers. This is all the more worrying for players like the group CISCONSULTING-SOLVUSEO, because we have the duty to support the market towards sustainable and tangible solutions allowing insurers to participate in the emergence of Africa and especially avoid that our companies are absorbed by multinationals. But a negotiating door is open to us because, as the note indicates, the Council of Ministers also asked the General Secretariat to already think about the solutions or measures for failing companies by the deadline; you should take advantage.
FinancialAfrik: What does the CISCONSULTING-SOLVISEO group offer?
Cissé Abdou: We propose a solution in two stages:
Step1: The markets of the zone can request the CIMA, so that it authorizes the insurers, as it is the case in Europe, to cover without limit their solvency margin with their traditional shareholder value (Social Capital + Reserves + Report to new) supplemented by the Insurer’s Commercial Fund (Current Value of Future Profits net of cost of capital and net of taxes). This full shareholder value (also known as the free commitment value) is considered under Solvency II as a high quality equity. Such a measure is accepted internationally and is financially justified.
This complete shareholder value, in economic vision of the insurer’s balance sheet, measures exactly the insurer’s assets-liabilities margin. This transition from the traditional balance sheet to the economic balance sheet will force all companies to practice Asset / Liability Management.
The CIMA must accept it because, it must recognize that by changing the capital from 1 to 5 billion, it requires insurers to put into practice the optimization of their assets-liabilities margin, to limit the relative capital costs. the realization of their risks, to put into practice a rigorous management of their Solvency Margin, to put into practice the measurement of the Wealth Richness of their company by the economic and prospective valuation, to create an increasing and regular shareholder value: it therefore implicitly asks companies to put Active Asset-Liability Management into practice. This is also the reason why we have dedicated all our 2018 seminars to the practice of Asset-Liability management.
Step2: In partnership with two financial entities in sub-Saharan Africa, the CISCO²NSULTING-SOLVISEO Group’s Business Office offers a technical offer and a financial offer to companies wishing to gradually complete their economic capital, in order to comply with the regulations.
The technical offer consists in Periodically valuing, through an asset-liability management software, all the portfolios of any company requesting financing. The valuation that will be carried out will also serve as an audit trail for CIMA. (The software in question is deposited at the INPI).
The financial offer is to monetize this value of the company through a financing fund that our business has backed banks and other financial entities in the area. The financing mandates are already deposited with our partner bank.
We will then describe the financing conditions, the reimbursement terms of the insurer and the options in case of default of the insurer.
FinancialAfrik: How do you briefly describe the implementation of such a solution?
Cisse Abdou: We will begin by asking CIMA to set up a working group that will bring together the CIMA area experts committee and us, (we may accept the presence of Solvency 2 experts from Paris, at the discretion of the Council of Ministers ), to fix the outline of the solution and a chronogram of execution. At the same time, we remain available to browse all the markets in the CIMA zone and expose our solution.
Abdou Cissé is leader of the CISCO²NSULTING Group
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