… Interrogating the critical role of NamibRe, amid industry legal challenges
By Hilary Mare
SINCE 2009, provisions of the Namibia National Reinsurance Act of 1998 have faced stiff criticism and legal challenge from the insurance industry players, who have expressed blatantly that these – particularly mandatory cessions – have stifled their growth and threatened them with annihilation.
In pursuance of more financial freedom, 12 insurance are currently being heard by the Windhoek High Court, in a case against the Finance Ministry, to have sections 39, 40 and 43 of the Namibia National Reinsurance Act of 1998 declared unconstitutional and null and void.
Critical to this narrative is that the Namibia National Reinsurance Act stipulates a mandatory cession to NamibRe – a wholly owned government agent enforcing the Act – of a portion of all insurance and reinsurance premiums written in Namibia.
On 1 November 2016, the Namibian Ministry of Finance announced changes to the implementation of the mandatory cession rules that would both increase the number of policies included in the scope of the mandatory cession, and over time, increase the cession amount, up from the current 10 percent to 20 percent of premiums, by 2020.
Justifying the rationale behind the policy changes, the Finance Ministry said NamibRe was established to promote development and to help Namibians participate in the industry, and minimise the placement of insurance and reinsurance business outside of Namibia.
On the contrary, insurance firms claim that the impugned provisions of the Act are irrational, conduce to arbitrariness, violate constitutional rights and are undemocratic, foreign-investment unfriendly, authoritarian, oppressive, retrogressive and prejudices Namibian insurance consumers and the Namibian economy.
Also justifying their argument is that deducting commission paid to Hollard by NamibRe, and claims proportionally settled, left a potential profit for NamibRe from Hollard’s business of N$82 116 350.88 which has been seen as exorbitant and unsustainable for any business to survive, considering the dip in insurance premiums due to a regressing Namibian economy.
Tinashe Munangati, who has been an insurance broker and expert for 25 years, told Confidente that the mandatory cession has a huge bearing on the success of insurance firms, particularly the smaller ones, but also viewed them as a key instrument in keeping Namibia reinsurer afloat, and as key for government dividends.
“Of course, insurance firms are justified to be aggrieved for obvious financial sustenance reasons, but you also have to look at the overall benefit of the mandatory cession to the country at large. NamibRe shares risk with these insurance firms, and hence it makes the industry more stable. We can argue about the percentage of the mandatory cession; but definitely not about the need for it,” he emphasised.
Accordingly, Section 3 of the NamibRe Act makes provision for the disbursement of dividends to the shareholder (the government of Namibia) at the end of each financial year. Through a consultative process by the board and the Ministry of Finance, the annual amount to be handed over is determined, and this has resulted in government receiving millions of dollars over the past years.
Ratings agency Moody’s, in its most recent assessment of NamibRe, highlighted that the mandatory cession under the NamibRe Act are a strong indicator of the importance of the reinsurer’s mandate.
“Implicit support for NamibRe is evidenced in the government’s 100 percent ownership of NamibRe, its track record of supporting State-owned corporations, NamibRe’s track record of profitability and progress, in fulfilling the government’s policy objective, and the government’s active involvement in the oversight of NamibRe, including a requirement that it appoints all the directors on NamibRe’s board. In addition, the mandatory cession under the NamibRe Act is a strong indicator of the importance of NamibRe’s mandate,” the ratings agency said.
NamibRe sources approximately 90 percent of its premiums in the Namibian market, with the remainder coming from a number of other African countries. The largest insurers in the Namibian market are subsidiaries of the largest South African insurers, which benefit from relatively sophisticated underwriting and risk management capabilities.
In addition, these insurers have a relatively diverse business mix, and through its quota share, NamibRe benefits from ready access to a well-underwritten and diverse flow of new business, including fire, marine, motor, guarantee and engineering, medical and various personal lines.
The critical role of reinsurance
Reinsurance serves not only as a further risk-spreading mechanism, but also as an important component of the capital structure of nearly every insurance company. Essentially, reinsurers supply capital to an insurance company, in exchange for a share of the premiums on the policies that the insurance company issues to its policyholders. Basically, a reinsurance contract is an asset on the books of the insurance company, which offsets the liabilities created by writing insurance policies for policyholders to assume their risks. But this asset runs the risk of disappearing, if the losses the insurance policies generate and the reinsurer reinsures are so massive, as to cause the reinsurer to become insolvent.
Reinsurance in the Namibian context
It is important to understand that the Namibia government implemented the legislative scheme for the creation of the Namibia National Reinsurance Corporation to limit the outflow of capital from the country, in the form of reinsurance premiums, and allows that capital to be retained and used in the country. The secondary objective of the creation of NamibRe was to develop insurance and reinsurance knowledge and skills in Namibia, in order to enhance the contribution of financial services to the economy of the country.
In a developing country context such as Namibia, the volumes of insurance business may not justify the establishment of local private sector reinsurers, and hence this hampers insurance market development. Although reinsurance is available on the international market, governments in jurisdictions where there is no local reinsurer, do not benefit from any tax on the profits of such international reinsurance companies, and suffer from foreign exchange outflow, because of reinsurance premiums leaving the country.
In Namibia’s case, NamibRe plays a vital role in the development of insurance products that are relevant to the particular jurisdiction in question, and offers reinsurance products to insurers that may not be available on the international market, on reasonable terms.
As an example, State-owned reinsurance companies are in place in Kenya, Tanzania, Ghana and Uganda, with the Kenya Reinsurance Corporation being established in 1970. Similar entities in Tunisia and Ethiopia were formed jointly by the State, local banks and local insurers, to retain capital in these countries. There are currently more than ten fully or partially State-owned reinsurance companies operating across Africa.
Does NamibRe remain relevant and critical?
NamibRe’s governing Act was the subject of a constitutional challenge by the insurance industry in 1999. The challenge failed, and the constitutionality of the Act and its objects was affirmed (Namibia Insurance Association v Government of the Republic of Namibia & Others 2001 NR 1 HC).
As is clear across Africa, there is a definite need for fully or partially State-owned reinsurance companies, to limit the dependence on foreign markets, and consequently limit the flow of capital from Namibia in the form of reinsurance premiums.
Confidente. Lifting the Lid. Copyright © 2015