Chuks Udo Okonta
The Commissioner for Insurance Fola Daniel, has finally put to rest agitations for bail out funds for weak insurance firms by saying that insurance is a risk transfer mechanism unlike bankers that are deposit takers, hence, funds are easily recovered from all those who initially share in the risk and the collapse of one particular insurer cannot pose systemic risks.
Daniel, in an interview with a national daily, said the operational mechanism of banks and insurance differs, adding that whereas a banking institution could be in possession of trillion of depositors’ money, insurers who assume risks worth trillions, keeps only a negligible portion of that risk usually within a proportion of their Shareholders’ Fund, and the excess is transferred to Reinsurers whilst a portion to Retrocessionaires.
Through this chain of risk spread, the collapse of one particular insurer cannot pose systemic risks, he said.
"In addition, recoveries will usually come from those who initially share in the risk. Because the risk which primary insurance firms share is well spread in such a way that even when there is a problem, those who are insured by this firm are not going to suffer irreparable loss because this company that is in crisis has recoverable from the reinsurers and if there is a significant crisis, what the regulator will do is to ring-fence the resources of those insurance companies to enable it to pay the policyholders.
"A particularly large loss may, for instance, lead only to a momentary diminution of the Shareholders’ Fund (temporary insolvency) with a window for the Shareholders to fill the financing gap. The AIG crisis did not emanate from its core insurance activities, but from their unregulated activities."
He said a collapse of an insurance entity, though may affect consumer confidence, will not affect the economic system the way the collapse of a major bank will.
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