Failed insurance firm poses no systemic risks - Daniel

Chuks Udo Okonta 

The Commissioner for Insurance Fola Daniel, has once again assured the public that insurance firms in the country are all safe, even as he stressed that the failure of an insurance firm poses no systemic risks due to the safety mechanism built in the system.

Daniel said funds deposited with underwriters are easily recovered from all those who initially share in the risk, hence the collapse of one particular insurer cannot pose systemic risks.

He noted that 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.  

Daniel added that through this chain of risk spread, those who are insured by a failed firm are not going to suffer irreparable loss because the company that is in crisis has recoverable from reinsurers and retrocessionaires.

"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.

 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.