The game is up for insurance companies that have the habit of owing re-insuirers or delay payment of their treaties as re-insurer have decided to walk out and away from such underwriters.

Some insurance companies also known as cedants that are usually in the habit of owing reinsurance companies by not updating their treaty arrangement may no longer find the business attractive as the latter have decided to do the business on a cash-and-carry basis. Reinsurance companies are ready to walk away from such debtors insurance companies henceforth even as underwriters become increasingly concerned with protecting their capital as the effects of the financial turmoil bite harder.

The National Insurance Commission (NAICOM) monitors and selects insurance companies for government accounts including the Nigerian National Petroleum Corporation (NNPC) based on criteria which include evidence of treaty placement by underwriters.

The guidelines for participation of insurance companies stipulate some requirements that must be met before any insurance company can take part in government accounts and other big businesses as follow; that company must be adequately capitalised for the classes of business it registered to transact; must have adequate and valid reinsurance treaty arrangement with premium fully paid, among others. And the law is very clear on that. Mr. Fola Daniel, Commissioner for Insurance does not joke about insurance companies having inadequate reinsurance treaty arrangements.

He recalled that over the past decade, and more recently, numerous economic and financial market events have resulted in dramatic and unprecedented attention to the soundness of the world's financial institutions.

He stated, "The insurance industry has been no exception. Whether resulting from specific catastrophe losses or economic events within a country or a region or due to global events like the tragedy of September 11, everyone has become increasingly concerned about the impact that events can have on the financial stability of insurers. Given the unique role that they hold in the global economy and given the ever-growing complexity of the financial marketplace, scrutiny about the stability of the re-insurers will only increase".

He explained, "Reinsurance is an insurance contract between an insurer and a re-insurer, wherein the re-insurer agrees to bear a certain amount of fixed risk borne by the insurer under the policies that it has issued. In exchange for providing reinsurance services, the re-insurer usually gets a premium from the ceding company, which may be a share of the original premium minus commissions or another, mutually agreed upon amount".

He said, "The main aim of reinsurance is to spread risk to enable the insurance industry to function effectively and efficiently. Reinsurance allows the ceding company to take on more business than would be possible without a significant increase in capital and risk whilst treaty Reinsurance is a standing contract between insurers and re-insurers. The ceding company is contractually obligated to cede and the re-insurer is bound to assume a specified portion or type of risk insured by the ceding company".

Besides, the International Association of Insurance Supervisors (IAIS) which is the world acclaimed umbrella association of insurance regulators. The body which was established in 1994 currently represents insurance regulators and supervisors in some 180 jurisdictions around the world. Amongst other functions, IAIS issues global insurance principles, standards and guidance papers on insurance business.

In its Principles No. 5 issued in January 2002 on Capital Adequacy and Solvency, IAIS strictly advocated the principle of adequate technical provisions as the cornerstone of a sound capital adequacy and solvency regime in insurance business. This approach underlines the position of advocates of risk-based capital in determining the adequacy or otherwise of the existing levels of capital in the insurance industry.

In most regulatory regimes, a simple quota-share reinsurance treaty makes it possible for the ceding company to reduce the solvency margin requirement. This is simply because the re-insurer shares the same technical risks as the insurer, based on the quota-share he has accepted. However, in the European Union there are limits. Reinsurance cannot reduce the part of the solvency margin requirement which is calculated on the mathematical reserves by more than 15% of the insurance class concerned by reinsurance. The limit is 50% as far as the part of the solvency margin calculation related to sums at risk is concerned. In other countries, notably Korea (for sums at risk) and the United States, there is no limit.

Mr. Adeyemo Adejumo, Managing director of Continental Reinsurance Plc said that the issue of delayed treaty placement which had been a long standing issue has improved tremendously in recent times.

Though, Adejumo admonished chief executives of insurance companies to take their treaty seriously else they may be jeopardising their companies' interests and exposures

"Also, the use of reinsurance undoubtedly has an indirect or a secondary effect on the solvency of primary insurers. Without reinsurance, many primary insurers may not write or may reduce the number or size of highly risky policies, such as policies that cover earthquake damage or environmental liabilities. In other words, the availability of reinsurance encourages primary insurers to engage in highly risky business. That, in turn, will raise their insolvency risk"

Mr. Bakary Kamara, Managing Director of Africa Reinsurance Corporation, said that the global financial crisis may trigger increase in the demand for reinsurance services, adding that underwriting companies should now begin to firm up their rates if they must survive in the difficult business environment. He said that reinsurance companies have lost about 15 to 20 per cent of their capital from the beginning of the crisis to January this year, adding that the core capital and capacity of companies to underwrite big risks are stable and robust.

Kamara cautioned that insurance organisations at this critical time needed to protect their assets and capital base, maintain strong liquidity with a view to mitigating exposure to losses that may arise in order to maintain the confidence of their clients.

In the same vein, Mr. Joe Ameh, Managing Director of Nigeria Reinsurance Corporation, explained that the global meltdown will seriously affect reinsurance prices in the international and domestic markets. The effect could be seen in the government expected revenue projection seriously being eroded. The capital market is in crisis because of the withdrawal of funds of foreign direct investors, therefore returns on investment will be very low, serious minded underwriting and reinsurance companies must do proper housekeeping in the unfolding situation. This is going to be a serious challenge in pricing of risks in the industry.

Ameh said, "The global financial crisis would seriously affect rating in the international and domestic insurance markets. Rating will certainly go up in the pricing of risks," he said.

According to him, "Prices will become the major determinant of the cost of which insurers will accept risks. As a result of the financial crisis, insurers will heavily rely on underwriting experiences rather than investment income to meet expectations of the stakeholders.

The Nigeria Re boss disclosed that majority of underwriting companies relied heavily on investment incomes to hedge against bad underwriting experiences and did indeed write risks at a cheaper rate considering the then boisterous stock market.

Ameh cited, "As a rule of thumb, an insurance company limits its retention on any given risk to a rate of between 3 and 5 percent of its shareholders' fund depending on its business strategy as to safety of its balance sheet or aggressive growth of market share. For example, an insurance company with shareholders fund in the region of N500 million will fix its retention on any standard risk at N15 million per risk at a conservative rate of 3% of its net assets or shareholders fund. Assuming that a reinsurance company granted such an insurance company a 20 line surplus treaty cover, then the insurance company would have a total cover of N300 million from the re-insurers. This scenario provides the insurance company with an underwriting capacity of N315 million. Though, a typical policyholder is not usually aware of this arrangement but in practice, this is the bulwark of insurance operation"