Solvency Under Strain at Niger Delta Assurance
At 31 December, Niger Delta Assurance plc reports gross written premium of ₦8.4bn, reinsurance premium ceded of ₦2.3bn, paid claims of ₦3.1bn, outstanding claims of ₦1.6bn (previous year ₦1.2bn), and an IBNR reserve of ₦0.4bn. The actuary's latest estimate puts IBNR at ₦1.5bn because of late-reported motor claims. Expenses were ₦1.9bn. Admitted assets are ₦14.2bn, including ₦2.4bn recoverable from a reinsurer recently downgraded to B+ and ₦0.8bn of unlisted equities. Liabilities are ₦10.9bn. The board wants to declare a ₦1.2bn dividend and is negotiating a new proportional reinsurance treaty. The UPR is currently calculated on a 365ths basis. One December policy has annual premium of ₦2.4m and inception on 1 November. The regulator's minimum solvency margin is ₦3bn, and the company's internal risk appetite requires a buffer of 150% of the minimum.
1. Recompute the adjusted surplus and advise whether the dividend can be paid.
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Reported surplus: 14.2 − 10.9 = ₦3.3bn.
Adjustments.
- IBNR strengthening: 1.5 − 0.4 = ₦1.1bn, raising liabilities to ₦12.0bn.
- Reinsurance recoverable from a B+ reinsurer: impair 40% = ₦0.96bn, reducing admitted assets to ₦13.24bn.
- Unlisted equities: 50% haircut = ₦0.4bn, reducing assets to ₦12.84bn.
Adjusted surplus: 12.84 − 12.0 = ₦0.84bn.
That is below the ₦3bn minimum and far below the internal buffer of ₦4.5bn (150% of ₦3bn). The proposed ₦1.2bn dividend would consume more than the adjusted surplus and would be unlawful: CAMA 2020 and NAICOM solvency rules prohibit distributions that leave the company unable to meet liabilities.
The board should suspend the dividend, disclose the reserving adjustment to the regulator and present a capital plan. Even a smaller dividend would need regulatory forbearance and a credible recapitalisation.
2. Calculate the UPR for the December policy on 365ths and 1/24ths, and explain why the choice matters.
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365ths. The policy incepted 1 November with annual premium ₦2.4m. At 31 December, 10 months are unexpired (January to October). UPR = 2.4 × 10/12 = ₦2.0m.
1/24ths. Premium is deemed earned 1/24 per month. Two months elapsed (November and December), so 2/24 is earned and 22/24 unearned. UPR = 2.4 × 22/24 = ₦2.2m.
The difference is ₦0.2m on one policy. The 1/24ths method assumes policies are written evenly through the month; it overstates UPR for policies written early and understates it for policies written late. The 365ths method is accurate to the day.
The choice matters because UPR drives earned premium, profit and surplus. For a December-heavy book, 365ths produces a lower UPR than 1/24ths and therefore higher initial profit - a reason to test the reserving basis rather than assume it. The actuary should disclose the sensitivity and ensure UPR is never less than the daily unearned amount.
3. What risk-management and reinsurance actions would you recommend before the new treaty is signed?
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Counterparty risk. The B+ downgrade is the immediate issue. Seek collateral, a trust account or a cut-off for the existing recoverable; limit exposure to any single reinsurer; and check the security clause in the new treaty.
Retention and capacity. Model the motor and fire accumulations before fixing the retention. Late-reported motor claims suggest reserving and claims-handling weaknesses, not just bad luck. Strengthen case reserving and IBNR monitoring.
Liquidity and capital. The adjusted surplus of ₦0.84bn cannot absorb a large cat or a reserve deterioration. Agree a capital injection or quota-share cession that improves the solvency position, not just premium volume.
Governance. Separate the dividend decision from the growth target. The board should receive a quarterly solvency dashboard showing admissible assets, reinsurance recoverables by rating and reserve adequacy.
Treaty terms. Check the reinsurer's claims control and offset clauses; ensure the treaty does not leave the company exposed to a counterparty it cannot enforce against.