Wednesday, January 19, 2022

Insurance industry faces ruin as NBFIRA fumbles

If it is peace of mind you want, then do not to place your security on local insurance companies. Parliament is worried that thousands of insurance policy holders may lose millions of pula and scores of insurance companies may find themselves facing closure as the Non Bank Financial Institutions Regulatory Authority (NBFIRA) proposed changes to reinsurance oversight seem set to steer the industry into ruin.

NBFIRA, which is the regulator of all non-banking financial entities, has issued a circular notifying Botswana registered companies that reinsurance should be placed with Botswana registered reinsurance companies.

NBFIRA has registered two reinsurance companies- FM Reinsurance Property & Casualty (FM Re) and First Reinsurance Company (First Re). Upon reinforcement of the circular all local insurers would be obliged to cede to the two recently registered local reinsurers.

Sunday Standard investigations have, however, turned up information that the parent companies of the two Botswana registered reinsurance companies are having financial difficulties and are facing possible liquidation.

Further investigations have revealed that one of the reinsurance companies does not even meet the minimum requirements put in place to protect insurance companies and their customers. The company FM Re’s audited financial statements as at 31 Dec 2010, which have been passed to the Sunday Standard, show their capital at P1, 39 million which is below the minimum share capital of P2 million stipulated in the NBFIRA Act.

Quizzed by the Parliament Committee on Statutory Bodies chaired by Robert Masitara, NBFIRA confirmed that FM Re’s capital was severely eroded by trading losses during the year and now stands at P1, 39 million which is P609, 114.00 below the minimum capital requirement as stated by the NBFIRA Act.

In their defence of retaining the FMRe’s trading licence, NBFIRA claimed that the board of the reinsurance company’s parent company Africa First Renaissance Corporation (AFre) “committed to the offering of new rights issue for the purpose of recapitalizing all the subsidiaries of AFre Corporation. FM Re property & Casualty has been earmarked to receive a total of US$3 million (BWP21 million) in new capital. The sale of this right issue is currently scheduled to commence at the end of this month (September) and NBFIRA is closely monitoring the situation to ensure that AFRe does return to a position of compliance in its capitalization.”

Sunday Standard, however, has in its possession a report of an investigation by the Zimbabwe Insurance and Pensions Commission which revealed that the FMRe parent company, AFRe , which is based in Zimbabwe, “is technically insolvent and the directors and shareholders are considering various capital raising initiatives in view of the need to comply with the minimum capital requirements.”

The Zimbabwean watchdog launched an investigation into the operations of FMRe’ parent company “to determine the financial soundness of the subsidiaries in view of irregular intercompany transactions, which emanated from the relations that exist between SFre , RFHL and RMB which was placed under curatorship in May 2011. In addition the investigations sought to establish if policy holders and pension fund members were not prejudiced.”

Further investigations by the Sunday Standard have revealed that the Zimbabwe Stock Exchange sometime last month blocked the AFRe shareholders meeting citing irregularities that could have an impact on policy holders and minority shareholders.

The shareholders meeting was meant to consider a proposal by directors for the US$ 15 million rights issue to recapitalize the group following financial irregularities. This is rights issue that NBFIRA made reference to when justifying their decision to have FMRe keep its trading licence.
On September 29th, two days after NBFIRA made its submission to the Botswana Parliament watchdog AFRe cancelled its AGM and EGM at the eleventh hour, after failing to garner enough proxies and following differences by board members over the accuracy and completeness of the draft forensic audit by BCA Forensic Audit Services (Pty) Ltd.

The other reinsurance company registered by NBFIRA, First Reinsurance (PTY) Ltd, has complied with minimum capital requirements of the Act, but its ultimate holding company, Zimre Holdings Ltd, which is also based in Zimbabwe, has been on the reserved list in South Africa and has just been released after a six year curatorship. At the time, NBFIRA issued the licence to FRe, the parent company was reeling from a loss of US $322 038 and actuarial reports stated the continuity of the company as doubtful. ZIMRe has, however, returned to profitability after recording a net profit of US $ 1,1 million in the six months ended June 30.

Sunday Standard investigations further established that the Prudential Rules approved by NBFIRA Board stipulate that Botswana insurers should place reinsurance with reinsurers who are at least “BBB” rated. The two reinsurance companies registered by NBFIRA are not rated at all at the moment.
Benchmarked against a set of guidelines obtained from a leading Willis Re insurance Broker in South Africa, the two Botswana registered Reinsurance companies do not meet any of the standards required from a reinsurer before they can be considered sound for business.

The Botswana Parliament watchdog is also worried that although the idea behind the NBFIRA proposed changes to reinsurance oversight were meant to insure that the money raise by insurance companies in Botswana remain in the country, the two re-insurers retain very little if anything to their net retention account in Botswana. Most of their income is being repatriated to foreign reinsurers. The parliamentary watchdog feels that Botswana insurers can place reinsurance directly rather than through these reinsurers, thereby reducing the cost of reinsurance.

Chairperson of the Parliamentary Committee on Statutory Bodies, Robert Masitara, would not be drawn into discussing the issue, saying until the committee has tabled its report to Parliament in November, he was not at liberty to discuss the issue with the media.

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