A Review of the Legal Framework for Reinsurance in Nigeria

Description

ABSTRACT

A Review of the Legal Framework for Reinsurance in Nigeria

Professor Peter Fogam* & Dr. Viashima Akaayar**

The paper reviews the current legal framework for reinsurance in Nigeria. It reveals that the legal regime, in its present form, is based on local protectionism and domiciled-oriented in approach. This present approach is not only unsuitable for emerging insurance markets, but also creates fundamental challenges for integrating international best practices for reinsurance regulation in Nigeria. In place of domiciled-oriented approach, this paper suggests a shift towards a quality oriented approach as a new face for reinsurance regulation in Nigeria. In order to strengthen the suggested approach, this paper proposes the establishment of Special Re-insurers Quality Technical Reserve for the purpose of supervising foreign re-insurers in Nigeria.

INTRODUCTION
Reinsurance is a form of insurance mechanism that appears to be rich in theory,₁ and empirical heritage.₂ In its essence, reinsurance is a risk control mechanism that is consistent with basic theory of insurance,₃ which is risks pooling and distribution.₄ That is, just as many policyholders pool their risks of loss, and transfer portions of those risks to the insurance company for a consideration known as premium, so it is with insurance companies and reinsurers. It is a mechanism upon which the insurance companies spread their risks of loss, which they assumed from policyholders to reinsurers in exchange for a share of the premium received by the insurance company from policyholders.₅ Thus, the reinsurance companies may be described as the backbone for the insurance companies in respect of risks accepted from policyholders. Consequently, all insurance markets, developed and developing, require reinsurance arrangements,₆ and same has been the subject of government regulation.

In Nigeria, the requirement of reinsurance is so fundamental that no insurance company is allowed to commence or carry on any class of insurance business, unless the National Insurance Commission (NAICOM) is satisfied that the insurer has adequate and valid arrangement relating to reinsurance treaties in respect of the class or category of insurance business to be transacted.₇

* Professor of Commercial Law. Formerly, Head, Department of Commercial & Industrial Law, Faculty of Law, University of Lagos, Akoka
** Ph.D., BL. Lecturer, Department of Commercial & Industrial Law, Faculty of Law, University of Lagos, Akoka

1. The literature on Reinsurance generally is considerate in the context of Nigerian Insurance industry. See for example: O. Yerokun, Insurance Law in Nigeria (NRP Publications: Lagos, 2001) 408 – 427; F. Adeyemi, Nigerian Insurance Law (Funmi Adeyemi & Co: Lagos, 2007) 158 – 171; J.O. Irukwu, Reinsurance in the Third World (The Caxton Press: Ibadan, 1980) 1 -277; J.O. Irukwu, The State, the Individual and Insurance (Fourth Dimension Publishing Co. Ltd: Lagos, 1987) 38 (hereinafter referred to “the State and Insurance”); O. Yerokun, D. Afejuku, A. Popoola, and O.A. Faghohun, Selected Essays on the Law of Insurance in Nigeria (1992 eds) 86
2. J.R. Garven, J.I. Hilliard and M. F. Grace, ‘Adverse Selection in Reinsurance Markets’ (2011) accessed 14 January 2015; C.R. Cole and K.A. McCullough ‘A Re-examination of the Corporate Demand for Reinsurance’ (2006) 73(1) Journal of Risk and Insurance 169 -192; L.S. Powell ‘Internal Versus External Capital Markets in Insurance Industry: The Role of Reinsurance’ (2007) 31(2-3) Journal of Financial Services Research 173–188
3. L.P. Schiffer ‘In Defense of reinsurance’ (2010) accessed 24 February 2015
4. C.K. Agomo, Modern Nigerian Law of Insurance (University of Lagos Press: Lagos, 2003) 3. Also see J. Birds, Bird’s Modern Insurance Law, (8th edn, Sweet & Maxwell: London, 2010) 1–13
5. Schiffer, (n )3
6. W.H. Wang, Reinsurance Regulation: A Contemporary and Comparative Study (Kluwer Law International: Hague, 2002) 27
7. Insurance Act, No 2, 2003; now in Cap. I 17, Laws of the Federation of Nigeria (LFN) 2004. (H ereinafter Insurance Act 2003) s 6(1) (c )