Prudential Solvency in Africa: Navigating Regimes Across Five Key Markets

Episode Summary

On the latest episode of “The Standard Formula,” host Rob Chaplin is joined by associates Dev Jain and Richi Kidiata for a comprehensive tour of Africa’s rapidly evolving insurance landscape. The team delves into the regulatory frameworks of South Africa, Morocco, Egypt, Nigeria and Kenya — markets at the forefront of aligning with international best practices and standards such as Solvency II — and breaks down each jurisdiction’s approach to capital and liquidity requirements, risk management and governance, while highlighting recent reforms, local challenges and the growing integration of African insurers into the global financial system.

Key Points 

• Prudential regulation across Africa is undergoing significant transformation. Regulators are gradually moving away from traditional rules-based solvency requirements and adopting risk-based frameworks that better reflect insurers’ actual risk profiles, drawing inspiration from international standards like Europe’s Solvency II framework.
• South Africa has some of the highest insurance penetration rates in the world, and the life, non-life and reinsurance markets have also seen steady growth over the last several years. In its so-called “Twin Peaks” model, the Prudential Authority oversees solvency, capital and risk, while the Financial Sector Conduct Authority supervises market conduct and the fair treatment of customers.
• Morocco is embarking on a new prudential regime that will fully come into force by January 2026. This reform introduces a risk-based framework inspired by Solvency II and marks a shift away from the rules-based retrospective approach to one that is more forward-looking and risk-sensitive.
• The Egyptian insurance and reinsurance sector has undergone regulatory transformation. The country’s insurance market stands out as one of the largest in North Africa, serving a population of over 100 million. Egypt’s new prudential solvency regime represents a significant leap forward for the country’s insurance sector. The reforms are expected to foster a more robust and transparent market aligned with international best practices in a manner that is compatible with the nature and characteristics of the Egyptian market.
• In Nigeria, the Nigerian Insurance Industry Reform Act (NIIRA) marks the most significant overhaul of the country’s insurance framework in more than 20 years, The act repeals and consolidates insurance laws into a unified framework that aligns with global solvency standards while also addressing realities of the Nigerian market.
• Kenya’s insurance market is on a strong upwards trajectory. The sector is projected to reach a gross written premium of 1.08 trillion Kenyan shillings this year, or around US$8.35 billion. Life insurance is set to dominate with an anticipated market volume of 615.7 billion Kenyan shillings. From a consumer demand perspective, many Kenyans are increasing how much to spend on insurance, signaling mounting interests on risk protection and financial security.

Voiceover (00:00:01):
From Skadden, The Standard Formula is a Solvency II podcast for UK and European insurance professionals. Join us as Skadden partner, Robert Chaplin, leads conversations with industry practitioners and explores Solvency II developments that matter to you.

Rob Chaplin (00:00:18):
Welcome back to The Standard Formula Podcast. This episode continues our global series on prudential requirements, forming part of our forthcoming Encyclopedia of Prudential Solvency.

(00:00:31):
In this episode, we explore select prudential solvency regimes across Africa. Prudential regulation across Africa is undergoing significant transformation. Regulators are gradually moving away from traditional rules-based solvency requirements and adopting risk-based frameworks that better reflect insurers’ actual risk profiles, drawing inspiration from international standards like Europe’s Solvency II framework. While the pace and scope of these reforms vary by market, the objective is consistent, to strengthen financial stability, protect policyholders, and support the sustainable growth and resilience of local insurance sectors.

(00:01:11):
Today, we’re focusing on five major African insurance markets, South Africa, Morocco, Egypt, Nigeria and Kenya. Each has crafted a regulatory framework shaped by its own local market dynamics where several common themes emerge. Across these jurisdictions, we see the introduction of minimum capital and liquidity requirements, along with a stronger push for enhanced governance, risk management and disclosure standards. Regulators are also sharpening their focus on whether insurers maintain adequate capital buffers, manage concentration risks and adapt to the fast-moving developments such as digitalization and climate change-related risks.

(00:01:56):
These reforms are not without challenges. Still, the trajectory is unmistakable. Prudential oversight in Africa is becoming stronger, more transparent and increasingly aligned with global norms. This shift is laying the groundwork for sustainable growth and deeper integration of Africa’s insurance sector into the international financial system. Connections between the London market and Africa have also strengthened over the past year. Recent approvals of Africa-linked syndicates at Lloyd’s represent a significant milestone for African participation in the global insurance ecosystem.

(00:02:32):
These developments signal the increasing integration of African insurers and reinsurers into global capital flows and cross-border regulatory standards. Strong underwriting performance from Africa-focused platforms has further reinforced market confidence in the sophistication and financial discipline emerging from African risk carriers. Together, these developments underscore both the ambition and execution capability within Africa’s insurance and reinsurance sectors.

(00:03:03):
Joining me today to discuss this exciting period of prudential regulation across Africa are my colleagues, Richi Kidiata and Dev Jain. Richi, Dev, it’s a real pleasure to have you here with us today.

Richi Kidiata (00:03:16):
Thanks, Rob. There’s a lot happening across Africa and it’s fascinating to unpack.

Dev Jain (00:03:20):
Absolutely. Shall we get started?

Rob Chaplin (00:03:23):
Let’s start with South Africa, the continent’s largest and most developed insurance market. Before we begin, we would like to thank our friends at Webber Wentzel for their input and feedback on this section of today’s podcast. Thank you.

(00:03:37):
Richi, could you give us an overview, please, of the South African regime?

Richi Kidiata (00:03:42):
Thanks, Rob. South Africa has some of the highest insurance penetration rates in the world. The life, non-life, and reinsurance markets have also seen steady growth over the years. As an overview, South Africa’s insurance sector is governed by a modern prudential regime established under the Insurance Act of 2017, along with the Long-term and Short-Term Insurance Act and the subordinate regulations published under them. These operate alongside the Financial Sector Regulation Act of 2017 and together implement the so-called Twin Peaks model whereby the Prudential Authority housed within the South African Reserve Bank oversees solvency, capital and risk, while the Financial Sector Conduct Authority supervises market conduct and the fair treatment of customers.

(00:04:32):
The Insurance Act of 2017 introduced a risk-based framework similar in design to the EU Solvency II with certain domestic variances tailored to reflect the South African market. For simplicity, we’ll refer to the Insurance Act of 2017 as the Insurance Act and the Financial Sector Regulation Act of 2017 as the FSR throughout our discussion of South Africa.

(00:04:57):
Rob, could you take us through the basics of the prudential regime in South Africa?

Rob Chaplin (00:05:02):
Thanks, Richi, of course. The Prudential Authority enforces governance, capital and reporting obligations through prudential standards that are published on the Prudential Authority website. These cover financial soundness, governance, operational risk and reporting obligations. All insurers, including microinsurers and reinsurers, must be licensed by the Prudential Authority. The Insurance Act distinguishes between life insurance business, non-life insurance business and microinsurance business with separate prudential standards for each class.

(00:05:38):
Other than microinsurers, an insurer isn’t permitted to conduct both life and non-life business within the same legal entity. Foreign reinsurers and Lloyd’s underwriters may be approved to operate in South Africa through a locally licensed branch, provided that they open a representative office and establish a trust. Once established, they’re subject to the same regulatory oversight.

(00:06:03):
Structurally, South Africa follows a three-pillar prudential framework similar to Solvency II. In other words, it addresses quantitative requirements, qualitative requirements around governance and risk management and reporting and disclosure obligations.

(00:06:21):
Dev, this sounds familiar when thinking about the structure of the Solvency II framework. Can you walk us through what’s expected of insurers under South Africa’s prudential regime?

Dev Jain (00:06:32):
Certainly. The Prudential Authority expects insurers to keep their governance and risk systems proportionate to the size and complexity of their business. Both are required to set up strong, independent control functions. Insurers are also required to conduct an own risk and solvency assessment, at least annually or whenever there is a material change in their risk profile. The purpose of the own risk and solvency assessment is to ensure that an insurer is adequately capitalized and to test their solvency across a range of possible scenarios, looking at both their current position and likely financial soundness in the future on both an economic and regulatory basis.

Rob Chaplin (00:07:20):
Thanks, Dev. Richi, turning to capital requirements. Do insurers follow a standardized formula or is there flexibility in how capital is calculated?

Richi Kidiata (00:07:30):
That’s a great question, Rob. There are two key capital standards designed to protect policyholders and ensure financial stability, which our regular listeners will be familiar with. The first is the minimum capital requirement, or MCR. And the second is the solvency capital requirement, or SCR. The MCR acts as a critical safety net and represents the lowest level of capital an insurer is allowed to hold. The Prudential Authority is expected to intervene immediately if an insurer falls below this level. It’s calculated using a simple factor-based formula that reflects the size and scale of an insurer’s business.

(00:08:09):
This formula, however, does not stand alone, and the numbers produced by it must meet further requirements. First, the MCR cannot fall below 25% or exceed 45% of the insurer’s SCR. Second, there is an absolute flow in (South African) rand terms, meaning the MCR must not be less than 50 million rand and no less than 30 million rand for composite insurers. This rand amount is then compared to 25% of the insurer’s annualized operating expenses over the previous 12 months. And the higher of the two figures becomes the final minimum capital level the insurer must hold. Insurers must also calculate the MCR at least quarterly and report the results to the Prudential Authority.

(00:08:57):
It is worth noting here that reinsurers writing both life and non-life insurance referred to as composite insurers in the relevant prudential standard must calculate separate MCRs for each of their life and non-life activities. For microinsurers, the prudential framework is intentionally streamlined. Unlike insurers, they are subject only to the MCR without the additional SCR requirement. The MCR for microinsurers is calculated using a simple two-part formula, which is 15% of net written premiums over the previous 12 months, subject to an absolute flow of 4 million rand. This lower threshold reflects the smaller scale of microinsurers’ operations while still ensuring sufficient capital to absorb unforeseen losses.

(00:09:45):
Turning to the SCR, this provides a risk-sensitive capital buffer designed to ensure that a sufficient minimum level of eligible own funds is held against the key risks to which an insurer is exposed to at a 99.5% level of certainty over a one-year horizon. Insurers can calculate the SCR in one of two ways. The first is using the standardized formula, which is a forward-looking, risk-based measure that addresses the key risks faced by insurers through the application of stress scenarios to an insurer’s assets and liabilities. The second is through the use of a full or partial model, subject to approval from the Prudential Authority.

(00:10:30):
The standardized formula is designed for use by the majority of insurers in South Africa. Under this approach, insurers apply a set of prescribed stress tests and calculate capital requirements across three key risk categories, which are market risk, underwriting risk and operational risk. For each stress test, assets and liabilities are revalued to assess the impact on basic own funds. The results are then brought together using a correlation matrix set out in the relevant prudential standard.

(00:11:04):

With prior approval from the Prudential Authority, insurers may apply to use a full or partial internal model to calculate the SCR instead of the standardized formula. Internal models are subject to strict safeguards. They must be properly governed, independently validated, based on credible data and embedded in the insurer’s day-to-day management. Where an insurer is approved to use an internal model, it must perform a complete SCR calculation using the internal model on a quarterly basis or as otherwise stipulated by the Prudential Authority. The insurer must also continue to use the internal model unless and until approval is granted by the Prudential Authority to discontinue.

(00:11:49):
Like Solvency II, insurers in South Africa also allocate own funds into three tiers with tier one funds absorbing losses first and enabling the insurer to continue operating as a going concern. Together, these requirements ensure that insurers maintain that robust and reliable capital base to protect policyholders.

Rob Chaplin (00:12:10):
It’s interesting that microinsurers are treated differently and that insurers using an internal calculation model need regulatory permission to revert to a standardized formula.

(00:12:22):
Shall we move on to solvency protection and intervention measures, Richi?

Richi Kidiata (00:12:28):
Absolutely. The central objective of the prudential regime is to protect policyholders and promote financial stability. Insurers must continuously monitor and report their solvency positions with the Prudential Authority maintaining oversight by monitoring each insurer’s overall financial soundness. If an insurer or microinsurer is likely to breach its SCR or MCR, it must immediately notify the Prudential Authority and submit a recovery or capital restoration plan.

(00:12:57):
Where the Prudential Authority is satisfied that the insurer has failed or may within the following three months fail to meet the prescribed capital standards, the Prudential Authority may in addition to directing the insurer to rectify the breach, suspend or withdraw the insurer’s license, or exercise the resolution power set out in Chapter 9 of the Insurance Act. This includes submitting an application for the winding up of that insurer, noting, however, that Chapter 9 of the Insurance Act does not apply to a branch of a foreign insurer, a Lloyd’s insurer or an insurer that is a designated institution in terms of the FSR. The process is similar for microinsurers. These measures ensure early action, responsible management and strong protection for policy holders, as well as the financial system as a whole.

Rob Chaplin (00:13:44):
That’s excellent. Thanks, Richi. Having explored South Africa’s sophisticated and mature prudential regime, let’s shift our focus north to Morocco, a market at a pivotal moment as it prepares to implement a new risk-based solvency framework. Our thanks go to our friends at Concordial for their input and feedback on this section of the podcast. Dev, can you start us off by outlining the legal and regulatory framework governing insurance and solvency in Morocco?

Dev Jain (00:14:15):
Of course, Rob. This is an exciting time for the Moroccan insurance sector as there is a new prudential regime coming into force towards the end of this year and into January 2026. As we are now in December, I’ll take you through what the new regime is expected to look like. It’s important to note that I will be discussing what we know about the new regime currently, but this is of course subject to change until the new regime comes into force.

(00:14:44):
Morocco is a fascinating case study, especially as it’s in the midst of aligning its solvency framework with international best practices, notably the Solvency II framework. Its insurance sector is primarily governed by Law No. 17-99 of the Moroccan Insurance Code, which has been amended over time to incorporate evolving potential requirements. The Moroccan Regulatory Authority known as ACAPS-

Richi Kidiata (00:15:15):
Or the Autorite de Controle des Assurances et de la Prevoyance Sociale.

Dev Jain (00:15:19):
... is responsible for supervising insurance and reinsurance companies, ensuring their financial stability and protecting policyholders. In recent years, Morocco has embarked on a major reform, the introduction of a risk-based solvency framework inspired by Solvency II. This shift marks a move away from the rules-based retrospective approach to one that is more forward-looking and risk-sensitive.

Rob Chaplin (00:15:48):
A significant change. What prompted Morocco to move towards a risk-based solvency framework and how does it compare to Solvency II?

Dev Jain (00:15:58):
That’s a good question. The Moroccan insurance market has grown rapidly, both in size and in complexity. By 2017, Morocco ran second in Africa and third in the MENA region by insurance premiums with steady growth continuing since. In this light, the existing solvency margin approach was seen as insufficient as it did not fully capture the range of risks insurers were facing. Morocco’s prudential reform project, led by ACAPS in collaboration with the Moroccan Federation of Insurance and Reinsurance Companies, aims to bridge the gap between the current regulatory framework and the risk insurers actually face in practice.

(00:16:44):
The new framework includes a three pillar structure familiar to our regular listeners, quantitative, qualitative pillar, and disclosure. However, while the principles of the new Moroccan framework are similar to Solvency II, Morocco will likely be more conservative in some respects, particularly in how it aggregates risks.

(00:17:08):
Rob, can you help us unpack those differences with Solvency II? First, looking at the quantitative pillar, how will the capital requirements and technical provisions be calculated under the new Moroccan framework and how does this differ from Solvency II?

Rob Chaplin (00:17:25):
Certainly. Under both the new Moroccan framework and Solvency II, insurers must calculate an SCR designed to ensure they can withstand severe but plausible shocks. The SCR is set at a 99.5% confidence level. Technical provisions will be determined using a best estimate methodology, which involves discounting and assigning probabilities to future cash flows in order to account for both the time value of money and the associated risks.

(00:17:57):
According to the latest update on the new framework, the new Moroccan regime will use a yield curve based on treasury bill rates published by Bank Al-Maghrib, constructed using the Smith-Wilson method, similar to the European Insurance and Occupational Pensions Authority curve under Solvency II, but with local calibration. A key difference is in risk aggregation. Solvency II uses a correlation matrix to aggregate risk modules, recognizing diversification benefits between different types of risk, such as market, underwriting, counterparty, and so on.

(00:18:36):
In contrast, the Moroccan framework will use an additive approach that assumes perfect correlation, meaning that all risks peak simultaneously. This results in higher, more conservative capital requirements, but less capital efficiency, and there has been some discourse around this in the sector. The difference in risk aggregation is something that an insurer entering the Moroccan market should be aware of.

(00:19:00):
I understand Morocco will use risk modules much like Solvency II. Richi, are there any notable omissions?

Richi Kidiata (00:19:08):
That’s right, Rob. The Moroccan framework will organize risks into modules, much like Solvency II. These are expected to include amongst others, market risk, counterparty risk, concentration risk and operational risk. However, some risk modules present in Solvency II, such as intangible asset risk are not expected to be included in the Moroccan framework.

Rob Chaplin (00:19:31):
Thanks, Richi. Moving on to technical provisions. Can you tell us a bit about how technical provisions and best estimate will be calculated in practice under the quantitative pillar?

Richi Kidiata (00:19:42):
Yes, certainly. Under the New Moroccan framework, technical provisions will be valued by category of insurance and reinsurance activity, whereas the Solvency II directive recommends calculating technical provisions by line of business. Technical provisions under the Moroccan framework will be calculated as the sum of the best estimate of liabilities, the best estimate of management costs and the risk margin. The best estimate is the probability-weighted present value of future cash flows segmented by category of insurance risk.

(00:20:14):
For life insurance, Morocco will require segmentation into four categories compared to the six under Solvency II. Both frameworks allow for contract aggregation when individual calculations would be unduly burdensome, provided that the grouping does not distort risk assessment.

(00:20:32):
Dev, what about the qualitative pillar? Can you walk us through the treatment of reinsurance and counterparty default risk?

Dev Jain (00:20:39):
Absolutely. The qualitative pillar will mandate robust governance systems and include a requirement for risk management, internal audit, actuarial and compliance functions. These must be independent and capable of producing reliable data. Insurers are also required to have effective outsourcing controls and to manage group risk if they are part of a larger group. Both the new Moroccan framework and Solvency II require insurers to adjust technical provisions for the risk of reinsurer default. The adjustment is based on the probability of default and recovery rates segmented by reinsurer and line of business. Morocco will use a table of default probabilities based on credit ratings similar to Solvency II, but with its own collaboration.

Rob Chaplin (00:21:34):
That’s useful to know. Thank you. And lastly, what about governance and disclosure requirements in Morocco under the disclosure pillar?

Dev Jain (00:21:43):
The disclosure pillar will focus specifically on the importance of transparency and open communication. Insurers will be expected to report prudential and statistical information to ACAPS regularly, as well as provide relevant information to policyholders and the public. So there will be robust and familiar expectations around transparency.

(00:22:08):
Rob, earlier I mentioned that Morocco is expected to take a more conservative approach to risk aggregation and capital requirements compared to Solvency II. Could you elaborate on what this conservative approach might look like?

Rob Chaplin (00:22:23):
Yes. This is an important difference between the new Moroccan framework and Solvency II. The additive approach to risk aggregation means Morocco insurers must hold more capital than they would under a diversification-recognizing framework such as Solvency II. This enhances policyholder protection and systemic stability, but it also has the potential risk of reducing competitiveness, limiting product innovation and constraining investment strategies.

(00:22:51):
As the Moroccan insurance market continues to mature, there is likely to be pressure from insurers to introduce a correlation matrix for risk aggregation in order to refine risk modules and to calibrate parameters based on local experience. There is much to consider for Morocco as it brings in the new regime.

(00:23:11):
Dev, looking ahead, what developments might we see in Morocco’s prudential solvency framework after the initial implementation of the new regime?

Dev Jain (00:23:21):
Once the new regime has come into force, there are a few developments that we might see in the future, including recognition of diversification effects in capital aggregation, moving away from the current additive approach, potential adoption of internal models for capital calculation as seen in Solvency II, and enhanced governance and disclosure requirements to further align with international best practices. As with any jurisdiction looking to align with international standards, the key is that the framework will need to be a good fit for the local market as well as facilitating a globally competitive regulatory environment.

Rob Chaplin (00:24:03):
Let’s turn to Egypt, a country whose insurance sector has recently undergone major regulatory transformation. First of all, thanks to our friends at Matouk Bassiouny & Hennawy for their input and review of this section.

(00:24:20):
Egypt’s insurance market stands out as one of the largest in North Africa, serving a population of over 100 million. It includes a diverse mix of state-owned, private and foreign insurers, along with takaful, mutual insurance arrangements that conform to the principles of Sharia, microinsurance and specialized medical insurance providers.

(00:24:42):
The Financial Regulatory Authority, or FRA, is the primary regulator responsible for the establishment, licensing, supervision and enforcement of all insurance and reinsurance activities. The FRA may issue executive decisions governing such activities, including methods for risk assessment and management, as well as standards and rules for financial solvency.

(00:25:07):
The Egyptian insurance and reinsurance sector, together with related insurance professions such as actuarial experts, insurance consultants, reinsurance brokers and risk assessment experts is now governed by the Unified Insurance Law No. 155 of 2024, or the Unified Insurance Law, which consolidates previously fragmented legislation into a single comprehensive framework.

(00:25:34):
The law’s objectives are to unify and modernize insurance regulation, enhance market efficiency and transparency, strengthen policyholder protection, and encourage digital innovation and investment. This level of legislative consolidation is designed to bring about significant change.

(00:25:55):
Richi, what are the requirements for licensing and market entry in Egypt? And does this differ for digital insurance providers?

Richi Kidiata (00:26:04):
These are excellent questions, Rob. To enter the market, companies must be established as joint stock companies in Egypt with their purpose limited to a specific insurance activity, service or related profession as provided under the Unified Insurance Law. Otherwise, the FRA may reject its incorporation request.

(00:26:24):
Beyond legal form, capitalization is a key consideration. As of January 2025, the FRA introduced strict requirements for both new and existing firms to meet minimum fully paid-up issued capital thresholds. For life, capital formation and property and liability insurers, this threshold is 400 million Egyptian pounds from the effective date, increasing to 600 million Egyptian pounds within two years. For non-life insurers in petroleum, aviation or energy, this is 450 million Egyptian pounds within one year, rising to 650 million Egyptian pounds within two years. And lastly, for reinsurers, this threshold is 1 billion Egyptian pounds.

(00:27:11):
In addition, strict requirements apply to the source and quality of capital. Capital must be fully paid in Egyptian pounds or an equivalent foreign currency approved by the Central Bank of Egypt. Governance and suitability are also central to the licensing process. Founders are required to demonstrate integrity, good reputation and no convictions for dishonesty or financial misconduct. Legal entities must show financial soundness and compliance with FRA regulations, and foreign founders must also obtain approval from the home regulator, which must exercise consolidated supervision. The FRA retains discretion to reject applications that do not meet regulatory standards or market needs.

(00:27:54):
Finally, the unified framework explicitly addresses digital insurance. The new law also introduces specific standards for digital insurance providers, requiring substantial investment in technology and compliance capabilities. Further, all companies subject to the provisions of the law must establish a licensed website approved by the FRA containing sufficient disclosure and transparency for their clients regarding their terms and operations, including in particular, the company’s purpose, the type and form of insurance it conducts, and the key decisions issued by its management. In this way, Egypt is looking to regulate for the advances in digital platforms and technology that we are seeing now and will in no doubt continue to see in the future.

(00:28:41):
Dev, how about the prudential solvency requirements for insurers? What do those look like?

Dev Jain (00:28:47):
Under the new regime, insurers must now maintain higher capital buffers than previously required, ensuring that their admissible assets exceed admissible liabilities by at least 125% of the required solvency margin. Furthermore, one major change brought by the resolution implementing the provisions of the Unified Insurance Law involves the establishment of two distinct methodologies for calculating the required solvency margin according to the business or class of the insurance.

(00:29:21):
As for property and liability insurance companies, they must calculate the required margin using a premium-based method and a compensation-based method and apply the higher value. Until the end of the 2027 financial year, the requirement is set at 20% of the net premiums or 25% of the net compensation incurred across all insurance branches, with a special reserve balance added during the calculation for the purpose of the net compensation. After the end of the 2027 financial year, differentiated rates will apply consisting of an amount equivalent to the sum of 30% of the net premiums compensation for the engineering, aviation, petroleum and energy insurance branches, and 25% of net premiums compensation for other insurance branches.

(00:30:14):
With regards to life and capital accumulation insurance, instead of financial solvency, margin is determined by applying the prescribed percentage to the insurance capital, then adding the required technical provisions minus liabilities after reinsurance. The required solvency margin is set as the aggregate of 0.3% of the sum insured under active contract at risk, subject to maximum of 50% reduction for reinsurance, 4% of the provisions for outstanding coverage, subject to a maximum 15% reduction for reinsurance, and 1% of reserves relating to the investment component associated with the investment units and fund accumulation absent a guarantee or 4% where a guarantee is provided.

(00:31:06):
In addition, the special reserve balance included within the equity and calculated in accordance with Egyptian Accounting Standard No. 50 shall be added when calculating the technical provisions for the required solvency margin. In all cases, the required solvency margin may not fall below the minimum paid-up capital thresholds by the FRA and reliance on the unregistered reinsurers is excluded from the calculation. There is much more that insurers operating within Egypt could consider.

(00:31:39):
Rob, can you tell us how assets and liabilities are valued under the new regime?

Rob Chaplin (00:31:45):
Great question. The new regime introduces tighter regulatory rules concerning how assets and liabilities are to be valued, aimed at strengthening the financial stability of insurance companies by enhancing the quality of assets. As for the valuation of the company’s assets, a company may only account for net assets which are recognized in the company’s financial statements, while also broadening the categories of assets excluded from solvency margin calculation.

(00:32:15):
Excluded assets now comprise categories such as investments in other insurance companies operating in Egypt in the same line of business, investments exceeding statutory concentration limits, financial investments abroad unless through approved subsidiaries or branches, financing provided to third parties other than financing granted to policyholders secured by their policies, overdue receivables older than three months, excess policyholder account balances, intangible assets and treasury shares.

(00:32:47):
Further, the FRA has regulatory discretion and has the power to exclude any asset which it deems to lack sufficient guarantees. Lastly, to ensure that financial capacity is assessed in a more objective and accurate way, the new regime also prohibits insurers from counting technical provisions as assets.

(00:33:08):
As for the valuation of the company’s liabilities, liabilities include all liability items recorded in the company’s financial statements in addition to the balance of the special reserve. This is excluding the contractual service margin included within insurance contract liabilities. The subordinated loans provided by shareholders and the Qard Hasan granted by shareholders to cover deficits in the activities of takaful insurance companies, which are recorded under creditors and other payables. It will be interesting to see Egypt’s take on what sufficient guarantees looks like locally.

(00:33:48):
Dev, what enforcement powers does the FRA have as the regulator if an insurer falls short of the solvency requirements?

Dev Jain (00:33:57):
The FRA has been granted strong and extensive enforcement powers in the event of a drop in the solvency margin below legal limits. If a company’s available solvency margins drop between 100% and 125% of the required solvency margin, the FRA can instruct the insurer to restore compliance within a period not exceeding the end of the following financial year.

(00:34:24):
But, if the margins fall below 100%, the FRA can require immediate corrective actions consisting of one or more of the following. First, retaining distributable profits to cover the shortfall in the solvency margin. And second, raising capital in accordance with the plan prepared by the company and approved by the FRA in the event that sufficient profits are not available to cover the shortfall.

(00:34:51):

The company may also cover the solvency margin deficit, obtaining subordinated loans from a shareholder in accordance with specified terms and conditions set by FRA. Altogether, these measures are designed to strengthen trust in the insurance sector, enhance the industry’s ability to respond to crises, and provide greater protection for policyholders’ assets.

(00:35:16):
Rob, how has the new regime been received by the sector? Have there been any transitional changes or challenges with the new law?

Rob Chaplin (00:35:25):
While the new rules are aligned with the FRA’s recent trend towards strengthening the financial resilience of the Egyptian insurance sector, the new rules have raised some questions. First, the transition from the old fragmented set of rules to the new unified law has created some confusion. This is due to the lack of clear guidance on how to handle insurance contracts established under the old regulations. As a matter of fact, the Unified Insurance Law does not specify which set of rules will govern old contracts or whether these will have to be amended to comply with the new framework, thereby raising substantial regulatory uncertainty and a likelihood of disputes.

(00:36:09):
While the FRA has been playing a positive and cooperative role in clarifying the confusion surrounding the transition period, much remains to be done. Through joint workshops with the Ministry of Justice, the FRA has provided training to economic court judges on the provisions of the law, promoting consistency in legal interpretation and accelerating the resolution of disputes.

(00:36:34):
Additionally, the FRA has introduced programs to inform companies about the new requirements and offer them essential guidance. However, as long as the disputes under the old regulatory regime remain ongoing, economic and legal ambiguity will continue to permeate the Egyptian insurance market.

(00:36:51):
Second, a difficulty arises whereby a regulated company can’t directly or indirectly participate in the capital of another insurance company carrying out the same activity in Egypt. The new regime, however, does not address the situation of companies that were already holding stakes in another insurance company engaged in the same type of activity in Egypt prior to the regulatory changes. This is despite the fact that all relevant entities must regularize their status within one year from the introduction of the new rules and that the board of directors of the FRA may extend this period for additional terms.

(00:37:27):
Dev, do you have any final thoughts on the future direction of Egypt’s insurance prudential regime?

Dev Jain (00:37:34):
Egypt’s new prudential solvency regime represents a significant leap forward for the country’s insurance sector. The reforms are expected to foster a more robust and transparent market aligned with international best practices in a manner that is compatible with the nature and characteristics of the Egyptian market. While the transition poses challenges, the reforms are expected to foster a more competitive market. Ongoing efforts to clarify transitional arrangements, support smaller insurers and strengthen corporate governance and risk management will be key to the regime’s long-term success.

(00:38:11):
The impact of the refo rms has already started to appear and is reflected in the Central Bank of Egypt’s financial stability report issued in March 2025, which noted the continued strong performance of insurance companies, including increases in asset values, equity, premiums and claims, which in turn reinforces the important role played by insurance companies in the Egyptian economy.

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The positive trajectory in assets, investments, premiums and claims underscore the growing solidity of the insurance market and highlights its increasing contribution to financial stability and economic development in Egypt. As the regulatory framework continues to mature, the sector is expected to play an even more pivotal role in supporting sustainable growth and strengthening the non-banking financial sector in Egypt.

Rob Chaplin (00:39:06):
With Egypt covered, let’s turn to Nigeria. Before we dive in, thanks to our friends, Ayodeji Oyetunde and Alex Ifechukwu at Aluko & Oyebode, for their input and feedback on this section of the podcast.

(00:39:23):
Richi, Nigeria’s insurance industry is emerging as a fast-growing segment of the country’s financial services sector. Could you give us an overview of recent developments and explain how the new Nigerian Insurance Industry Reform Act, or NIIRA, is shaping prudential regulation?

Richi Kidiata (00:39:40):
Of course, Rob. Nigeria’s insurance sector is indeed growing rapidly. According to a report published by the National Insurance Commission, or NAICOM, the industry recorded around 1.2 trillion (Nigerian) naira in the second quarter of 2025, which represents a 57.8% growth compared to the previous quarter.

(00:40:01):
At the same time, the sector is currently undergoing a transformative shift with the enactment of NIIRA this year. This marks the most significant overhaul of the country’s insurance framework in more than 20 years. NIIRA repeals and consolidates a number of insurance laws into a unified framework that aligns with global solvency standards, while also addressing the realities of the Nigerian market.

Rob Chaplin (00:40:25):
That’s outstanding growth. Can you walk us through what prudential regulation looks like in Nigeria? Is the new framework a move towards risk-based supervision?

Richi Kidiata (00:40:34):
Yes, it is, but it is still very much a hybrid model at present. NAICOM is Nigeria’s prudential regulator, setting industry standards and regulating transactions between insurers and reinsurers. NIIRA codifies NAICOM’s long-planned transition from a compliance-based model to a risk-based supervision regime, closely aligned with Solvency II principles. The framework assesses each insurer’s capital adequacy relative to its risk profile rather than applying uniform solvency thresholds.

Rob Chaplin (00:41:07):
Thanks, Richi. It sounds like NIIRA represents a major step forward for Nigeria, moving the sector towards a risk-based Solvency II-style approach, although important to note that the regime is still a hybrid model at present. With that in mind, what does this mean in practice? What are the key prudential requirements insurers now need to meet?

Richi Kidiata (00:41:27):
Happy to explain that. The prudential requirements for insurance companies are primarily set out in NIIRA. NIIRA introduces a hybrid capital adequacy model representing one of the most significant features of Nigeria’s new prudential regime. Under the system, each insurer must maintain the higher of either a fixed statutory MCR or the risk-based capital level determined by NAICOM. The statutory MCR has increased significantly from the previous Nigerian regime, triggering a recapitalization cycle.

(00:41:59):
NIIRA sets minimum capital requirements of 15 billion naira for non-life insurance, 10 billion naira for life insurance and 35 billion naira for reinsurance. Under NIIRA, NAICOM is given discretion to calculate the risk-based capital for each insurance business and apply the higher of the two values in terms of the MCR.

(00:42:22):
The types of risks that need to be considered by insurers, including insurance, market, credit and operational risk. Existing insurers have been given 12 months from the commencement of NIIRA to comply with the MCR, meaning firms have until the 30th of July 2026 to meet these compliance requirements.

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If an insurer wishes to commence operations in Nigeria, they should deposit 50% of the MCR with the Central Bank of Nigeria, and for existing insurance companies, this is reduced to 10%. Once registration is successful, the central bank returns 80% of this deposit.

(00:43:00):
Rob, could you elaborate on the transition to risk-based capital under NIIRA and how it compares to the capital requirements insurers face under Solvency II?

Rob Chaplin (00:43:09):
Certainly. While NIIRA mandates the shift to risk-based capital, it leaves the specific methodology to NAICOM. NIIRA outlines the guiding principle, stating that in determining the risk-based capital, the commission shall consider the capital required for insurance risk, market risk, credit risk and operational risk, and apply appropriate capital charges. This modular structure is similar to the risk modules of the Solvency II standard formula.

(00:43:37):
Although NIIRA does not define the precise calculations, calibration, correlation matrices and the ultimate prudential standard, like Solvency II’s 99.5% value at risk, NAICOM’s implementation circular confirms the transition to a risk-based capital framework and notes that detailed guidelines and a standardized computation template will be issued in due course.

(00:44:02):
Richi, building on the risk-based capital framework, how are solvency margins treated under NIIRA? Are there parallels with the approach taken under Solvency II?

Richi Kidiata (00:44:11):
NIIRA mandates that every insurer carrying on business in Nigeria should maintain a capital adequacy ratio of 100%, although this may be further adjusted by NAICOM. When calculating capital, certain types of assets are explicitly excluded. These include, for instance, goodwill and other intangibles, deferred tax assets, pledged assets, prepayments, fixed assets and unsecured loans. NAICOM also has broad discretion to exclude any other class of assets.

(00:44:43):
There are additional requirements for reinsurers, in that they should maintain a general reserve fund. This fund should comprise of at least 50% of the original insurer’s gross profit for the year if the fund falls below the authorized capital for the insurer, and at least 25% of the reinsurer’s gross profit for the year if the fund is equal to or exceeds the authorized capital of the reinsurer.

(00:45:05):
Rob, how are funds treated as part of the hybrid model we are seeing at the moment?

Rob Chaplin (00:45:09):
NIIRA does not actually reference own funds specifically, but goes on to outline what types of funds can be considered under the MCR. For new insurance companies, this includes government bonds and treasury bills, as well as cash and cash equivalents. In the case of existing companies, the MCR can consist of the excess of admissible assets over liabilities minus any own shares held by the firm, subordinated liabilities subject to approval by NAICOM and any financial instrument as approved by NAICOM.

(00:45:40):
Richi, are there any other requirements that our listeners might want to know about or points about Nigerian prudential regulation that stand out?

Richi Kidiata (00:45:50):
There are a few, but one that’s particularly noteworthy is that insurers must report the risk-based capital levels to NAICOM as of the 31st of December the previous year and submit this report by the 31st of March each year. This represents a step up in internal monitoring and reporting compared to the old regime. For new insurance companies, this includes government bonds and treasury bills, as well as cash and cash equivalents. In the case of existing companies, the MCR can consist of the excess of admissible assets over liabilities minus any own shares held by the company, subordinated liability subject to approval by NAICOM and any financial instruments approved by NAICOM.

Rob Chaplin (00:46:31):
Thank you. It will be interesting to see how firms operating in Nigeria implement greater internal monitoring. Richi, looking internationally, what are some of the main differences between the Nigerian regime and Solvency II in the EU?

Richi Kidiata (00:46:44):
While Solvency II uses a market consistent balance sheet, Nigeria retains a more conservative prudential filter for determining admissible assets. For instance, items like goodwill, deferred tax assets, incumbent property and unsecured loans are assigned zero value for capital liquidity purposes. This reflects Nigeria’s preference for liquidity and verifiable ownership, ensuring capital is held in risk-free or government-backed instruments.

(00:47:11):
Comparing the two regimes across the three prudential pillars, starting with the first pillar focusing on quantitative metrics. Under Solvency II, the capital requirement is purely risk-based and calibrated to a 99.5% value at risk. The Nigerian regime follows a hybrid model whereby insurers must meet the higher of the fixed MCR or NAICOM-determined risk-based capital and applies a stricter filter on admissible assets.

(00:47:39):
Moving to the second pillar, which deals with governance. Solvency II mandates a robust governance framework with an own risk insolvency assessment. This is mirrored under the Nigerian regime, which includes a similar type of own risk insolvency assessment and framework broadly aligned with Solvency II’s qualitative requirements.

(00:47:58):
Finally, on the third pillar dealing with disclosure, under Solvency II, insurers must publish solvency and financial condition reports annually. The Nigerian regime has similar disclosure requirements whereby financial condition reports prepared by an actuary are publicly disclosed and submitted to NAICOM.

Rob Chaplin (00:48:16):
From what you’re saying, it seems like pillars two and three are substantially aligned with the EU Solvency II regime, while pillar one diverges by design. Nigeria’s model seems to emphasize immediate capital strength and market discipline over model-driven precision. To finish this section, what are the challenges and opportunities for the Nigerian insurance industry following the passage of NIIRA?

Richi Kidiata (00:48:40):
The main challenge for insurers and reinsurers will be meeting the higher minimum capital requirements. This could drive increased M&A activity in the sector as smaller players look to consolidate. And we may also see insurers raising fresh capital through private placements or rights issues. On the opportunity side, moving to a risk-based framework could make the Nigerian insurance sector more attractive to foreign investors, given its alignment with global prudential standards.

Rob Chaplin (00:49:06):
Thanks, Richi. Let’s turn to Kenya, our final market for today. We’d like to thank the team at Bowmans for their thoughtful review of this section.

(00:49:14):
Dev, can you start us off by breaking down the core solvency requirements under the Kenyan regime?

Dev Jain (00:49:20):
Of course. The Kenyan framework overseen by the Insurance Regulatory Authority, or IRA, is a sophisticated blend of risk-based capital requirements, hard capital flows, leverage constraints, and liquidity safeguards. At the heart of the Kenyan solvency regime for insurers is the Insurance Act Chapter 487 together with the Associated Capital Advocacy Guidelines.

(00:49:47):
Kenya shifted to a risk-based capital advocacy framework in June 2020, whereby insurers are required to maintain a minimum capital advocacy ratio, or CAR, of 100% held as tier one capital. If an insurer has attained a prescribed CAR of 200%, the IRA is constrained from intervening in its management on capital advocacy grounds. The risk-based capital calculation for insurers is methodical and robust, designed to ensure that insurers hold capital commensurate with the risk they underwrite.

(00:50:24):
In simple terms, the calculation takes the capital needed for the insurance risk, market risk and credit risk. These are then combined using the square root or the sum of the squares for each of these risks to account for diversification. Capital required for operational risk is then added. This approach ensures insurers hold capital that matches the full spectrum of risk rather than a one-size-fits-all requirement.

(00:50:51):
Let’s delve into the core capital requirements, which are set out in the second schedule of the Insurance Act. These requirements are not merely theoretical. They are hard floors that must be maintained at all times, and they differ depending on the class of insurance business. Richi, can you please talk us through the core capital requirements in more detail?

Richi Kidiata (00:51:13):
Of course, Dev. In Kenya, insurers must maintain minimum paid-up capital held in government securities, deposits or cash equivalents. For general insurance, the minimum is the highest of the three thresholds of at least 600 million Kenyan shillings, the risk-based capital, 20% of net earned premiums from the preceding financial year. For long-term insurance, the threshold is set at the higher of 400 million shillings, the risk-based capital of 5% of life business liabilities for the year.

(00:51:45):
Reinsurers face more stringent requirements. For general reinsurance business, the minimum is the higher of 1 billion Kenyan shillings in paid-up share capital or 20% of the net earned premiums of the precedent financial year. Requirements for long-term reinsurance business follow the same framework with the minimum being the higher of 500 million Kenyan shillings in paid-up share capital, the risk-based capital of 5% of life business liabilities. These thresholds are not fixed. The risk-based capital component is periodically recalibrated by the IRA, ensuring the regime remains responsive to evolving market conditions and risk profiles.

(00:52:23):
You will note from these requirements that in addition to the risk-based and absolute capital flows, Kenya’s regime incorporates a leverage-style backstop. This is a non-risk-based constraint designed to prevent excessive balance sheet expansion relative to core capital.

(00:52:39):
By introducing core capital thresholds of 20% of the net earned premiums of the preceding financial year for general insurance and general reinsurance business, and 5% of the liabilities of the life business for the financial year for long-term insurance and long-term reinsurance business, Kenya’s prudential regime provides a mechanism to check against aggressive growth strategies that could otherwise undermine solvency.

(00:53:04):
Dev, what are the liquidity requirements under the Kenyan regime?

Dev Jain (00:53:08):
Thank you, Richi. Liquidity is another critical pillar of the Kenyan prudential framework. Upon application for licensing, every insurer or reinsurer is required to deposit with the Central Bank of Kenya, the higher of 5 million Kenyan shillings or 5% of total assets. This deposit must be made in the form of Kenya government securities and is held under the lien for the benefit of the IRA. The objective here is clear, to ensure that insurers maintain a buffer of high-quality liquid assets readily available to meet policyholder obligations and regulatory demands.

(00:53:49):
Now let’s turn to one of the key features of Kenya’s prudential solvency regime, its strict concentration limits. Richi, how are the thresholds set out under the Kenyan regime?

Richi Kidiata (00:54:01):
For general insurers, the framework prescribes that deposits held in any single financial institution or group of related companies must not exceed 10% of total assets. The same 10% threshold applies to shares held in any one institution or related group. When it comes to property, the admissible limit is set at 30% of total assets, while investments and related parties are similarly capped at 10%.

(00:54:27):
Life insurers are subject to a parallel regime with deposits and shares in any one institution or related group, each limited to 10% of total assets. However, the property concentration limit is more generous, allowing up to 50% of total assets while investments and related parties remain capped at 10%. These concentration limits are designed to mitigate risk by preventing excessive exposure to single counterparties or asset classes, thereby reinforcing the overall resilience and stability of the insurance sector in Kenya.

Rob Chaplin (00:55:00):
With the prudential framework covered, Richi, can you shed some light on the Kenyan insurance market today? Why is Kenya’s insurance market getting so much attention lately? What is driving its momentum and evolving dynamics?

Richi Kidiata (00:55:14):
Certainly, Rob. Kenya’s insurance market is on a strong upwards trajectory. The sector is projected to reach a gross written premium of 1.08 trillion Kenyan shillings this year. That’s around 8.35 billion US dollars. Life insurance is set to dominate with an anticipated market volume of 615.7 billion Kenyan shillings. From a consumer demand perspective, many Kenyans are increasing how much to spend on insurance, signaling mounting interests on risk protection and financial security.

(00:55:47):
Looking ahead, Kenya’s insurance market is expected to keep growing. Gross written premiums are forecast to rise at a roughly 3% annual rate between 2025 and 2030, reaching about 1.256 trillion Kenyan shillings. This positions Kenya as a market with significant potential for both domestic and international insurers.

(00:56:09):
Whilst the legal and regulatory frameworks are in place making Kenya an attractive market for both local and international insurers, a number of smaller Kenyan insurance companies are finding it tough to meet the solvency and compliance requirements. The regulator has so far shown some leniency, but it is expected that the regulator will be tougher going forward. That said, it’s clear that Kenya’s insurance sector isn’t just growing. It’s evolving fast.

(00:56:34):
Dev, what are the key trends driving this change and what can we expect to see in the future for Kenya?

Dev Jain (00:56:39):
Thanks, Richi. Kenya’s insurance sector is undergoing rapid transformation driven by technology regulatory reform and evolving consumer needs. Digital innovation is taking off. Over 70% of the insurers now offer digital platforms, with insurers and tech startups leveraging AI to expand access and streamline claims. This helps to tap into a larger pool of people who may previously not have been reached. And key players in the Kenyan banking and telecommunication sector are likely to play a pivotal role here. Micro insurance is making significant inroads, offering affordable cover from as little as 40 Kenyan shillings per month, particularly benefiting low-income and rural populations.

(00:57:29):
Bancassurance is also on the rise as banks become key distribution partners. For instance, between 2019 and 2023, premiums grew from 19.5 billion Kenyan shillings to 35 billion Kenyan shillings. And finally, agri and climate-linked products and ESG integration are gaining prominence, supporting resilience and attracting investment.

(00:57:52):
Despite these advances, there is still a lot of room for growth. For instance, insurance penetration remains just over 2% of the GDP and engaging younger consumers is also a challenge, affordability, perceived value and trust being major barriers. Insurers are responding with bite-sized pay-as-you-go policies, instant claim settlements and educational campaigns via social media influencers.

(00:58:21):
Looking forward, the IRA is reshaping the sector through stricter compliance with two key reforms. Firstly, the introduction of risk-based supervision phase two will require insurers to hold capital proportional to their risk exposure, encouraging better risk management, and secondly, the adoption of the global accounting standard, IFRS 17. These reforms enhance transparency and risk management, but also raise operational costs prompting consolidation as smaller underwriters are acquired by larger players. This will inevitably boost M&A activity in the country.

Rob Chaplin (00:59:02):
That’s great, Dev. In short, it sounds like Kenya’s solvency rules combine a few layers: risk-based capital standards, hard capital flows, limits on leverage and asset concentration and liquidity protections, all under the watchful eye of the Insurance Regulatory Authority. The goal appears to be a stable, resilient insurance sector, which aligns with international best practice while addressing the unique dynamics of the local market. We’ll certainly be watching closely as the market evolves.

(00:59:32):
That brings us to the end of today’s episode and what an in-depth episode it’s been, quite a marathon. My thanks to Richi and Dev for joining me today and covering these five important African prudential regimes. We hope you’ve enjoyed this episode and do please join us next time where we’ll cover prudential regulation in Korea. Thank you.

Richi Kidiata (00:59:49):
Thanks, all.

Dev Jain (00:59:50):
Thank you.

Voiceover (00:59:53):
Thank you for joining us on The Standard Formula. If you enjoyed this conversation, be sure to subscribe in your favorite podcast app so you don’t miss any future episodes. Additional information about Skadden can be found at skadden.com. The Standard Formula is a podcast by Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates. Skadden is recognized for its deep experience in representing insurance and reinsurance companies and their advisors on a wide variety of transactional and regulatory matters. This podcast is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This podcast is considered advertising under applicable state laws.