Counterparty Credit Risk in Nigerian Reinsurance Arrangements: Measurement and Management

This study examines counterparty credit risk arising from reinsurance arrangements in Nigerian insurance companies and develops a measurement and management framework appropriate for the Nigerian institutional context. Reinsurance credit risk, the risk that a reinsurer fails to pay claims owed to a ceding insurer, can threaten the solvency of companies that rely heavily on reinsurance recoveries. In Nigeria, the combination of significant foreign reinsurance dependence and limited reinsurer financial strength data creates a distinctive credit risk management challenge. This study uses reinsurance placement data from 20 Nigerian non-life insurers obtained through regulatory reports for 2019 to 2023, combined with financial strength ratings and solvency data for counterpart reinsurers from AM Best and Standard and Poor's. Credit exposure is measured using expected reinsurance recovery amounts by counterparty. Counterparty default probabilities are estimated from rating agency transition matrices adapted for African reinsurance market conditions. Credit VaR for reinsurance counterparty exposure is computed at 99.5 and 99.9 percent confidence levels. Findings reveal that credit concentration in a small number of foreign reinsurers, particularly in the energy and marine lines, creates meaningful counterparty credit risk for several large Nigerian cedants. Several placements are with unrated counterparties, whose default probabilities cannot be reliably estimated. The study concludes that reinsurance counterparty credit risk is inadequately managed in the Nigerian market. It recommends that NAICOM introduce minimum reinsurer credit rating requirements for proportional and non-proportional treaty placements.

Keywords: counterparty credit risk, reinsurance, credit VaR, Nigerian insurance, risk management.