Analysts see growth potential in Nigeria’s insurance sector

Analysts from Standard & Poor’s (S&P’s) Rating Services says the Nigerian insurance sector is confronted with significant challenges that must be confronted for the sector to achieve its growth potential.

“There is potential for growth, but the industry needs to overcome significant challenges to achieve this,” said the S&P analysts.

S&P report on Nigeria’s property/casualty (P/C) insurance sector assessment, says it considers growth prospects for the insurance sector neutral because the industry barely maintains pace with real economic growth and sees limited evidence of increased insurance penetration.

According to the Agency, though the Property and Casualty Insurance business in Nigeria also called general business faces high risks of low levels of per capita income, heightened political tension, low levels of economic development outside the oil sector, significant infrastructure shortfalls, and weak institutions, the sector is comparable with other markets like Ghana and Tunisia.

Industry Risk: Moderate

In our opinion, insurance industry risks are moderate. This reflects good historical and prospective profitability, although fraud and corruption have the potential to cause volatility.

Return on equity (Neutral)

Based on historical data, we estimate return on equity to be around 10 percent, which is modest compared with similar developing markets, but high compared with the global average. However, we estimate that the combined ratio is high at about 100 percent. (Lower combined ratios indicate better profitability.

A combined ratio of greater than 100 percent signifies an underwriting loss.) In our view, profitability therefore relies on investment performance and these accounts for the high volatility in returns over the past five years. The sector recorded significantly stronger returns in 2007 and 2008, when it derived investment gains from the then-booming Nigerian stock exchange.

After the 2009 domestic banking crisis and a sharp fall in the local stock exchange, returns moderated to around 9 percent, in line with investment returns. We anticipate that industry returns will remain volatile due to the limited size of the capital markets, combined with concentrated insurance risks and the competitive market.

Product risk (Negative)

In our view, product risks could trigger volatility in profit levels. Product risk is exacerbated by the strong likelihood that fraud could affect settlements, reflecting the weak judicial institutions; poor underwriting skills across the sector; and low wealth levels, which increase the likelihood that retail customers will allow their policies to lapse. On a more positive note, exposure to natural catastrophe risk is only modest.

Barriers to entry (Neutral)

The sector is regulated by the National Insurance Commission (NAICOM). NAICOM imposes basic rules to establish a local company–including minimum capital requirements, which are relatively high compared to peer markets–and examines the particulars of the board of directors and management.

The regulator limits foreign ownership in Nigerian insurers to 40 percent of total equity, although we believe there is some flexibility around this. Barriers to entry to the Nigerian property and casualty market have a neutral effect on our rating analysis. We view both regulatory and operational barriers as moderate. Operational barriers are limited by the small size and relatively fragmented nature of the local market.

Modestus  Anaesoronye