Insurance penetration key to financial intermediation, long-term funds for economy
Insurance sector contribution to GDP dropped to 0.6 percent from 0.7 percent following the recent rebasing of the Nigerian economy, raising concerns among analysts and policy makers about the sector’s potential to support government’s financial intermediation target towards pulling long-term funds for infrastructural development. MODESTUS ANAESORONYE looks at the challenges facing the industry in achieving product penetration, new policy on bancassurance and operations in other markets.
A major challenge facing the nation’s insurance industry has been product distribution and how to deepen penetration of insurance to the uninsured populace in the country. So, there appears to be only one well developed distribution channel, the broker channel which is said to control about 70 percent of total premium generation in the market.
So, over time insurance companies and regulators have focused on this channel to the detriment of the overall insurance industry because the broker channel focuses mainly on the corporate end of the market to the detriment of the retail market.
And this probably explains why as at the end of 2012, only 1.3 million Nigerians had taken up any form of individual insurance, that is life, property and even compulsory insurance like, motor according EFInA report. This is against the population size of over 170 million, indicating an abysmal situation.
The other distribution channels which have not been well developed are the agency, financial institution and electronic channels. Whilst a few insurance companies have been able to make an effort in creating agency distribution channels, most companies still tend to shy away from this due to the huge set-up and operating cost.
The electronic channel is just picking up, with a handful of insurance companies selling insurance products through telecommunication platforms, e-commerce websites and the websites of insurance companies. Whilst the electronic channel appears to be a very good innovation that can help deepen insurance penetration due to the convenience associated with distribution, a few challenges remain in terms of regulation on the conduct of business in this area, analysts said.
The financial institutions channel (often called bancassurance) saw a few insurance companies and banks going into partnership for the distribution of insurance products and this is beginning to help deepen insurance penetration due to the large distribution outlets that these Nigerian banks have. According to some estimates, the channel is responsible for about N13bn of insurance premium annually, that is about 5 percent of total insurance industry revenues and appears to be the fastest growing distribution channel.
However, the channel may soon suffer a sudden death because of the recently released CBN circular prohibiting Nigerian banks from engaging in any form of bancassurance. Since bancassurance is a globally acceptable practice, it becomes very disturbing as the apex bank’s proposed decision completely deviates from global practice, analysts have argued.
A close look at the banking regulation which the CBN referred to (i.e. CBN Scope, Conditions & Minimum Standards for Commercial Banks Regulation No. 01, 2010), shows that Nigerian banks are not permitted to carry out amongst other things, insurance underwriting.
According to the analysts, the latest CBN circular seems to be confusing insurance underwriting with bancassurance. Insurance underwriting is the process by which licensed insurance companies assess the risk of a client, charge a premium on such risk and then indemnify the client when a loss occurs.
The financial strength of the insurance company (i.e. shareholders) is used to support the total risk carried by the insurance company, hence the minimum capital requirement stipulated by insurance regulators i.e. National Insurance Commission (NAICOM). In Nigeria, only companies licensed by NAICOM can carry out insurance underwriting – Section 4(1) of Insurance Act 2003. “Nigerian Banks cannot underwrite insurance risks as they are not licensed to do so and do not possess the skills for such.”
Any bank having an insurance subsidiary may indirectly participate in insurance underwriting. This can occur due to the consolidation of the accounts of both entities. The CBN in 2010 put an end to this practice when the universal banking regime came to an end. Nigerian banks have since divested their interests in insurance companies. Thus no Nigerian bank is directly or indirectly engaged in insurance underwriting practice.
Bancassurance on the other hand is the sale of insurance products through banking channels. Thus, the insurance company leverages on the banks’ distribution channels (branches, electronic etc.) for the sale of its products. In this case, banks would only act as collection agents for the insurance products sold. At no time will the bank be expected to bear any risk. In some regions, banks and insurance companies collaborate to sell products that have both banking and insurance elements.
Such products are usually unbundled such that the banking elements of the transaction are properly separated from the insurance elements. This way, each entity carries separate liabilities. When insurance companies are used as a medium for the distribution of banking products, such a channel is called agency banking.
Presently, Nigerian banks act as collection agents for schools, government (states and federal), travel agents, airlines operators, examination bodies (WAEC, JAMB, NECO etc.), professional bodies (ICAN, CIBN etc.), Telecommunication companies, insurance companies etc. The collection platforms of banks are used by these entities to sell their products thus helping to collect monies or sales proceeds.
Nigerian banks are not licensed travel agents, airline operators, examination bodies or education bodies, yet they present their platforms for use by these organisations in the same way they allow licensed insurance companies to use their channel to sell insurance products. If none of these entities is prohibited from distributing their products through the banking channel, why should the insurance industry be an exception? Insurance should not be singled out of this overall economic benefit to the nation.
Banks, just like insurance companies, are nation builders as they help deepen financial inclusion and act as financial intermediaries through which funds are aggregated to provide long-term funding for the development of infrastructure in every economy. The contribution of the insurance sector to this responsibility remains very poor, as the sector suffers from very weak distribution.
With regulations such as the proposed prohibition of bancassurance, the insurance sector would never grow to its full potential to perform the function of financial intermediation, and the country may never benefit from access to pool of long term life insurance funds needed to fund infrastructural development, a key component of President Goodluck Ebele Jonathan’s administration.