‘All you need to know about Insurance in Nigeria’ – Series 10

Since the conclusion of the consolidation exercise in 2007, the Insurance Industry has witnessed some tremendous growth in terms of capacity and compliance to best practices particularly with the drive by NAICOM to raise the profile of the industry and its contribution to GDP. Against this background, it is appropriate to strategically appraise the sector using the SWOT (Strength, Weakness, Opportunity and threat) analysis.

Strengths

a) Enhanced Ability to Meet Obligations and Settle Claims

With the consolidation, the financial strength of the insurers and reinsurers that scaled through the exercise increased considerably. Because of this, their capacity to meet maturing obligations and settle claims increased. Indeed, with the increased capitalization, the absorptive capacities of the various insurers and reinsurers were enhanced implying improved capacity not only to underwrite more businesses but also to meet the obligations that may arise from the occurrence of disasters. Prior to the issuance of the subsisting directive on re-capitalisation, the minimum paid-up capital requirements for insurance companies based on class of business were N150m for Life, N200m for Non-Life (General), Composite (Life and General) and N350m for Reinsurance. This was largely identified as the cause of the inability of players to underwrite certain classes of businesses as well as honour obligations. This reason, which contributed significantly to the impairment of the industry’s goodwill, has now become a thing of the past.

With more equity funds, insurers of all categories are now able to meet their legitimate obligations to clients through prompt claims settlement and payment of verified claims. For instance, between 2012 and 2014, the sum of N193billion was paid out to settle Insurance claims with positive impact on public perception of the Industry. With these payments, business entities that would have closed shops were indemnified and given life lines to continue operations by the Insurance Industry.

b) The Nigerian Oil and Gas Industry Content Development Act 2010

It is common knowledge that Nigeria is an oil producing country and in fact, the 6 largest in the world. Interestingly, all risks arising from this sector were insured abroad for two reasons: dearth of financial capacity to shoulder the huge risk and second, lack of skilled manpower to handle the technical issues involved. With the consolidation exercise and the passage of this Local Content Act in 2010, it became mandatory, according to its Sections 49 and 50, for all insurance business from the oil and gas sector to be handled by indigenous underwriters who must also use local brokers. The Act also provides that any risk that is to be insured abroad from the sector must receive the approval of NAICOM. Thus, the consolidation exercise prepared and greatly enhanced the capacity of the sector to undertake insurance business in the oil and gas sector. Available statistics indicate that the gross premium income generated by insurers from the sector grew by 23% between 2009 and 2014.

c) Regulatory Activism

With the conclusion of the consolidation exercise, the Commission increased its tempo of supervision not only to assure investors of the security of their investments but also to reassure the insuring public that the current players in the industry will consistently play by the rules while deviant behaviours will be sanctioned. Indeed, the requirement that insurers should hire compliance officers was spot on as they set the tone for effective monitoring of various classes of businesses undertaken by insurers. The NAICOM’s commitment to its objective of increasing consumer trust and confidence in Insurance mechanism has been on its front burner.

d) Code of Corporate Governance for the Insurance Industry

As part of its regulatory oversight, NAICOM issued a Code of Corporate Governance for the industry. This code defines the governance and ethical practices acceptable in the industry. The level of disclosures prescribed and enforced has helped to raise the confidence of stakeholders as well as attract more players, particularly foreign players, to the Industry.

e) Improved Customers’ Services

One of the fallouts of the consolidation exercise was the increased focus on customers by insurers. With more resources, insurers could reach out to prospective and existing customers with useful product information. The practice of sending messages to customers on their birthdays and during festivities is now common. In other words, the packaging of products was enhanced by some insurers while customer relationship management now enjoy greater premium in the scheme of things. Furthermore, many insurers have leveraged technology to improve their product offerings and by extension, market share. It is fair to say that the customers are now having a good time with underwriters.

f) EU Solvency II Requirements

With the re-capitalisation of insurance companies in Nigeria, their solvency and ability to underwrite policies and meet obligations arising from claims have improved. Indeed, the recapitalization has had very significant effect on the preparation of underwriters to meet the requirements of Solvency II set by the European Union (EU) for insurance companies operating in its jurisdiction. The Solvency II requirement specifies and assesses the amount of capital that EU Insurance companies must compulsorily have to reduce the risk of insolvency. Risk-based solvency regime has also helped to facilitate mergers and acquisitions in the industry.

g) Foreign Direct Investments (FDI)

Due to the consolidation and the resultant improvement in regulations, more foreign insurance companies have been attracted to the Nigerian business environment. For instance, AXA Group acquired Mansard Insurance; Old Mutual acquired Oceanic Life Insurance Limited; Liberty Holdings acquired UNIC Insurance PLC; while New India Insurance Company acquired Prestige Assurance PLC. The capacity of this local insurer to underwrite policies particularly in the oil and gas sector has increased considerably. In line with the statutes, no foreign insurance firm can set up shop in Nigeria without first being registered by the Commission. Hence their entry through some existing insurance entities. As the economy continues to develop, more Foreign Direct Investment, through the insurance companies, is expected to be attracted to the Industry.

h) Growth in Gross Written Premium

The gross written premium, according to International Risk Management Institute (IRMI), refers to the total premium (direct and assumed) written by an insurer before deductions for reinsurance and ceding commissions. It includes additional and or return premiums. Written does not imply collected, but the gross policy premium to be collected as of the date of the policy, regardless of the payment plan. Given this definition, the gross written premium of all companies as at 31 December 2014 was put at N561.06billion by IMF & NAICOM (see table 1a below). Compared to its value of N105.37billion in 2007, this represents a 432.5% percentage growth. When compared to the 2013 numbers, the percentage is higher. The slight decline in 2014 was due to fall in premium incomes for Motor Insurance and Workmen’s Compensation. It would be safe to attribute the observed growth in gross written premium to the consolidation and the improved regulatory environment which has helped to create bigger and stronger insurance companies with financial capacity to underwrite bigger businesses and deepen insurance penetration.

The point must be made, however, that if gross premium income, defined as the revenue an insurer derived from premium paid by customers as consideration for insurance coverage under its various policies for a period of time, is used, the above numbers or values will be much lower. For instance, the premium income for the Insurance Industry in Nigeria as at 31 December, 2014 was put at N284.2billion by NAICOM while the President, Nigeria Insurers Association was reported to have put the 2015 figure at N350billion. These values represent a statement of the money that insurers earned from premiums and do not include any money that were paid out elsewhere from those premiums. Although the numbers are comparatively lower, they represent a steady growth of premium income from the pre-consolidation years.

Funmi Babington-Ashaye