‘All you need to know about Insurance in Nigeria’ – Series 9

The Nigerian Insurance market today cannot be effectively discussed without reference to the consolidation exercise which took place between 2005 and 2007 in the industry. Accordingly, this chapter considers the insurance sector reforms in its ramifications.

The Insurance Sector Reforms

Prior to the 2007 consolidation exercise in the Insurance Industry, there were over 100 registered insurance companies in Nigeria providing diverse services including, motor insurance, general accident, contractors’ all risks, cash in transit, marine and aviation insurance, life assurance, property, fidelity insurance, etc. Most of the insurance companies were privately owned following the divestment of Federal Government’s interests from several insurance companies in which it had shares. With a market gross premium of N44.5b, N50.2b and N76.32b in 2002, 2003 and 2005 respectively, the Nigerian insurance market was then rated as one of the largest and fastest growing market in Africa while it occupied number 65 position in world insurance ranking at the time.

Incidentally, the number of professionals in the industry, which is germane to its efficient performance, was not growing at a proportionate rate thereby creating a managerial gap that called for urgent action of all stakeholders. Indeed, a review of the industry’s performance as reported by the Financial System Strategy (FSS) 2020 showed the following:

• Contribution to GDP 0.71% in 2005

• N76.32bn ($587.0m) premium income 2005

• Insurance density: Premium per capita $4.3

• Life insurance premium income 17% of total premium income

• Non-life premium income 82.12% of total premium income

• No. 65 position in World Insurance ranking

• No. 6 out of 8 leading insurance markets in Africa

The scenario above painted a grim picture of the Nigerian Insurance Industry as the same report ranked China (11), India (19) and Malaysia (33) in the World. Aside the country’s poor ranking, its insurance premium/GDP ratio of 0.71% was low compared with China (3.5%), India (3.6%) and Malaysia (5.6%). The performance of the country’s Insurance Industry when compared with these countries was indeed poor given that these countries were also in the league of developing countries as Nigeria. It was to redress this unacceptable scenario that the 2007 consolidation exercise was undertaken as part of the holistic reform of the insurance sector.

Objectives of the Insurance Sector Reforms

According to Obaremi (2007), the seven objectives of the reforms are as follows:

(a) To increase the industry’s low retention capacity which had stunted its growth. Government was especially concerned about low local underwriting capacity for big ticket risks in the oil and gas, aviation, marine and other special risk sectors and was determined to stem the huge foreign exchange outflow engendered by the situation.

(b) To attract foreign capital infusion into the industry for enhanced premium growth and profitability.

(c) Achieving a consolidation that will produce companies capable of meeting claims obligations and compete at the continental and global levels.

(d) To enable operators to attract the wherewithal for strategic investments in human capital development, that is, to attract, train and retain professionals able to utilise new technologies for greater efficiencies.

(e) Creating a competitive environment which leads to brand activities, increased investment and better public awareness of the benefits of insurance to society at large.

(f) Achieving the necessary economies of scale that will make insurance affordable and accessible.

(g) Encouraging the industry to leverage the synergies from mergers and acquisitions and other alignments to achieve superior product innovation, deeper market penetration and product distribution

The Consolidation Exercise

On February 28, 2007, the curtain fell on the deadline set in September 2005 by the National Insurance Commission (NAICOM) for insurance companies to raise their minimum capitalization to new heights based on the class of business they underwrite. Varying degrees of minimum capital level increases were prescribed for the three categories of business.

From the table, the minimum capitalisation for Life Business was raised by 1,233% from N150m ($1.2m) to N2bn ($16.2m), while General Business operators were required to jack up their capital from N200million ($1.62m) to N3billion ($24.3m). The figure for composite insurance rose by 1900% from N250million to N5billion! The country’s four re-insurance companies were required to make greater capitalisation increases than the combined increases for Life and General Businesses. They were required to raise N10bn ($81m) to be re-certified–an increase of 2,757% from the previous level of N350m ($2.83m). At the end of the exercise, the Insurance Industry capitalisation exceeded N200bn ($1.62bn) from a pre-consolidation level of N30bn ($243m). With the exchange rate of one USA Dollar hovering around N305 officially and N490 in the parallel market, the current values of the minimum capital for various classes of insurance business can be better imagined.

FSS 2020 and the Insurance Industry

As part of the reforms of the financial services sector of the economy, the Committee of the Financial Services Regulators came up with a reform Agenda christened ‘’Financial System Strategy 2020’’ (FSS2020). To give effect to its vision for the Insurance Industry, the NAICOM, under the leadership of Mr. Fola Daniel, constituted a team of experts who calibrated the strategic initiatives of the FSS 2020 Insurance Sector Report into thematic Outputs, Action Steps, Deliverables, Time-Buckets and Market Impacts on the basis of short, medium and long term deliverables with specific time lines. Tagged “Market Development and Restructuring Initiatives (MDRI),” implementation of the initiatives covered a 3-year period of 2010, 2011 and 2012.

The following were the components of the NAICOM’s MDRI project:

(a) Enforcement of the Compulsory Insurance Products.

(b) Sanitization, modernization and standardization of the Insurance Agency System.

(d) Adoption of Risk-based Supervision and Solvency-Focused Regulation

(e) Bridging the skill-gaps in the young Insurance Practitioners

(f) Building Consumer Trust and Confidence in Insurance

The Expected Deliverables:

The following were the expected results from the MDRI project:

(a) Create about 50,000 new jobs in the Insurance Industry.

(b) Provide Fire Service Maintenance grant for each state in Nigeria.

(d) Increase Consumer Trust and Confidence in Insurance mechanism.

(e) Lower the Insurance Gap from the current 94.0% to about 70%.

(f) Increase Insurance Contribution to the GDP to over 3.0%

(g) Increase Premium per capita from the current N825.00 to N7,500.00 by 2012.

(h) Promote Insurance as a tool for stimulating growth of other sectors in the economy and to raise funds for projects of national development.

(i) Consolidate the market through Risk-based supervision and Solvency-Focused Regulation.

The National Insurance Commission had hoped to leverage the six (6) Compulsory Insurance Products in Nigeria to reduce the huge Insurance Gap. The Compulsory Insurance Products in Nigeria are:

i) Employers Liability – Workmen’s Compensation Act 1987.

ii) Healthcare Professional Indemnity -NHIS, Act 1999.

iii) Builders’ Liability–Insurance Act, 2003

iv) Occupiers’ Liability – Insurance Act 2003

v) Motor 3rd Party Liability–Insurance. Act 2003

vi) Employers’ Liability – (Group Life) – Pension Reform Act 2004

As noted by a school of thought, for any organisation to remain viable, its management must provide periodic review of its objectives, resources and opportunities. It must constantly re-examine its basic business and focus, target audience and select customer groups, differential advantages, channels of communication and messages; against the backdrop of new developments, trends and market needs. These were the driving force behind NAICOM’s MDRI project. The extent to which these objectives and targets were achieved by NAICOM is still being aggregated.

Funmi Babington-Ashaye