The insurance industry in 2015 witnessed low patronage both from the government and the general public, as a fallout of the general elections and a dwindling economy, Omobola Tolu-Kusimo writes.
The insurance sector in 2015 had a fair share of the fallout of the nation’s dwindling economic fortunes and the impact of the elections that year resulting in lull in business. Activities did not pick up until mid-year after the election and the emergence and swearing in of President, Muhammad Buhari.
This according to experts is because insurance thrives only when the economy of a country is booming. In other words, there is a connection between economic growth and insurance, and the sector is the engine room of growth of most developed economies and pivotal to infrastructure development, such as roads, healthcare and electricity, among others.
Among the few major events that took place in the industry, was the change of baton at the industry regulatory office, the National Insurance Commission (NAICOM), first insurance mega conference and the inauguration of insurers committee by NAICOM.
According to a special report by A.M. Best, an international rating agency titled “2015 Issue Review on Nigeria’s Non-Life and Life,” Nigeria’s insurance market is being confronted by a difficult operating environment as fluctuating oil prices threaten the country’s economic expansion.
The agency stated that despite this uncertain backdrop, the sector is considered to offer significant potential, with foreign investors attempting to build a profile in the market. A sense of optimism is prevailing the new political era instilling a greater degree of confidence in Nigeria’s future.
The report read: “Domestic insurers, particularly those that maintain insurance portfolios weighted to the oil and gas segment, are likely to feel pressure from the decline in oil prices. This reflects delays, or in some cases, cancellations of infrastructure projects as a result of negative investor sentiment relating to the stability of the economy, and therefore lower premium revenues.
“Furthermore, for insurers that maintain foreign-currency denominated obligations and utilise a weak asset liability matching framework, the decline in the naira relative to the U.S. dollar will increase liquidity constraints, owing to the need to increase domestic-denominated assets to meet their foreign-currency denominated liabilities.
“This would in turn have negative implications for the capitalisation levels of these insurers and hence their financial strength. In addition, with inflationary pressures set to increase amidst the rising cost of goods in the economy, the higher cost of importing spare parts also places insurers at risk from inflated claims costs, particularly within their motor accounts.
“In spite of such challenges, there appears to be some signs of renewed confidence in the economy following the accession of the new government led by Muhammadu Buhari. On March 28, 2015, Buhari of the All Progressives Congress (APC) defeated incumbent President Goodluck Jonathan of the People’s Democratic Party (PDP), garnering over 54 per cent of the 26 million votes cast.”
Evolving regulations enhance insurance expansion and improve market confidence
The report stated that in line with growth in the broader economic environment, Nigeria’s insurance sector has expanded significantly, although largely driven by inflation, which is reported to have fluctuated between eight per cent and 14 per cent over the past five years.
A.M. Best report further said: “Market participants have reported double-digit rates of expansion in nominal terms, supported by the rise in infrastructure projects and an increasingly wealthier population, which in turn has more valuable goods to insure and residual earnings to save. Growth to some extent has also been supported by the introduction of compulsory insurance, although enforceability of these mandatory lines of business remains a problem for the industry as a whole. Nonetheless, despite these positive drivers of growth, total insurance penetration rates remain low at just 0.3% in 2013.
“Although Nigeria’s population is growing, high levels of poverty and unemployment remain the reality for the majority of the country, as the benefits of economic growth have not sufficiently reached swathes of the poorer segments of society. Furthermore, a distrust in financial institutions, perceived weak oversight of regulators, or even a low-level of awareness regarding the benefits of insurance, are factors continuing to dampen the attractiveness of the sector to the majority of the population. Without addressing these issues or introducing innovative products and appropriate distribution methods to attract the various segments of Nigeria’s demographics, insurance will continue to be viewed as a luxury product only available and necessary to the well-off.”
The rating agency added that NAICOM continues to be proactive in its attempts to advance the Nigerian insurance market.
“Over the years, the regulator has implemented numerous reforms to improve the perception of the sector and expand the contribution of the industry to the country’s economic output, to varying degrees of success.
“In particular, the ‘Nigerian Oil and Gas Industry Content Development Act’ has yet to successfully deliver on its objective of effectively domesticating the majority of oil and gas business in Nigeria. The Act, established in 2010, mandated that insurance companies must participate in 70 per cent of the local energy business arising from the sector before these risks could be transferred internationally. A.M. Best has previously commented on the uncertainty regarding the practicality of this legislation, as Nigerian insurers lack the adequate levels of capital to support their exposures to these high-value risks. This uncertainty is enhanced by the absence of expertise and technical know-how to support the underwriting of oil and gas business.
“A.M. Best is aware that despite the legislation, significant amounts of high-value insurance risks continue to flow into the international markets. However, it estimates Nigerian insurers are currently retaining between 25 per cent and 40 per cent of the country’s oil and gas related business, compared to the less than five per cent written prior to the 2010 legislation.
In a further attempt to increase the retention of oil and gas profits in the country, NAICOM supported the Nigerian Insurance Association’s establishment in January, 2015 of a new initiative, the Energy and Allied Risks Insurance Pool of Nigeria. Managed by African Reinsurance Corporation, the pool consists of 14 members and has capacity to underwrite $4million of oil and energy risks. The pool is expected to assist in the sharing of knowledge and expertise of insurers underwriting oil and energy business, although in reality the capacity of the pool remains very small in comparison to the scale of many of the large oil and energy risks underwritten.
“While the Nigerian Oil and Gas Industry Content Development Act has enjoyed marginal success, in comparison, the ‘No Premium, No Cover’ provision enforced since 2013 has put an end to the practice of delays in premium collection by market participants.”
NAICOM
The industry got a new sheriff in the person of Mohammed Kari following the expiration of former Commissioner for Insurance, Fola Daniel’s two term of four years tenure.
Kari came in singing the change mantra. At the Chartered Insurance Institute Insurance (CIIN) 2015 Professional Forum, Kari said, for this Government to succeed in achieving the change agenda, all relevant sectors, organizations, householders and individual must be prepared to make impactful contributions to the desired outcome.
Insurance practitioners must begin to reflect professionalism both in their words and deeds by upholding the tenets, ethics and principles of the Profession.
Kari said: “We have seen unbridled, unsustainable and technically unsound rates being offered by supposedly insurance professionals more out of the need to meet a target than to properly underwrite. Professional Brokers takes business from contraptions called “sub-agents” who by the way are not registered by anyone.
“Premiums are loaded, discounted, retained or returned with impunity. Market indiscipline among practitioners, Boards and Management conflicts may degenerate to threatening the stability of some of our Companies. The implication of such practices on the industry in this new Nigerian business environment is the gradual diminution of our professional relevance as a veritable shield for the financial sector of the economy.”
He stated that they must all as professionals have zero tolerance for these unethical vices.
“Most of the actions of our professionals today are actually criminal. The Institute has a role to play in addressing the identified need of the industry. It is therefore my expectation that the Institute ensure that the Code of Ethics is reintroduced and strictly implemented. The disciplinary committee of the Institute must be hungry for work.
“The Commission is empowered in law to enforce a Code of Ethics. If the Industry does not, then the Commission has no option then to criminalise the enforcement. The Industry certainly cannot achieve the success it craves in an atmosphere of distrust, chaos, unprofessionalism and suspense without unity of purpose.
“Suffice it to say that the changing Nigerian business environment offers insurance industry the opportunity to re-adjust its governance, portfolio management, operational structures and leverage on regulatory direction of the Commission. It is my expectation that we learn from our past, be realistic with our present “Change Rhythm” and project into the future with calculated assumptions, simulations, forecasting that secures the future of our business.”
Also recently at the 2015 Champion Newspaper Insurance Day/Luncheon, Kari also said on the part of the regulator, and beyond providing leadership and a sane regulatory environment for insurance entities to operate, NAICOM has continually introduced market developmental programmes and initiatives aimed at increasing penetration and assisting insurance institutions enhance their premium revenue generation and, by so doing, increase the industry contribution to the nation’s Gross Domestic Product (GDP).
In our efforts to forestall the insistent poor cash flow position of most insurance operators and the attendant inability to settle claims and other operational liabilities, the Commission embarked on the full implementation of the No Premium No Cover as enshrined in the Insurance Act 2003 at the beginning of 2013.
Industry chieftain comments
CIIN President and Managing Director, Nigeria Reinsurance Corporation, Lady Isioma Chukwuma in an interview with The Nation said year 2015 has been a very challenging period for them. She said they are however, hopeful that year 2016 will be better.
She stressed that government needs to insure their properties adequately and increase spending for the economy to improve. “The year 2015 has been a very challenging period. Generally, things were slow as there was no business and less money in circulation. We are expecting that if all government properties are adequately insured, it will translate into improved premium income for the industry.
“If the economic policy is made in such a way businesses get the money that they require, people will have money to spend to be in business. I am hoping that money will be in circulation so that people can do their businesses as usual and if they do their businesses, there will be need to insure and when they do so, money will come into the insurance industry,” she said.
Managing Director, NEM Insurance Plc, Tope Smart said the year has been more challenging. According to him, there were so many issues to contend with in the year under review. “It was an election year and it took time for the Federal Government to put in place the machineries and people that would drive the economy. This impacted on the economy and the industry. It affected business a lot.
“The issue of fall in price oil affected so many things. Many manufacturers were unable to import products, which resulted in the insurance element of some of this businesses to be affected. Many of the banks are not able to give out credits and as such, the insurance element in some of these transactions too has been lost,” he added.