Menu Style

Cpanel

18June2018

Creating more value through enforcement of compulsory insurances

At the end of the insurance sector consolidation and recapitalisation, part of the reform of the entire financial system in 2007, expectations were high that the sector would unlock the huge untapped value in the industry and deliver exponential growth similar to the experience of the banking sector post consolidation in 2005. Unfortunately, despite the huge market for insurance, growth in the industry has remained flat in the last four years, partly due to the global economic recession. To a large extent the industry has been unable to deploy the new capital to grow earnings and mobilise long term investible funds. Rather, a large portion of capital raised might have been lost to the financial market crisis through equity investment. The sector has therefore not been able to take over from banks in the provision of core services such as underwriting performance bonds and guarantees and credit bonds for large ticket transactions.

There is huge potential for the underwriting business in Nigeria

With a population in excess of 160 million, Nigeria offers one of the biggest insurance markets in the world. The potential of the insurance market is better appreciated when compared to South Africa which has a population of about 40 million but controls 78.13% of Africa’s insurance sector’s premium while the sector contributes about 16% to the country’s GDP. According to statistics for 2010, Nigeria controlled a mere 1.7% of the continent’s total premium of US$67 billion. Therefore, if South Africa with less than a third of Nigeria’s population could control a premium of US$52.6 billion (N7.88 trillion) in 2010, Nigeria’s insurance industry has the potential of reaching this landmark in the medium to long term.

The Nigerian Oil & Gas Local Content Development (NOGCD) Act 2010 is poised to open up huge capital investment underwriting business for the sector with the capacity to deliver an estimated premium income of N52 billion in 2011 and annual growth of 10% afterward.  The huge infrastructure gap, low manufacturing capacity, high agricultural production potential, expanding middle income group and rising per capita income of the nation suggests that Nigeria’s insurance sector is at least as big as the pre-crisis banking sector in gross premium potential.

Stiff competition from banks and pension funds is among the several challenges facing the sector

The industry is however bedevilled by a number of challenges which has contributed to its stunted growth. Following the recapitalisation of the industry, it has been faced with stiff competition from banks, the pension industry, the stock market and even the real estate market in attracting household and firms’ funds. On the back of the poor perception of insurance among the populace, the high return on investment being offered by these other channels depressed insurance penetration. The reform of the pension system and the strength of enforcement supported faster growth in the pension sector to the relative disadvantage of insurance- personal and life insurance. Hence, the most enforced compulsory insurance business, motor insurance, remained dominant, accounting for over 25% of total industry revenue.

Slow adoption of innovation and creativity contributed to sector underperformance

The failure of the industry to emerge stronger from the reforms of 2007-2008 with a view to overcoming many of the challenges of the past contributed to its underperformance. The industry’s product offerings remain largely unsophisticated with only few companies creating new opportunities and exploring ways of filling existing gaps in the market. Insurance operators also failed largely to acquire the requisite skill to participate in highly specialised transactions especially in high value risk segments such as aviation, oil & gas, construction and infrastructure. At the low end of the market, where insurance participation has been estimated at only 2.3%, the industry has failed to focus on developing innovative products that could capture the market segment while improving on the image of the insurance business. In addition to the low depth of the capital market, most insurance companies also have below average investment and asset management capabilities considering the passive investment strategy adopted by most of them and their level of exposure to the equity market at its peak. Industry skill is still largely limited to technical underwriting while regulatory oversight, although improving in recent times remains substantially reactionary.

Insurance penetration in Nigeria is very low

At 0.05%, the insurance contribution to national value added has remained low in the last five years compared to other markets, globally. Industry gross premium dropped below N200 billion in 2010 translating to a penetration rate of 0.8%. Besides the surge in gross premium by 49% in 2008, the immediate post-consolidation year, the average industry growth declined to 33% in 2009 and was even lower in 2010. In our opinion the industry might have lost significant premium income in 2010 as a result of the drastic fall in consumer spending following the protracted financial markets slowdown which began in 2008.  

The high exposure of the sector to the capital market during the protracted crisis eroded the value of investments and eventually the capital base of the industry at a period when the demand for insurance products was shrinking. The total market capitalisation of the industry grew from N200 billion (US$1.36 billion) in 2006 to N550 billion (US$3.74 billion) in 2008 but today the market capitalisation of the industry is less than N140 billion.  Unfortunately, the performance of the quoted insurance companies in terms of profitability, valuation, corporate governance, timely and reasonable rendition of returns and brand visibility has been below expectation.

Despite the enactment of the enabling law, compulsory insurances are not being enforced

Insurance is strategic to the development and economic prosperity of any nation because it serves as the custodian of the nation’s wealth through the process of indemnification. Insurance also mobilises small savings from millions of policy holders to create more wealth through long term investment in the productive sector of economy. It is in recognition of this that the government, in the Insurance Act 2003, made six classes of insurance compulsory.  Unfortunately, with the exception of the third party motor insurance which is a part of vehicle registration requirement, and the group life insurance as part of the new Pension Reform Act 2004, the others have existed merely as legal pronouncements.

In 2009, the National Insurance Commission (NAICOM) instituted the Market Development and Restructuring Initiative (MDRI), the centre point of which is the enforcement of the compulsory insurance and growing the industry gross premium to N1 trillion by 2012. In furthering the implementation, NAICOM pronounced March 1, 2011 as the deadline for the commencement of strict enforcement of these compulsory insurances. Unfortunately the non-existence of the institutional framework for enforcement has made it impossible to achieve. The enforcement of the third party motor insurance was easy because it is entrenched in the vehicle registration process and enforced by the police and traffic agencies.

The industry may not benefit from the opportunities until key challenges are addressed

Enforcing the compliance of the 6 compulsory insurance alongside the effectiveness of the provision of the Local Content Act are key success factors to the growth of the industry. The adoption of the model for enforcing motor insurance would be more effective at enforcing the other classes of insurance. A substantial body of evidence suggests that a robust and efficient insurance market will go a long way towards improving the country’s financial sector depth and efficiency. The sector can leverage on its institutional investor role in offering important services for which it has comparative advantage. The hurdles however appear numerous but they are not insurmountable if the regulators and players are willing to play by the rules and focus on the identified key issues.

  • Written by The Analyst
  • Hits: 261

Placing the Capital Market on Nigeria’s economic agenda

In a recent article by the Economist proffering “sensible ideas for reviving America’s entrepreneurial spirit” the magazine argued that the country’s growth machine was in trouble because the three most powerful pistons of the machine had been malfunctioning for over a decade. The capital market was listed as the first of these pistons along with innovation and a knowledge economy. The Economist puts the capital market as the root of America’s economic prowess saying that the “United States once boasted of the world’s most friendly capital markets”. Buttressing the importance of the capital markets, Robert Litan and Carl Schramm point out in a new book, “Better Capitalism” that the lull in America’s initial public offerings (IPOs) is down from an average of 547 a year in the 1990s to 192 since then. This IPO drought has cut the supply of new high growth companies. According to the authors, given that companies less than five years old may have provided almost all the 40m net jobs the American economy added between 1980 and the financial crisis that could represent dismal news for the unemployed.

If the capital market is this important to economic growth owing to its multiplier effects on job and wealth creation it is quite worrisome that economic planners have chosen to snub the market even to the point of derision. Policy makers who have snubbed the capital market could be pardoned for oversight especially when weighed against the pronouncements of the hawks who have boasted in public forum that they would adopt policy measures to “squeeze the equity markets”. For a country that boasts of its ambitions to be among the top 20 economies by 2020, it would remain a global marvel how this grandiose ambition can be achieved without carrying the markets along.

That is why the parley between the capital market community and the Minister of Finance (who also doubles as the Co-ordinating Minister of the Economy) which held in Lagos in July came as a welcome relief. The Nigerian equities market was heavily deflated by what started off as a price correction in March 2008 but later snowballed into a full blown market crash. Despite the bullish rally of the last three months, the benchmark index is still less than half of what it was at its peak. Some doomsday analysts even argue that owing to the losses suffered by investors (especially at the retail end) that it will take collective amnesia of a new generation to ignite interest in the equities market once again. 

The higher than expected yields in government debts even gave local institutional investors a compelling reason to shun the equities market. Despite the high yields on government debts, as long as the truism that equities offer higher returns on the long term than bonds still stands, then even institutional investors especially pension funds who think long term will still need to keep equities on the radar. This insight may have informed the keen interest of foreign portfolio investors in the Nigerian equities market. Despite the exposure of these FPIs to foreign exchange risks and double digit inflation, 80% of the total trades on the Nigerian bourse in the last year were driven by the FPIs.

When will the Nigerian companies start raising equity capital again?

We must appreciate that a capital market in its simplest of definitions is a place where the government and business enterprises can raise long-term funds. However, the current market downturn has sapped the market of capital raisingactivities especially when adjudged against the 2007 era when First Bank alone raised over N600 billion in one swoop. Capital raising by firms last year from equity offerings was roughly below N5 billion at a time companies are still in dire need of capital. Firms that seek listing on the exchange must see commercial sense behind the decision. It is not a decision that can be entirely driven by emotion. The ability of Nigerian capital market operators to serve as intermediaries steering long term funds to fill capital investment needs could just be the silver lining into the exchange.

But the Nigerian equity market is currently an inaccurate mirror of the economy

It is quite true that the Nigerian equities market is not a true representation of the broader economy. The market capitalisation of the NSE at $52.83 billion pales into insignificance for instance when it is compared to South Africa’s market value of over $600 billion. The Nigerian economy has corporations that can truly help with catching up. If press reports are anything to go by, the listing of the telecoms firms alone can add another $45 billion to the market’s value. It is baffling that with agriculture’s contributions to GDP, it only represents a minute fraction of the value of the equities market. Even at its five year peak in 2007 when agriculture contributed 42.2% to GDP, the market capitalisation of the quoted agriculture companies contributed a miserly 0.36% to the market value. That the sector has only five companies listed is even a more damning commentary.  In order to attract more interest to the capital market,  the country need to put the capital market on the economic agenda.

Government should start the process by listing state-owned companies 

Following the government’s decision to liquidate NITEL, perhaps one should ponder if this exercise would have been necessary had the firm’s shares been listed ab-initio.  Every round of sale of NITEL attracted criticisms especially on the transparency levels being adopted around the sale. When there was no transparency issues around the sales process, preferred bidders failed to muster the cash resources to execute the deal. However, with the benefit of hindsight one might wonder if NITEL would have been the contraption it is today if the government had sold off some of its stake through an offer for sale on the exchange. Our suggestion especially at this times when the government plan to privatise some of its assets is that while the government seeks for core investors, the divestment process should also include giving other Nigerians a chance to retain a portion of this commonwealth by offering minority stakes on the exchange. With this we will avoid the asset stripping that has bedevilled some of the privatised enterprises in the past.

Why it is important to list government owned corporations?

According to Hans Christiansen and Alissa Koldertsova in an OECD article on Corporate Governance, the main direct contribution of exchanges to corporate governance has been listing and disclosure standards and monitoring compliance. According to them, “stock exchanges have established themselves as promoters of corporate governance recommendations for listed companies”. It has been allegedthat Nigeria’s age old problem of cronyism and patronage affected the performance of some of the privatised entities especially since some of the new core investors were not able to deploy sufficient capital and expertise to achieve the intended turn-around effects. Listing a portion of some of the government’s shares would have helped safeguard disclosure levels and transparency standards in these entities post privatisation. And it is pertinent that the government must not follow this same path when selling its stake in the PHCN entities. The NSE must become the guardian angel of privatised entities to avoid the pitfalls of the past.

The creation of a vibrant OTC market for equities would also help

Nigeria is long overdue for an active over the counter (OTC) exchange in the mould of the American NASDAQ. This would serve as a platform for non-listed companies with a large number of shareholders to exchange their shares even without public listing. Thus firms like WAMCO and MTN will be able to expand their current OTC framework beyond registrar brokered deals. The OTC platform will also serve as an intermediary for firms that seek to test the markets prior to their full listings on the exchange in the route that Facebook adopted. Thus companies will have been able to test investors gauge for their shares and fully appreciate the impact of listing.

  • Written by The Analyst
  • Hits: 272

Connect