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.

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