Despite operating with the highest capital in Africa, Nigerian insurance industry’s penetration rate remains very low, at 0.6 per cent, compared with South Africa’s 15.4 per cent. What is required to change the narrative and grow the sector? OMOBOLA TOLU-KUSIMO reports.
The Nigerian insurance industry operates with the highest capital in Africa. For instance, as at March 2015, Nigeria had minimum paid-up share capital requirement for life and non-life insurers of N150 million and N200 million, according to a report by Ernst and Young (EY).
The EY report on African insurance market profiling analysis of 18 insurance markets in Africa, also put Nigeria’s minimum capital requirement for life insurance business at N2 billion (about $12.8 million) non-life, N3 billion (about $19.1 million), composite, N5 billion ($31.9 million); reinsurance, N10 billion, or $63.8 million equivalent.
But, despite the country’s insurance industry’s robust operating capital base, its insurance penetration rate remains low, standing at 0.6 per cent, compared with South Africa’s 15.4 per cent. The minimum capital requirement for long-term and short-term insurers and reinsurers operating in South Africa is ZAR10.0 million, equivalent of about $1.2 million.
The Rainbow nation, according to EY, has the most developed insurance market in Africa, accounting for about 75 per cent of all insurance premiums in the continent, primarily dominated by life insurance products, accounting for more than 80 per cent of the total premiums written in 2013.
South Africa’s 15.4 per cent insurance penetration level is also adjudged the highest in the region, driven mainly by life insurance (about 13 per cent penetration rate). South Africa’s total premiums also grew at a Compound Annual Growth Rate (CAGR) of about seven per cent from 2009 to 2013, with premium growth largely driven by the economic prosperity that South Africa has enjoyed over the years.
Nigeria trails behind, Morocco, Kenya, Ethiopia
Comparatively, Morocco also fares better than Nigeria. The North African country’s insurance market, is the second largest in the continent, recording premium volume of $3.2 billion in 2013. The minimum capital to conduct life, non-life and reinsurance business is fixed at $6.3 million. Morocco’s insurance industry, according to EY, grew at a CAGR of about six per cent from 2009 to 2013.
Its insurance penetration rate, which stood at 3.5 per cent in 2013, is the highest in the Middle East and Northern Africa (MENA) region. The market is dominated by the non-life segment, which accounted for 68 per cent of the total premiums written in 2013. At the end of 2013, the market had 17 insurance companies and one reinsurer.
Morocco’s insurance market has witnessed major consolidation since 2006 as a result of an increase in minimum capital and solvency margin requirements by the regulator. The consolidation has led to a fairly concentrated market, with the five biggest companies generating more than 70 per cent of the total written premium volume.
The third country with the highest premium is Kenya, while Ethiopia is fourth, leaving Nigeria, Africa’s largest and the biggest economy, in fifth position. For instance, the Kenyan insurance industry grew at a CAGR of about 20 per cent between 2009 and 2013, making it one of the fastest growing insurance markets in Africa.
Kenya is considered a regional hub for many foreign insurers, including Prudential and AIG, angling to gain a foothold in Eastern Africa. The market is also sought after by specialty insurers and reinsurers. The insurance market is dominated by the non-life segment, accounting for around two thirds of the total GWP in 2013.
Kenya’s insurance penetration rate is put at 3.4 per cent, with Life at 1.16 per cent, and Non-Life at 2.28 per cent, in 2013. Although, it is the third largest in Africa, its penetration level is still low compared to South Africa’s. The low penetration is attributed to negative perception about insurance products, poor distribution channels as well as product offerings.
Similarly, the Ethiopian insurance market witnessed impressive growth rates during 2009 and 2013, at a CAGR of 35 per cent. The country also recorded gross premiums written value of about $253 million. Its insurance market is however underdeveloped in comparison to other African countries, with an insurance penetration rate of 0.6 per cent in 2013.
This is mainly due to the economic condition of the country which is still ranked amongst the poorest in the world with more than half the population living below the poverty line. The market is dominated by the non-life market, which accounted for about 95 per cent of the insurance premiums in 2013.
Nigeria became the largest economy in Africa, ahead of South Africa following the rebasing of its Gross Domestic Product (GDP) in early 2014. It also has the largest insurance market in West Africa. However, the country’s insurance market is yet to achieve the penetration levels of its peers.
For instance, in 2013, Swiss Re Sigma reported that Nigeria’s insurance penetration stood at 0.6 per cent, which is much lower than the 15.4 per cent insurance penetration rate in South Africa. Between 2008 and 2011, the insurance market grew at a CAGR of about .22 per cent.
While the non-life insurance dominates the market with 75 per cent of the total premiums written in 2013, the life segment exhibited higher growth rates, a trend which is expected to continue.
According to World Bank, Africa economically was the world’s fastest growing continent in 2013, and is forecast to remain one of the world’s three fastest growing regions. Economic growth in most countries is driven by commodity exports, increase in energy, construction and mining projects. These have had a cascading effect on the insurance markets.
EY in its report stated that despite strong average GDP growth for the continent overall, many insurance markets in Africa are small by international standards.
Other than the relatively mature insurance markets, such as South Africa, Namibia and Morocco, insurance penetration rate in the profiled countries including Nigeria, remain low with levels ranging between 0.6 per cent and 3.4 per cent, which is lower than the regional average of 3.5 per cent in 2013.
The Deputy Commissioner for Insurance, Technical, National Insurance Commission (NAICOM), Mr. Sunday Thomas, gave more graphic details of the Nigerian insurance industry when, at the Chartered Insurance Institute of Nigeria (CIIN) 2019 Business Outlook held in Lagos, he affirmed that Nigeria’s insurance penetration across the majority of Africa remains drastically low.
Presenting a paper titled: “The role of the regulator in shaping insurance industry performance in 2019,” Thomas said the industry in the third quarter of 2018, recorded 22 per cent increase in Gross Premium Income (GPI), year-on-year, to N315 billion, from N258 billion recorded in the corresponding period of third quarter 2017.
He said the gross claim figure for the period under review increased by 30 per cent to N143 billion, from N110 billion in 2017. He added that the industry’s total asset stood at N1.179 billion as against N1.128 trillion in 2017.
Thomas was emphatic that by global standards, Africa’s insurance industry remains relatively underdeveloped, accounting for just under 1.2 per cent, at $0.06 trillion of insurance premiums written globally. While Asia is $1.62 trillion, Europe has $1.47 trillion and North America, $1.46 trillion.
Hear him: “Insurance penetration across the majority of Africa remains very low, South Africa remains the most dominant with about 16 per cent while other large countries like Nigeria remains drastically underpenetrated.
“Looking ahead, it is expected that global life insurance premium growth will improve over the next few years. While advanced markets are expected to grow at a moderate pace, emerging markets are set to outperform, mainly driven by strong growth in China.
“The global non-life sector is expected to improve, supported by advanced markets due to a solid economic environment, especially in the US. In emerging markets, non-life premium growth will remain robust, but slightly lower than in the recent past due to less strong growth in emerging Asia and ongoing soft rates.”
The NAICOM chief listed capital requirement for insurance practice, establishment and implementation of effective risk management and full implementation of risk based capital and supervision as areas of focus for the commission on the industry in 2019.
What could be responsible for country’s insurance industry’s lack-lustre performance despite operating with the highest capital in Africa? While answers to this may have thrown up a hot debate by industry operators and stakeholders over whether or not capital is the industry’s most critical problem, NAICOM appears to have taken the lead in the search for a solution.
In trying to find solution to the country’s insurance industry’s problem, the Commission had on August 27, 2018, introduced the Tier-Based Minimum Solvency Capital (TBMSC) that would have made companies recapitalise in order to have a good ranking under the Tier 1, 2 and 3 categories of the TBMSC plan. But the plan was later cancelled in November by the regulator.
The recapitalisation scheme, The Nation learnt, was aimed at developing and applying appropriate tools that consider the nature, scale and complexity of insurers, as well as non-core activities of insurance groups, to limit significant system risk and thereby achieve soundness of companies and contribute to the achievement of stability of the financial system.
Before the cancellation of the TBMSC policy, NAICOM said the policy would allow insurers to focus on their areas of strength; improve settlement of claims; enhance local retention; encourage market discipline, prudence and appropriate pricing.
Others are to encourage innovation and deepen market penetration; encourage voluntary mergers, and build investors’ confidence; and build a stronger and more vibrant insurance industry.
But industry observers and stakeholders are of the opinion that capital is not the solution to growing the industry. They believe that the regulator should return to the drawing board and fully implement and enforce the Market Development and Restructuring Initiative (MDRI) and eliminate what some operators referred to as bad elements or companies in their midst.
The MDRI project was aimed at addressing the issue of compulsory insurance products, insurance agency system, fake insurance institutions and risk based supervision. It was structured as a medium-term plan, 2009-2012, of installing the first phase of the necessary reforms in the areas of industry capacity, market efficiency and consumer protection in the Nigeria insurance market.
At the end of the plan period, the market was expected to have increased its gross premium income to N1trillion.
Stakeholder’s position
A major stakeholder, who pleaded anonymity, said one of the major problems of the industry is inability of some companies to pay claims as and when due. He said the operators engage in unethical practices that have continued to bedevil the industry, thereby impoverishing it.
He argued that capital is not the problem of the industry and urged the Commission to rather wield the big stick against bad and defaulting companies. He said the Commission needs to rejig its drive on the MDRI to further grow the industry by 2020.
He said: “There is need for NAICOM to carry out the effective implementation of the MDRI initiative. Also, presently, some companies are not able to pay claims. These companies are known to NAICOM.
“Some operators are unhappy with this development as the negative impacts of these companies that are not paying claims affect the existence of the good ones negatively. Hence, they want NAICOM to simply stop such companies from continuing to do business as the reason for any company in insurance business is to pay claims to the insured when the need arises.
“Also, the industry is under trading with the current capital at its disposal. So capital is not the problem. The problem is that NAICOM needs to take action against companies that fail to pay genuine claims by suspending their operational licence. If NAICOM suspends like three or five of them, others will sit up.”
But a top official of NAICOM, who does not want to be mentioned, disagrees with him. He said it is incorrect for anyone to say that the industry does not need capital. “If somebody believes that capital is not the problem of the industry, then let the person tell us what the problem is, he charged.
He stated that the issue of full implementation and enforcement of the MDRI was on the Commission’s priority list. “Moreover, the State Insurance Producer (SIP) that we introduced and was rejected by brokers is part of our strategy to implement the MDRI,” he added.
A major operator and one of the managing directors of an insurance company said it is true that many companies are under trading and underutilising their capital. He, however, expressed worry, saying “If capital is not the issue as argued by some, then what is the issue?”
He observed that no market grows at appropriate rate when it is dependent on government business. He posited that enforcing compulsory insurance shows compulsion on the part of the consumers, noting that insurers should rather work on creating value to their customers.
The managing director added that the regulator also has to take decisive actions and remove the bad companies that are causing problem for the industry. “Insurers should work on how to create value.
“I do not believe in compulsory insurance because it is all about using force and people resist force. They don’t see value in it. There is room for growth, but that growth will not come from compulsory insurance. My take is that people must see value in what you are selling first,” he said.
According to him, some companies are trading with a capital that is over and above the statutory minimum and are doing well. But many companies are not writing enough premiums and are therefore not creating enough liabilities to cover that billion-naira statutory capital.
“A lot of them are spending the premium to run the company. The reality of our situation is that we do not need this large number of companies that we have. Too many of them are in the fringes and barely surviving.
“There is need to create strength by consolidating. We can have few insurance companies that can be big and strong. We have seen it work with the banks. They have consolidated and are stronger. Access Bank and Diamond Bank just merged. With the strength they have, it means they can give more loans because the deposit base has grown, he said.
The managing director insisted that he believes that “We don’t really need to inject new capital. Part of the reasons why we have not been able to consolidate like the banks did is because many of us want to be managing directors. But rather than have 10 managing directors, have three and put all their resources together to be strong’’.
He, therefore, suggested consolidation and not necessarily injection of capital. “The people who will need capital are those who do not know what they will do with their N2 billion because of their solvency level. The people that are writing real businesses and are showing will not need new capital. We don’t need new capital because we have surplus capital.
“NAICOM on the other hand needs to take action. The banks did not consolidate voluntarily. They were forced. When the regulator looks at the finances of a company and see that it is going bad and there is no room for growth, it should say so. It is the regulator that can tell such a company that it can’t continue again.
This is important because the more it continues business, the more trouble it causes for the financial system. The Central Bank of Nigeria (CBN) don’t allow banks to go down; they simply tell them to go and merge when they cannot inject capital. But in the case of insurance, they are allowed to get to the point where they cannot pay claims. This is wrong”, he added.
NIA: Self-regulation is the way to go
The Chairman, Nigeria Insurers Association (NIA), Mr. Tope Smart, said the association is promoting self-regulation among its member companies.
Speaking during a media parley with newsmen in Lagos, Smart stated that the association is taking self-regulation more seriously than ever before, following the cancelled TBMSC introduced in August 2018, and later cancelled by NAICOM.
The NIA Chairman stated that the association had two years ago launched a transformational agenda that would grow insurance companies and the sector, adding that it is in the interest of the operators to shore-up their capital and not wait to be compelled by the government to do so.
Smart said: “Self-regulation is one of the things that we are trying to promote at NIA. In view of this, we launched a transformational agenda two years ago. We don’t want to wait until NAICOM tell us to raise capital.
“We want to on our own decide that the capital we are using to trade needs to be increased to a particular threshold. We have agreed among ourselves that this is necessary.
“When the commission cancelled TBMSC, we discussed the issue at our council meeting and told our members to shore up their capital so that they can be responsible and pay claim. It will also enable us to play where we are supposed to play and to carry the risk we are insuring.
He said this is an issue that NIA is taking up at Council. “Going forward, we don’t want to wait for government to say do this or that and that is why we have taken it up as an association,” Smart said.
Although, Thomas listed NAICOM’s focus areas for the industry in 2019, other areas, according to him, include monitoring of asset and liability management practices; enforcement of code of corporate governance; sustained surveillance on the activities of operators, especially those with issues of regulatory concern.
Others are attention to financial reporting practices by holding board and external auditors responsible; and preparing for implementing International Financial Reporting Standard (IFRS) 9 and IFRS 17.
He said that optimal development of the insurance market would be to facilitate financial inclusion initiatives, promote policy to facilitate public access to insurance services nationwide, and the enforcement of compulsory insurances
Thomas stated that the key areas of regulatory concerns in the sector are corporate governance failure; inadequacy and poor quality of capital and asset structure; delays in the settlement of reported insurance claims; and reduction in the market capacity to underwriting special risks.
He said they are also concerned about the inadequate risk assessment and pricing among insurance operators, inadequate deployment of technology in the industry; insufficient support to market development initiatives; challenges in financial reporting practices; and deficiency in human capital needs.
“The Commission is working to ensure the success of its major priorities for 2017 to 2020 through the MDRI. The aftermath of the financial crisis saw a globally coordinated response that resulted to series of new regulations across major financial sectors, for a more robust and stable financial system.
“Tougher, more detailed and more complex standards now apply to all aspects of regulation. Regulators across sectors remain highly vigilant to the risks of economic downturn and market shocks. The global business environment is changing and the changes will necessitate regulatory refocusing in 2019,” he said.
He also said jurisdictions are increasing business protection against money laundering and financing terrorism. “There are rising supervisory expectations, reflecting the growth of principles-based supervisory approaches that emphasise the importance of governance, culture, and management approach and the outcomes,” he stated.
The NAICOM chief further stated that a sound regulatory and supervisory system is panacea for maintaining a fair, safe and stable sector for the benefit and protection of the interests of policyholders; and effective insurance regulation supports economic growth.
