Why the annual financial results of most insurance firms remain consistently poor

Matthew Otoijagha

It has become a common saying that Insurance is under performing in Nigeria, with dismal percentages and unflattering comparisons trotted out to reinforce this position. While some may not disagree that the industry is performing less than optimal potential, the insurance industry has however not been static.

All the industry’s indices have grown steadily, though at a slow pace over the past few years. But unlike countries in other clime, including South Africa, which contribute majorly to their economy, Nigeria’s insurance industry contributes less than 0.4 per cent to the nation’s Gross Domestic Product (GDP) and efforts by successive industry regulators to improve the financial standing over the years has failed to revise the consistently bad financial results released by majority of the insurance firms.

The industry with estimated N600bn premium income, comprise of 58 insurance companies, about 500 brokers and over 2000 agents, without has also failed to fully play its role in developing the economy and thereby raising questions as to why financial results of majority of insurance firms is nothing to write home about.

 

Why insurance remain the weakest link

Key players in the industry, including the regulator, National Insurance Commission (NAICOM) have blamed the development on the non-cooperative attitude of some insurance firms.

To buttress this fact, the commission came up with policies that can change the dynamics of the sector and boost its income in its effort to make the industry more vibrant.

In July 2018, NAICOM introduced the TBMSC to classify insurance companies into three-tier category while it raised the minimum capital base for composite insurance firms (life and non-life underwriters) that want to get licenses to underwrite all risks in the country from N5 billion to N15 billion.

The commission also raised the minimum capital requirement of life insurance firms that want to underwrite all forms of life insurance from N2 billion to N6 billion; while the minimum capital base for non-life insurance firms was raised from N3 billion to N9 billion.

Before the new initiative, the Commissioner for Insurance, Mohammed Kari, had noted at several insurance fora that  the industry is characterized by inadequate capital, inability by some firms to pay claims promptly; dearth of appropriate human capital and professional skills; poor returns on capital; too many fringe players; incidences of rate cutting and corporate governance issues.

He listed other problems of the industry as insurance premium flight; lack of innovation in product development; lack of awareness on the part of consumers on the suitability of insurance products and low GDP per capita figures, among others.

According to NAICOM, the TBMSC structure was a complimentary measure to the ongoing implementation of the Risk-Based Supervision (RBS) program. But some insurers resented the policy because they believed it would put them out of business and make others to thrive. This led their shareholders to drag the commission to court. Consequently, NAICOM withdrew and cancelled the policy.

 Cancellation of TBMSC

With the cancellation of the Tier Based Minimum Solvency Capital (TBMSC) framework by the National Insurance Commission (NAICOM) late in 2018, the capital base of the industry remains the same, meaning that, Non-Life Insurance Firms are to continue to operate with a minimum of N3 billion capitalization; Life Insurance Operators to maintain N2 billion and Composite Insurers are to maintain N5 billion minimum capital base, a base to which they will conduct their respective businesses in 2019.

 If the recapitalization exercise had gone through, it would have increased the capitalization of insurance industry by at least 300 per cent, which would have allowed insurers in the country to retain some of the huge insurance businesses being taken abroad.

While calling on his colleagues in the business of insurance to shore up their capital base in the new year, irrespective of the cancellation of the recapitalization exercise, the President, Chartered Insurance Institute of Nigeria (CIIN) who is also the Managing Director/CEO, Consolidated Hallmark Insurance Plc. Mr. Eddie Efekoha, said, most insurance companies will still lose businesses they used to underwrite as policyholders seemed poised to transfer their risks to underwriting firms with strong capital base.

He explained that there is a particular transaction in Exxon Mobil for several years that never respected the N3 billion capitalization, adding that operators whose capital were within this minimum were excluded from their businesses. He noted that, recently, he was told of a broker, who said his client had informed him not to place risks with any underwriting firm with less than N9 billion as proposed in the cancelled TBMSC policy.

Efekoha posited that with such developments, it is now immaterial whether the industry regulator withdraws the TBMSC policy, adding that the policy has opened the eyes of insurance consumers.

According to him, “What I heard from our office recently was that there is a broker that said that my client has already seen that N9 billion is what is required, so please go and shore up. It is immaterial whether the commission has withdrawn from the TBMSC or not.

‘‘Of course, we are all here in this market, there is a particular transaction in Exxon Mobil for several years that never respected the N3 billion capitalization and to that extent, some of us whose capital were not up to that minimum were excluded.”

Issue of rate-cutting:

Another problem that has consistently hindered most insurance firms from posting good results and has resulted in poor financial result is the issue of rate. The problem is expected to continue in Insurance Industry in 2019 as insurers scramble for businesses, especially, in the informal sector base.

A development that is hurting insurance industry in terms of premium income, experts said, is risk-cutting is a regrettable act that must be addressed to increase insurance contribution to the nation’s Gross Domestic Product (GDP).

According to the Deputy Commissioner for Insurance, Mr. Sunday Thomas, “There was a point in this market when 10 per cent for comprehensive insurance was sacrosanct, but later, it came down to five per cent and that became the standard. But you and I also know that there was a point that some operators were charging as low as one per cent

“Also, there was a point that 3rd party was N5, 000. You and I know that it came to a point where people were charging N1, 000 and the market was producing N200 million premium income from this business. If they decide to charge N5000, what is the market likely to produce?”

This challenge, he said, must be addressed by insurers to increase the stake of the industry to pay genuine claims as and when due, noting that, when a risk underpriced, it affects the ability to promptly pay claims.

The Managing Director, NSIA Insurance Limited, Mrs. Ebelechukwu Nwachukwu, speaking in the same vain said, “If we can push all of these over and over in 2019, I have no doubt at all that penetration will increase, and premium will rise also for insurance firms.

 Failure of the N1tn premium target:

The National Insurance Commission (NAICOM) said the industry’s N1 trillion premium income failed because insurance operators failed to behave rationally by their refusal to join NAICOM in upliftment of the industry.

Deputy Commissioner for Insurance, Technical, Sunday Thomas, who started this in Lagos, noted that the commission proposed N1 trillion for the market, under certain circumstances and with a lot of assumptions, stressing that part of the assumptions was the effective enforcement of compulsory insurances, assuming that operators would behave rationally.

 He also accused operators of violating laws to hurt their business, as against their counterparts in the banking sector that would do same to promote their operations.

According to him, “I did a comparative analysis between the banking sector and the insurance sector. The central bank of Nigeria will put a cap on interest rate for certain sector. The banks would violate this rate, not by reducing the rate, but by increasing the rate, using other terminology like administrative fee. If CBN for instance says the rate should not be more than nine per cent, the banks would charge 12 per cent.

“There was a time that CBN also gave a directive to the banks to have branches, even at rural areas.
“The banks would violate such directive and pay the penalties for not having branches in those areas because they consider these areas as not being viable.

He noted that there is no way the regulator can go after all operators, stressing that it beats his imagination why anyone would want to cut himself, whilst doing his business.

He said NAICOM is committed to taking the industry to lofty heights, adding that the commission has always reminded government agencies that if they want insurance operators to pay their claims, they need to pay the right premium.

 Poor capitalization of insurance firms

The insurance sector which ought to provide risk cover for other sectors seemed to be losing its ground as parties it should secure are breaking new grounds leaving it behind. This can be attested to by the recent move by the Central Bank of Nigeria (CBN) to raise the capital base of Micro Finance Banks and mortgage guarantee banks to N5 billion and N6 billion respectively.

The Commissioner for Insurance, Mohammed Kari, who is not happy with the development, said the sector remains the weakest link in the Nigerian economy, adding that an industry that should ensure the aviation and other high-ranking sectors, should not be seen to have capital less than that of microfinance banks

Said he, “We are the weakest link in the Nigerian economy and now we are going to be less capitalized than mortgage guarantee banks with N6 billion and less capitalized than microfinance banks with N5 billion. How can an insurance company that ensures the aviation sector have capital less than that of microfinance banks? We should wake up.

“Some insurance operators argue that capital is not important. If capital has no function, how come banks bought over insurance companies that used to be owned by insurance companies?  Insurance anywhere in the world is the mobilizer of funds and provider of security.

‘‘You cannot provide security if you don’t have capital. How can you approach a microfinance bank of N5 billion and tell them you want to give them protection? What is your capital? The claim you pay and the liability you hold is a function of your financial ability.

‘‘Check any jurisdiction in the world, insurance companies are more capitalized than banks. Insurance companies own virtually all the financial sector in the world. They fund infrastructure because they have long term funds to fund long term business. If the insurance industry doesn’t need capital, why are they the weakest link in the financial sector?’’

He posited that the current capital of insurance companies was increased 13 years ago, stressing that financial sector should not leave capital stagnant for 13 years. In the last 10 years, microfinance banks license has been reviewed five times. ‘‘That is how a financial sector operates and to a large extent a responsible operator should do these things without regulatory prompting,’’ he said.

Failure to bring more people into insurance web

The Managing Director/Chief Executive Officer, Infrastructure Bank Plc. Adekunle Oyinloye, while speaking recently at a forum in Lagos, called on the government and underwriters to make concerted effort to bring more people into insurance web.

He maintained that if the economy is in a better shape, the prospective assured will have the liquidity to procure insurance. He urged underwriting firms to improve on their customer services, adding that companies are constrained by customer-service related issues, typically relating to product offerings, quality of services and sophistication of products offered.

According to him, “Customer service is clearly important for winning new customers and retaining existing ones. The first step of changing the face of the industry is ensuring an exceptional customer experience.

‘‘Insurance companies must find a way to provide customers with an internet based self-service insurance platform where customers can view policy coverage, pay bills, make changes to policies, submit claims and check the status of claim progress. Brokers should be able to obtain online quotes, proposal and plans, design for their customers,” he stated.

“Insurance companies must also find ways to sensitize the populace about the use of insurance. The government also has a role to play in this by making relevant laws that will help make certain insurance policies compulsory and harsh sanctions for non-compliance of same,” he added.

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