The Nigerian insurance sector needs higher capital requirement to raise underwriting capacity and regulation to enforce compulsory insurance, report has shown.
In the special report on the insurance sector released at the weekend, analysts at Afrinvest West Africa concluded that the insurance sector needs massive consolidation as had happened in the banking sector.
The Central Bank of Nigeria (CBN) had in 2005 increased minimum capital base for banks from N2 billion to N25 billion, leading to reduction in the number of banks from 86 to 25.
The report noted that the new risk-based capitalization requirements which has been proposed by the National Insurance Commission (NAICOM) is insufficient to address the problem of undercapitalization and could further lead to fragmentation. Faced with resistance from insurance stakeholders, NAICOM recently suspended the risk-based capital requirements.
According to the report, despite growing at a faster pace than the economy, the insurance sector is still one of the most underdeveloped compared to peers.
Analysts however noted that despite the poor performance of the sector, it has huge opportunities as improved capital buffers to increase capacity, innovation in micro insurance to deepen penetration, adoption of banc-assurance by players and investment in takaful insurance will drive performance of the industry.
Analysts highlighted the key role regulation plays in buoying the performance of the industry, but also noted that increasing population size and growing middle class are factors that support growth.
They said weak underwriting, cultural and religious beliefs, premium leakages, weak mortgage culture and slow pace of adoption and enforcement of compulsory insurance may weigh down performance going forward.
“After careful analysis, we believe all segments of the sector are viable options for investments, as all currently operate at sub-optimal levels. In non-life, it is evident that players are largely under-capitalized to underwrite big ticket transactions in oil and gas, marine and aviation; hence, forfeiting the opportunities in these segments.
‘‘Whilst we note that the new capital requirements by NAICOM compel companies seeking to play in these segments to raise capital, we believe there will be a need for mergers and acquisitions to strengthen underwriting capacity to adequately capture ‘big ticket’ and profitable transactions,” Afrinvest stated.
The report further noted that technological disruption to insurance has started in advanced climates with the introduction of various platforms such as Auto Claims Direct, E-brokers in the United States and Bima operating across Africa and Latin America.
According to the report, insurance is going digital and technological solutions insurtechs, with abilities to increase penetration, eliminate brokers or fasten claims verification processes are investment opportunities to position in. Insurance companies or insurtechs with a model to drive insurance operations through mobile technology are positioned to be industry leaders in the near term.
“We also believe micro insurance is a sweet spot in the industry, as it possesses the ability to deepen penetration and produce positive returns in the mid to long term. Fresh injection of patient capital and a model that encourages the use of mobile technology and unconventional sales channels are likely to produce better results,” the report stated.
The report showed that the insurance sector suffers from poor pricing with industry’s price to book at 0.7 times, lower than relative peers such as South Africa with 2.9 times, Egypt, 1.3 times and Ghana, with 1.3 times.
The report urged investors to look for value creation in the insurance sector while awaiting the necessary reform to drive industry growth.
With a population estimated at 196.1 million people, a growing middle class and increased life expectancy rate for Nigerians-54.5 year’s average for men and women in 2017 from 53.4 years in 2016, the potential for growth in the Nigerian insurance sector is significant. At optimal state, industry gross premium should be comparable to overall consumption expenditure in the economy, since insurance is a risk mitigating strategy.