The Nigerian nation is 52 years old, however, the nation’s insurance industry is very much older than the country having been in existence since 1918 when Royal Exchange commenced operations.
Invariable, the Nigerian insurance sector have come of age, regrettably however, experts are of the opinion that the sector in its current structure is still very fragmented.
The sector made significant progress with the successful recapitalisation in 2007, however, the 49 insurance companies put together, write little above N200billion as premium income in a country of 160 million people against a total industry shareholders’ funds of about N347billion.
Of the 49 companies, less than 50 percent write premium income equal to or higher than their share capital which is usually a measure of the efficiency of capital utilisation by insurance companies.
Looking at the technical solvency of the entire insurance industry, experts are worried that gross under-utilisation of capital has continued to exist.
The regulatory minimum capital requirement for composite insurers is N5billion, N3billion for general and N2billion for life operators, however, experts are of the view that with such as capital requirements, there is only so little that underwriters can do.
Because globalisation has become reality, insurance operators need to invest in infrastructure, technology, people, etc. And because in a number of these things, operators have to make the investment up front before the income flow will come in, N5 billion capital base is therefore not sufficient.
According to Managing Director of Cornerstone Insurance Plc, Mr. Ganiyu Musa, if insurers are going to play in some segments of the market like in corporate business, oil and gas, as well as in the multi-national sector, there is need to embrace more capital injection.
Musa said “If you have a capital of N5 billion and you want to insure a major industrial risk for instance, they are not going to take you serious. At N5billion, you have to make heavy use of Re-insurance which will reduce your retained income and the rest.
“So, while it is possible to operate as a niche player with minimum capital, if you want to be broad- based and essentially play in the corporate, oil and gas as well as the multi-national sectors and also to make the investment necessary to roll out a broad based strategy, I would think you need more than N5 billion.”
Another major challenge for the insurance industry is the fact that the penetration ratio is very low, reported to be less than one per cent.
According to Managing Director of Risk Guard Africa, Mr. Yemi Soladoye, less than one million adult Nigerians carry one form of insurance or the other.
Soladoye said “If you compare that with 25 per cent penetration in the banking industry, you will see that the potential you have in the insurance industry is really outstanding.”
According to Musa, one of the consequence of the fragmentation is the fact that very few individual insurance companies have the necessary financial capacity to make the investment needed in human capital, technology and infrastructure to be able to really provide the type of service that will appeal to and attract the 90 million adults out of the 160 million population.
He said “Because capital is small, your access to or comfort in making those investments will be limited on one hand. On the other hand, your capacity to underwrite and retain risk is also dependent on the level of capital that you have. When you are small and fragmented, there is only very little that you can write and retain.
“A number of the multi-national risks tend to be de-localized or dislocated because those multi-nationals have very strict credit requirements such that only very few insurance companies will meet their minimum credit threshold. As a result they don’t feel comfortable insuring in the local market.”
The way forward:
According to experts, for the insurance industry to move forward, there is need for a paradigm shift. One basic factor that insurance operators must imbibe, according to Musa, is to improve on the quality of personnel in their companies.
Musa said “Managements of companies need to work hard to put in place a robust strategy to re-position their companies to play a very key role in the emerging insurance industry landscape in Nigeria.”
According to him, for insurers to really play a key role, there is need to have a minimum size to be relevant because there will be a lot of opportunities if there is adequate capacity.
Musa also said that with adequate capacity, there is no reason why the agency workforce in the sector should not be ten times what it is at the moment. “It takes time and resources to train and build an agency workforce to get to the level of experience that you require,” he said.
Since individual insurance companies have different areas of strength, Musa said that there is need for companies to embrace mergers and acquisitions because coming together to form a big entity will be in the interest of stakeholders including staff, shareholders and more importantly the insuring public.
Also, underwriters should be committed to operating at a very high level of professional standard and ethics.
Musa said that the key to the growth of insurance is in the retail market. “While we have to position to serve the commercial and corporate sectors, the key to the development of insurance in this country is in the retail sector, that is, the personal lines business.
Really we need to make insurance attractive and affordable to as many people as possible. We need to be able to do more in terms of consumer awareness and consumer education, we need to put in place the infrastructure to enable you do your insurance.”
”We all run after the same NNPC business; head of service account and such major accounts. So the investment in infrastructure, technology that is needed to build a sustainable business model is not focused on because we don’t have the money to do that. So, there is the potential for business volume far beyond the level of capital that we have.”
Musa said “Having been beaten in the capital market during the 2008/2009 crash and the capital market remains challenged at the moment, there is very limited opportunities for significant investment returns which means as insurers now, we have to go back to the basics in terms of doing proper professional underwriting and charging appropriate prices.”
”Unfortunately, we are all chasing the same companies, accounts and we tend to compete only on price. Competition is stiff at times and almost very brutal in the industry. So, we see competitive pressure on pricing being a significant challenge in certain segments of the market,” he said.
There is a significant level of either misunderstanding or mistrust on the part of the insuring public. “We are still struggling as insurers to remove the garb of poor perception. We need to work on that, do a lot more in terms of consumer education,” Musa said.