By Rosemary Onuoha

The Nigerian insurance sector is considered to offer significant potential with foreign investors attempting to build a profile in the market despite being confronted by a difficult operating environment as fluctuating oil prices threaten the country’s economic expansion. According to a report by A.M Best, a sense of optimism is prevailing as the prospect of a new political era is instilling a greater degree of confidence in Nigeria’s future.

The report titled, ‘Nigeria’s Insurance Sector Faces Economic Challenges, but New Government Improves Prospects’ stated that in spite of such challenges, there appears to be some signs of renewed confidence in the economy following the accession of the new government led by Muhammadu Buhari.

“Buhari faces numerous economic, fiscal and political challenges, including the decline in oil prices and a continued insurgency from the militant group Boko Haram. It is anticipated that Buhari will bring much needed changes by reducing corruption (over USD 20 billion in oil revenue is unaccounted for in government accounts he will be inheriting), implementing economic reforms by reducing the country’s reliance on oil and by increasing foreign investor interest in Nigeria through the promise of greater transparency.

Should these expectations transpire, greater confidence in Nigeria will likely attract further interests into its largely untapped insurance industry,” the report stated. According to the report, in line with growth in the broader economic environment, Nigeria’s insurance sector has expanded significantly, although largely driven by inflation, which is reported to have fluctuated between 8% and 14% over the past five years.

Market participants have reported double-digit rates of expansion in nominal terms, supported by the rise in infrastructure projects and an increasingly wealthier population, which in turn has more valuable goods to insure and residual earnings to save. Growth to some extent has also been supported by the introduction of compulsory insurance, although enforceability of these mandatory lines of business remains a problem for the industry as a whole. Nonetheless, despite these positive drivers of growth, total insurance penetration rates remain low at just 0.3% in 2013.

The report noted that although Nigeria’s population is growing, high levels of poverty and unemployment remain the reality for the majority of the country, as the benefits of economic growth have not sufficiently reached swathes of the poorer segments of society. Furthermore, a distrust in financial institutions, perceived weak oversight of regulators, or even a low-level of awareness regarding the benefits of insurance, are factors continuing to dampen the attractiveness of the sector to the majority of the population.

Without addressing these issues or introducing innovative products and appropriate distribution methods to attract the various segments of Nigeria’s demographics, insurance will continue to be viewed as a luxury product only available and necessary to the well-off. A.M Best stated that Nigeria’s insurance regulator, the National Insurance Commission (NAICOM), continues to be proactive in its attempts to advance the Nigerian insurance market.

Over the years, the regulator has implemented numerous reforms to improve the perception of the sector and expand the contribution of the industry to the country’s economic output, to varying degrees of success.