Amidst the rising cost of goods in the economy, the higher cost of importing spare parts places insurers at risk from inflated claims costs, particularly within their motor accounts, according to a report by A.M Best.
A.M Best also noted that insurers that maintain foreign-currency denominated obligations and utilise a weak asset liability matching framework, the decline in the naira relative to the U.S. dollar will increase liquidity constraints, owing to the need to increase domestic-denominated assets to meet their foreign-currency denominated liabilities.
The rating agency said that it would in turn have negative implications for the capitalisation levels of these insurers and hence their financial strength.
The report said, “Without 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 believes that consolidation is likely to continue, abetted by the entrance of foreign investors seeking global expansion to diversify their business. For domestic insurers, this enables them to utilise international practices and technical expertise, further aligning the Nigerian market with that of the global operating environment.
However, international investors targeting Nigeria will need to remain mindful of the inherent challenges overshadowing the insurance market, including the uncertain economic environment. While the existing retail portfolios of domestic players may be considered attractive as these lines of business are relatively untapped, significant investment is required to establish strong distribution channels to enable insurers to build sufficient scale.
This will require investors to have a long-term view of their positions in the market. Furthermore, the low, albeit improving, level of transparency in the market is likely to be a hurdle in undertaking sufficient due diligence on potential acquisition targets.
“The young and growing population of Nigeria continues to present a huge potential for the growth of the underpenetrated insurance industry, with annual nominal growth rates of up to 10% expected for the coming five years. However, the economy remains subject to fiscal and structural weaknesses, including the country’s dependence on oil revenues, the high levels of corruption and subsequent distrust in the financial system.
These factors restrict the development of the insurance sector, particularly given the high poverty levels and persistent inequality between the various demographics that continue to be ignored.
“Growth of Nigeria’s insurance industry and increased competition from international participants will continue to be important to the health and development of the insurance sector, although companies need to stay focused on the economic and regulatory environment. A sudden deterioration in the stability of the political environment, economic growth or weakening regulatory supervision could represent risks for investors,” the rating agency stated.