The Group Managing Director/CEO, Cornerstone Insurance Plc, Mr. Ganiyu Musa, has said that to inject capital into the insurance industry, individual companies would require different levels of capital. He spoke on issues affecting the insurance industry during an interview with Financial Vanguard. Excerpts:
By Providence Emmanuel
WE will like to know how the insurance industry is coping with the current economic situation of the country.
It is something that is very close to the heart of everybody and I don’t think there is anywhere you live in Nigeria that you will not feel the impact, I remember one of my colleagues when he was delivering a paper, he was asked to describe the impact of the economic situation of the country to the industry and he likened the impact to the trouser belt he used last year to the present day; where he buckles it then and now is a vivid description of how the economy has impacted on the industry .
The same thing goes to all of us as a person. We all have to go through the process of adjustment and belt tightening; that is not different for us in insurance industry, we have seen it in all facets of life.
Few weeks ago, I was in a meeting with a partner and he gave me something that brought hope. He just took a loan to set up two production lines; they were into tomato paste which depended heavily on foreign inputs. They could not be able to source foreign currency on their own because it was not available.
Ripple effect on the economy
The immediate impact was that one of the production lines has to be dismantled and moved to another country, Ghana. The advantage of this investment is that along with it is the insurance cover for the vehicles, the production line and other things; so the impact is a ripple effect to the economy.
With reports that we get from analysts and economists in recent time, not only has scarcity of foreign exchange bottomed out, we have started seeing early signs of an upturn in the economy , the expectation is that things will begin to improve further.
We have seen the naira coming up against dollar; do you think this is going to impact on insurance business?
The short answer is yes, because exchange rate mechanism is central to a number of the economic activities in the country. The stage we are in now as an economy is import dependent but our national life is still there. Therefore, whatever happens to exchange rate will have an impact on all businesses, insurance inclusive. For us in the insurance industry, it affects us more than anyone; it affects us when we go through a sharp devaluation or let me use depreciation that we have gone through. You will see an immediate impact on insured value as people now try to reallocate resources. Unfortunately, one of the areas that get affected is insured things. Traditionally, with time insurance values will catch up because if you just take a short example of automobile, two years ago the entry level of Toyota Corolla that we were buying was going for like N9 million, I understand right now is going for N17 or N18 million depending on the specification. So if you have your car that you bought N9million 18 months ago, conventional wisdom in insurance will tell you that after 18 months you depreciate it by 20 percent, so if you are carrying an insured value of N8million on your Toyota Corolla which is within some reach, you pay a premium. For me as an insurer, I will receive reduced premium, but that is just half of the story. That is the message we are carrying to our clients that there is need to constantly monitor the value of your assets, so that the insured value would be consistent with the real state of price.
Looking at Cornerstone Insurance, take a review of what you did in 2016 and what your expectations are in 2017, taking cognisance that the first quarter has ended?
2016 was a challenging year both at the level of macro and the industry and for us as a company, it was not unexpected. We already saw the signs from late 2015 and we started seeing from the onset of what is coming in 2016.
For us at Cornerstone, we believe it is a marathon not a sprint; you have to build resilience into your operation. Earlier on, we decided that we are going to focus on innovation as a way to entrench resilience and engagement with the customers, so we continued not just on products but on technology, processes with our people, we focused on making insurance more acceptable, not just in terms of the physical channels but the electronic channel.
We improved on instant call delivery, we also strengthened distribution in the physical channel, right now we have close to 30 branches and that is one of the direct consequences of the strategic actions we took in terms of strengthening the balance sheet of the company by acquiring another insurance company, Fin Insurance.
The acquisition was fully completed in 2016 and that has placed Cornerstone in terms of capitalisation among the top players in the insurance industry; it has also improved our distribution channel and now we can reach our customers in all the six geo-political zones of the country.
Our agency network has expanded rapidly from 800 in April 2016 to about 1500 or 1600 by end of 2016. In the process, we got a number of recognition nationally and continentally. We remain committed irrespective of the ups and downs in the economy and the industry. We believe it is something that we need to work on consistently because one phenomenon that we have seen is the rising cost of claims, part of it is not just the quantum of the claims but the claim relative to the premium. Put in another way, as an industry we are not charging enough premium to cover the claim, when your premium rate is not sufficient, especially as a result of competition, then the impact of the claim become more pronounced.
We saw a lot of that in 2016 that is one area we are clearly working on to better manage in the years ahead. 2017started on a fairly decent note, the expectation is that by third quarter, Q3 we would begin to see more visibly the signs of recovery and insurance seem to be following the economic tempo.
Performance of the industry
We are cautiously optimistic about 2017 in terms of the performance of the industry as a whole.
The industry is planning risk base capital , how prepared is Cornerstone Insurance and how is it going to impact on the industry?
Overall, I will expect the impact to be positive on the industry because our business itself is about risk management that is at the core of insurer. It is only natural that we progress as an industry to risk base, not just capital management but improve on the overall risk management infrastructure of the industry.
I expect it to be positive, in the real sense of it, it is not new, we are just getting to the concluding part where all the individual components are being put together, a number of building blocks are being put in place right from the financial reporting of 2012 to the adoption of International Financial Reporting Standard. IFRS, and the code of corporate governance that was released by NAICOM which we all are expected to comply with. We started also with the risk management framework in 2014 where we moved to a focused approach of risk management; defining the risk appetite and risk tolerance; setting up the risk policies and cataloguing the risk in properly documented risk register.
All those building blocks were already being put in place, but it is now that the regulator is coming to consolidate into the risk base supervisory model. Part of it is the risk base capital and essentially it is meant to improve the management and the response and the capability of insurers to respond to the risk that they carry.
It does not necessarily mean that you have to carry more capital, it just means that you should arrange your business in such a way that it is consistent with the level of capital that you have. The whole essence of risk management is to match your capital to the risk profile of your business.
If you are in a position to advice practitioners , do you think the industry needs more capital injection?
For me, I would answer it this way; that it will depend on the risk appetite. Individual companies would require different levels of capital. Why I am saying so is because the minimum capital requirement that we have today in Nigeria is one of the highest in Africa, which is the minimum regulatory capital.
I worked for a very long time in the reinsurance sub-sector and I sat on the board of a subsidiary in South Africa, even for a reinsurance company then in South Africa, the minimum capital required then was $10million.
Is that amount adequate for the insurance business?
Clearly no, but as a regulatory minimum I believe what we have now is not inadequate, if you are now moving to the risk base capital, if the bulk of your risk is made of highly volatile risk. If you are an aviation underwriter for instance, if you are an oil and gas underwriter, the sort of capital that you require, would be different than individual that is just writing motoring because they know that apart from the super rich where you could have N270 million to the approved cars, the average value for the insured car in the country is nowhere near what you have with aviation underwriter and oil and gas underwriter. If you recall we had launched a product with Airtel
in 2014 , which was a very successful introductory launch. Because of the number of people covered, about 1.8million within 18months, the total risk could appear very huge but in actual fact, the maximum that you pay out on any single thing is limited to N500, 000.
So if you are doing micro insurance for instance, you do not need the sort of capital that an insurance firm needs for the aviation business. I think that is the reason that has led the regulator to consider the move into the risk base capital rather than just levy the same capital on everybody irrespective of the sort of business one is underwriting.