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Growth in insurance claims outstrips premium

By Rosemary Onuoha

FINANCIAL results of 20 leading insurance companies in Nigeria have indicated that rising claims experienced since last year has finally upstaged the rate of growth in premium, a development which industry executives say is threatening the profitability of the companies and the industry as a whole.

Financial Vanguard investigations show that in absolute figures the insurers still maintain a health gap between the Gross Premium Written (GPW) at N97.2 billion and total claims settlement at N26.9 billion in the first quarter of 2018, Q1’18.

However, the growth rate between the two key performance indicators shows that claims settlement is rising faster, recording a massive 46.9 percent year-on-year growth during the quarter as against 26.2 percent GPW growth recorded.

Dilemma on the industry operators

This has effectively wiped out the narrow difference in the growth rates recorded for the full year 2017 by the insurers, when GPW went up by 29.2 percent while claims payment went up by 28 percent.

Consequently, the situation has imposed a dilemma on the industry operators who desired to increase premium fees to match the growth rate in claims, but they could not because of fears that the market would resist, forcing a depression in GPW, which will in turn heighten the adverse ratio of claims to premium.

Industry leaders who spoke to Financial Vanguard stated that the development is worrisome, saying that faster increase in claims without commensurate increase in premium rates could gradually lead to erosion of companies’ reserves, especially for the fringe players, thereby creating weak insurance companies and unprofitable industry.

Companies’ profiles

Top five insurers in adverse claims to GPW ratio includes Equity Assurance, Regency Alliance, Aiico Insurance, AXA Mansard and Mutual Benefits Assurance.

Details of the companies’ results show that Equity Assurance came out worse in the claims to GPW ratio as the company’s GPW declined by 1.7 percent at N1.203 billion in Q1’18 against N1.224 billion in 2017, but claims payment went up by 566.2 percent at N2.1 billion in 2018 from N230.5 million paid in first quarter of 2017.

Regency Alliance GPW went up by 7.4 percent at N1.9 billion from N1.8 billion while claims payment went up by 72.1 percent at N432.3 million from N251.2 million.

Aiico Insurance GPW went up by 52 percent in 2018 at N10.3 billion from N7.1 billion in 2017 while claims payment went up by 55.9 percent at N5.6 billion from N3.4 billion.

Axa Mansard GPW went up by 10.1 percent at N14.2 billion from N12.9 billion while claims payment went up by 46.8 percent at N4.7 billion from N3.2 billion.

Mutual Benefits GPW went up by 28.8 percent at N4.7 billion from N3.7 billion while claims payment went up by 29.1 percent at N1.4 billion from N1.1 billion.

Industry leaders’ worry

Managing Director of Continental Reinsurance Plc, Mr. Femi Oyetunji said that the global insurance market witnessed huge claims payment in 2017, accordingly, many advanced markets beefed up premium rates during renewals for the 2018 business year. However, despite that claims are shooting up in Nigeria, premium rates have remained static.

Oyetunji stated: “In our local market we recorded some huge claims payments last year, in essence we expect to see increase in premium rates going forward, but we are not seeing that. The implication is that companies will continue to dig into their reserves which could create weak insurance companies in the long run.”

While industry players agree that the standard practice is to beef up premium rates in the face of increasing claims experience, the quest to retain customers in the prevailing economic situation coupled with the stiff competition in the industry has been hindering such move, they stated.

Oyetunji added, “In compliance with the new rates on compulsory insurances, it will be wrong for insurance companies to reinsure based on old rates because that will be going against the National Insurance Commission, NAICOM’s regulation.

“However, for other classes of insurance where claims experience have been huge, the expectation is that premium rates should have gone up at next renewals, but we did not see that happen. All over the world, where an industry witnesses huge claims payment in a financial year, you get to see increase in premium rates at renewals for the next financial year. But in Nigeria, the rates have remained the same and this is not good for our market.”

Managing Director/CEO of Staco Insurance Plc, Mr. Shakiru Oyefeso said, “Insurers have refused to jack up premium because of the attitude of Nigerians towards insurance coupled with the economic situation in the country. Due to the economic situation of the country, the disposable income of the average Nigerian is very small and because many insurance companies are struggling, they will not want to scare away customers with increased premium.

“Unfortunately, during recession, as experienced last year, we get more claims request because people that ordinarily don’t make claims could be propelled by the economic situation to do so. It doesn’t mean that it has to translate to increased premium because when you check the bottom-line of some organisations, you will discover that they are managing and struggling to stay afloat.

Steady claims payment

“However, the reserve of the company could be affected because in the event of steady claims payment where premium paid is not adequate, the company will continue to dig into its reserves to meet up claims payment. If such action goes on in a period of three to five years, then it calls for worry.

“Meanwhile, if the claims experience of a company is too detrimental to its existence, it is the duty of the regulator to look at the situation and ensure that the company does the appropriate thing.”

President of the Chartered Insurance Institute of Nigeria, CIIN, Mrs. Funmi Babington-Ashaye said, “Early this year, NAICOM reviewed the rates for some compulsory insurances and interestingly clients have been paying premium with the new rates.

However, for the non-compulsory ones, the market players have been meeting to agree on a common rate. Hopefully, before the end of the year, we should be seeing a standard rating for the insurance products and services.

“In places where rates are standardized, most often, premium rates will go up after prior claims experience has been really bad. For example, we just came back from an exchange programme in Hong Kong and part of the things we learnt was that they keep reviewing premium rates based on the claims experience. “However, in Nigeria, despite the bad claims experience last year, premium rates have not been hiked because the NIA is still meeting to decide on a standard rating. In essence, the NIA choose to do nothing about it despite that claims experience was huge. NAICOM on the other hand can only wield the big stick against defaulters in the pricing of compulsory insurances which it is in-charge of. That is why it did not interfere in premium rates of non-compulsory insurances.”

Chairman of Nigerian Insurers Association, NIA, Mr. Eddie Efekoha said, “There has been some bit of what I will regard as lack of professionalism in our underwriting. As underwriters we are expected to look at the good features of a risk and the bad features of a risk. And all of them put together will lead you to determine the rate which you will apply in order to generate a premium. That is why we say that no two risks are exactly the same.”

 The way forward

Meanwhile on the way forward, Efekoha said that the ideal thing is to price right. He stated: “Let’s go back to the old basics. When the industry was newly developing, underwriters are likely to price a given risk about the same, so that the insured does not use it as a basis of deciding where to go.

For example, if somebody prices a risk ten naira, another person will price it nine naira while another will price it N10.5. In the end the differences are not material. So it will not be material for you to say ‘I am giving it to this company,’ rather the business will just be given to all. That is what we are used to.

“However, a situation where there is a major loss on an account, and the next year the insurer decide to reduce the premium by half, doesn’t speak so well of us. If you are trading with your shareholders fund or capital and you think that is the best way as management to deploy your capital, all well and good.

But if we must do well as an industry and as operators, we must price right, so that we can live up to our expectation or obligation to all stakeholders. If you don’t have surplus, then issues like dividends will not happen. You won’t be able to take care of your employees and you will find it difficult in meeting your tax and other obligations.”


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