September 5, 2022

Premium income in insurers’ life pension segment crashes by 62%

Premium income in insurers’ life pension segment crashes by 62%

*Down to N13.6bn in Q-1 2022, from N36.1bn in Q-1 2021

*Segment nosedives as ‘retirees live longer’

*Business eroding profit, insurers lament

By Rosemary Iwunze

There are indications that insurance firms are now side-stepping annuity business, otherwise known as ‘life pension’ policy as retirees beat their life expectancy forecast.

Consequently, the development has led to a massive decline in revenue accruing to the insurance industry from the annuity business segment.

Insurance companies pay life pensions to retirees known as annuity. Annuity is a fixed sum of money paid to a retiree for the rest of his/her life.

A retiree under the Contributory Pension Scheme (CPS) has the option of choosing between buying an annuity insurance policy with part of his pension savings after retirement or take up programmed withdrawal of the pension savings with a Pension Fund Administrator, PFA.

The life pension (annuity) is guaranteed to the retiree or the family for 10 years. This means in the event of death of the insured within the period the benefit ceases at the 10th  year and the remaining investment is forfeited to the insurance firm.

Insurance industry analysts told Financial Vanguard that most insurance firms forecast that most retirees would have died within the period.

But Nigerians are living longer, with life expectancy rising by 10 years between 2000 and 2021.

Life Expectancy in Nigeria increased to 54.69 years in 2021 from 46.27 years in 2000, according to the ‘State of the World Population 2021’ report of the United Nations Population Fund.

Following this trend, more retirees are living longer, translating to increased annuity payment costs for insurance companies.

Consequently, insurance companies are finding the annuity line of their business less attractive, and hence reducing annuity sales to interested retirees.

Reflecting this trend, premium income from annuity business nosedived significantly by 62.3 per cent Year-on-Year, YoY, to N13.6 billion in the first quarter of 2022, Q1’22, from N36.1 billion recorded in the corresponding period of 2021, Q1’21,

Furthermore, Financial Vanguard’s findings show that decline in annuity premium impacted severely on the Life business premium income, which fell by 9.7 per cent to N85.8 billion from N95.01 billion.

However, the regular Individual Life premium income rose by 5.4 per cent to N43.1 billion from N40.9 billion while Group Life premium income increased by 61.3 per cent to N29.2 billion from N18.1 billion.

Explaining the situation to Financial Vanguard, former President of the Nigerian Council of Registered Insurance Brokers, Mrs. Laide Osijo, said that the annuity business is too volatile for some companies and some of them are not recording profits from the business.

She stated: “While some insurance companies are seeing the annuity business as gold mine, others are witnessing erosion of profits and are even recording losses as a result of the volatility of the business.

“A company with relatively low annuity premium income in a year could have retirees that are collecting huge monthly benefits which could translate to a loss for such companies.”

Osijo said that those that consider the business to be volatile are gradually reducing their intake of annuitants (annuity policy holders), even as those on the positive side of the divide are making frantic efforts to enrol more annuitants.

Also speaking to Financial Vanguard on the development, President of the Chartered Insurance Institute of Nigeria, CIIN, Mr. Edwin Igbiti, said that annuity business can make or mar an insurance company.

He stated: “Annuity can make or unmake an underwriter. Annuity requires some actuarial analysis. It requires the skill of an actuary for a company to be able to assess that risk.

“As an underwriter, once an annuity premium is given to you, it means you will pay the insured a particular sum for the rest of his life. That means the underwriter has accepted longevity. Once you have fixed a rate to it, you have tied yourself from day one, which means you must be able to read the future.

“We know that annuity cover comes with a guaranteed period of ten years, but the annuitant might live above ten years, and that is why they come to take annuity. That is why I said it depends on the skill of the actuary to be able to assess that risk, and once you have tied yourself in, you have to make sure that the assets that you are using to back up that liability are aligning because if there is any shortfall, you have to take the loss.

“Interestingly, once retirees take up annuity and there is money that they are collecting, they don’t die. When you  hope that money will come in, you will be alive.

“So as an underwriter, you only make a profit when there is a loss, which is, when the annuitant dies, you quickly discount it. If it is above the ten years guarantee, you pay nothing again. You only spread it for those ten years for you to pay the difference at a discounted rate, only then can you make profit.”