By Rosemary Onuoha

Nigerian insurers remain inadequately prepared to capitalise on the underwriting of emerging risks, such as the on-going campaign of terror by Boko Haram, A.M Best has said. The rating agency in its report titled, “Nigeria’s Insurance Sector Faces Economic Challenges, but New Government Improves Prospects,” said that the situation reflects the absence of data and other capabilities to support the understanding and quantification of potential loss exposures to the sudden and severe catastrophic nature of these events.

Since the re-emergence of the militant Islamist group in 2010, there has been a rising spate of bombings and kidnappings in Nigeria, with the violence mainly in the North-Eastern region of the country.

According to A.M Best, political and terrorism risks are generally prescribed as a standard exclusion on all policies.

However, in cases where cover has been requested, domestic players have effectively acted as fronters, utilising international reinsurers for technical expertise to price and implement the appropriate terms and conditions. Many regional and multi-national companies have gone directly to the international markets to find appropriate cover rather than utilise local capacity.

“The limited risk appetite of Nigerian (re)insurers to provide terrorism coverage means that the international markets will continue to thrive from the profitability of these risks, as local insurers will partner with foreign reinsurers to support this business. Government intervention is likely to be required to support the industry’s ability to increase their participation on political and terrorism risks, as has been the case in certain markets around the world; for example, the Terrorism Risk Insurance Program Re-Authorisation Act (or TRIPRA) in the U.S.

Terrorism pools worldwide have also acted as an alternative approach in supporting the industry’s terrorism risk retention, as per the UK’s Pool Reinsurance Company Ltd (Pool Re) and the Arab War Risk Insurance Syndicate (AWRIS) in Bahrain,” A.M Best noted. “To aid in the industry’s ability to retain some of this and other emerging risks in the country, insurers will need to advance themselves in the understanding and handling of these exposures, as well as finding ways to increase their capacities to support the underwriting of this business,” A.M Best said.

According to the rating agency, 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.