THE CHALLENGES OF THE INSURANCE INDUSTRY IN NIGERIA AND THE WAY FORWARD.
Paper Presented by Sam Chukwuka Onyeka, PhD on the occasion of the Inauguration of Retail Insured Family Association of Nigeria (RIFAN), on Thursday 22nd November, 2018 at National Press Centre, Radio House, Area 10, Garki, Abuja.
It is my privilege to be part of this historic event of the inauguration of Retail Insured Family Association of Nigeria, also known as RIFAN, and to present this paper. I understand that RIFAN is an association of insurance policyholders in Nigeria whose principal aim is to promote retail insurance business in the country. This is a step in the right direction given that almost every business is now looking at controlling the retail end of the market. I remember in the early 1990s when Cowbell began to package milk in sachets. Many laughed at them but their success has inspired everyone to begin to package everything in sachets. Targeting the retail end of the market may be exactly what the insurance industry need to succeed at this time. I also understand that the other objectives of RIFAN include creating public awareness about insurance, enhancing public confidence in insurance industry by facilitating prompt settlement of claims and protecting the rights of her members generally. I will make my observations on these other objectives of RIFAN as I progress in this address.
I would like to begin by admitting that the insurance industry in Nigeria has great potential. This is having regard to a huge population of over 180 million people with nearly seventy percent of the population being young people. By this I mean people who can engage in productive activities– people who can work and earn income. In addition, the insurance sector is lucky to have many existing development drivers. These include proactive legislation that have made many insurance products compulsory and also forbid buying insurance on credit. Others include robust frameworks for micro-insurance and Takaful Insurance, the Oil and Gas Local Content regime which protects the local Insurance Industry against international competition in Oil & Gas business and the Pension Reform Act which has introduce statutory annuity and made employee Life Insurance policy compulsory for all employers within a given bracket.
But despite the vast potential, the insurance sector in Nigeria can at best be described as struggling. The sector has remained relatively stagnant with less than 1million adults having any form of insurance policy. Insurance protection is actually purchased by multinational corporations and few private institutions who understand the need to protect their investments. In the real sense, in Nigeria, those who really have need for insurance do not buy insurance protection.
This has serious consequences for our economic and social development. For example it is difficult if not impossible to finance the critical sectors through short term funds (Funds from Deposit banks etc). You need long term funds. Insurance and Pension funds are examples of long term funds. Thank God for the Pension reform that now leaves the government with huge pension outlay, when properly managed can be invested in funding the critical sectors. Life Insurance is another avenue that could have attracted long term funds. But we have failed to exploit it because our 180 million people are not insured. Besides, absence of insurance leaves a needlessly huge insurance burden on the government, especially in the event of insurable disasters.
Mr. Chairman, Ladies and gentlemen, this trend is unfortunate and indeed disturbing. The big question therefore should be: Why are Nigerians not interested in insurance and what can be done to quicken the pace of development in the sector? In his article, ‘The Insurance Industry in Nigeria: Challenges and Opportunities’, published in 2012 in Journal of Insurance Law and Practice, the then Commissioner for Insurance, Mr. Fola Daniel, had summarised the challenges facing the insurance sector in Nigeria to include prescriptive legal framework, inadequate capital; limited human and technical capacities; lack of insurance awareness and low public confidence in the sector. I agree with the honourable Commissioner.
I am particularly worried by the challenge posed by legal framework. By nature, the extant legal framework for insurance business, the Insurance Act 2003 is prescriptive. By this I mean that the law does not allow the regulator to be innovative or make any changes without reference to the National Assembly. The international best practice standard for legislation is to make it mainframe approach. This means that the legislature puts the law in a mainframe and allow the regulator through regulations and guidelines to fill in the details based on the dictates of times and environment. The banking sector has met this standard in BOFIA. The Pension Industry has done the same in the Pension Reform Act 2014. The prescriptive legal framework is the main reason the insurance is not moving anywhere. This challenge must be addressed with all the capacities the industry can muster. Take for example, the current proposal for Tier-Based Minimum Solvency Capital (TBMSC). The proposal is a good one, but it can never be implemented under the Insurance Act 2003. The Insurance Act allows increase of minimum capital across the board (Section 9 (4)), but not solvency margin. Solvency margin for non life business is fixed across board at 15% of Gross Premium or the amount of minimum capital without making any room for increase by NAICOM (Section 24).
Similarly NAICOM has proposed to introduce with effect from January 2019, State Insurance Producers (SIPs). By this model, the insurance regulator intends to licence some state institutions as insurance agents. By this the insurance regulator hopes to encourage the states to key into insurance business and thus further deepening insurance penetration in the country. Again while this proposal may be well intended but it may not work as the regulator has no authority in law to create SIPs. The conditions for licensing insurance intermediaries are specified under sections 34 and 36 of the Insurance Act 2003. You are either a broker or an agent. Section 34 does not envisage corporate agency. I recommend that NAICOM should encourage the states to take up Brokers licence (as it used to be) not corporate agency as they have proposed.
On the challenge of capital, I am happy to note that through a series of recapitalization and consolidation exercises, beginning in 1997 and ending in 2007, the sector’s minimum capital requirement has increased to N3billion for General Business, N2billion for Life Business and N10 billion for Reinsurance. Although from available statistics, this capital requirement as at 2007 was among the highest in Africa. But 10 years down the line, with growing inflation, it makes sense to think about review of minimum capital. In line with section 9(4) of the insurance Act 2003, NAICOM may consider increasing the minimum capital at this time, but it must follow a transparent process that allows all players equal opportunity to raise additional capital.
In terms of human capital development, I am of the view that the insurance sector is making sufficient efforts having regards to the growing number of qualified Insurance practitioners. I am happy to note that over 5,000 Insurance Professionals have trained and certified by the Chartered Insurance Institute of Nigeria (CIIN). I also acknowledge the efforts of the CIIN in continuous human capacity development through the College of Insurance and Financial Management.
Regrettably, however, the insuring public has continued to hold insurance with contempt. The average insurer in Nigeria is still perceived by the insuring public as ‘eager to collect premium from the policyholder only to repudiate claims at the slightest opportunity. Many Nigerians have continued to be discouraged from having any form of relationship with insurers. The experience is the same even in relation to insurances that have been made compulsory by law. In particular, in the case of Motor Vehicles (Third Party) Insurance, many motor vehicle owners in practice prefer to patronize fake insurance agents to risking disagreement and, possibly, outright repudiation by the insurer in the event of the happening of the event insured against. This has continued to frustrate genuine efforts by stakeholders to reduce the incidence of fake insurance in the country.
There is an urgent need to heal the psyche of the insuring public in Nigeria and woe them once again to a more cordial relationship with the insurers. In line with the current international practice, the insurance sector in Nigeria should be ready to imbibe the culture of ‘Treating Customers Fairly.’ Treating customers fairly considerations have become more relevant as Nigeria continues to pursue the new economic policy of financial inclusion. In the insurance sector, this policy has translated into the introduction of Micro and Takaful insurances. Typically, these are insurances that are designed for the poor and the unbanked. Many people in this bracket are illiterate and uninformed hence requiring special protection in their relationship with the insurers.
There should be formidable platforms for advocating and protecting the interest of the vulnerable groups in our system in their dealings with the insurers. Insurance policyholders must come together to protect their common interest. Such platform will enable sustainable awareness and facilitate prompt settlement of genuine claims. Luckily RIFAN will have a role to play in facilitating the desired platform.
Beyond restoring insurance industry confidence, there is need to further deepen insurance penetration in Nigeria through massive public awareness drive. As I noted earlier in this address, less than 1 million Nigerians have one form of insurance or another. The insurance sector in my view must rise up at this time, to exploit Nigeria’s huge population to advantage. The sector can borrow a leaf from countries like India, Brazil and others with similar population advantage. Massive grassroots sensitization for Nigeria has become inevitable.
I am happy to note the ongoing rebranding effort by the insurance industry. Yet for a meaningful result, there should be coordinated approach especially in relation to creating grassroots awareness. On a broader perspective, synergies should be created between the regulator, operators and aggregators. RIFAN could not have come on board at any better time than now.
Let me conclude this paper by making the following recommendations;
1. Insurance industry should aggressively and proactively pursue review of Insurance Act 2003.
2. Public confidence must be restored through clear cut approach that guarantees policy holders’ protection.
3. Insurance industry should focus on the retail end of the market. This is the only way Life Insurance business can be developed.
4. There should be continuous and sustainable creation of awareness at the grassroots.
5. As a means of taking maximum advantage of the oil and gas local content regime, regulators should license more reinsurance companies.