Nigeria’s insurance market offers significant potential despite headwinds – AM Best

Commissioner for Insurance, Sunday Thomas

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Chuks Udo Okonta

Nigeria’s substantial oil and gas reserves, its young and growing population and its position as Africa’s largest economy continue to point to significant development potential for its insurance sector, AM Best has said.

In a new Best’s Market Segment Report, “Nigeria’s Insurance Market Offers Significant Potential Despite Headwinds”, AM Best notes that, due to the COVID-19-driven economic slowdown, the insurance market regulator (National Insurance Commission [NAICOM]) has agreed to further delay its revised plans to strengthen market capitalization and limit the volume of premium flowing out of the country, adding that insurance penetration – market gross written premium (GWP) as a percentage of gross domestic product (GDP) – is extremely low, further highlighting the market’s long-term growth opportunities.

It said Nigeria’s failure to deliver on that potential historically has been due in part to the volatility of real GDP growth in the country, coupled with the sporadic enforcement of mandatory retail insurance lines.

It posited that robust and timely market statistics, that would support insurers’ knowledge and understanding of trends, are scarce. While the official statistics published by the insurance market regulator, the National Insurance Commission (NAICOM), cover financial information up to the year-ending December 2018,

for this report, AM Best has also made use of year-end financial information from the 15 largest insurers (who account for approximately four fifths of the market’s GWP).

Economic and COVID-19 Overview

Nigeria’s economy is the largest in Africa; however, real GDP growth has been relatively modest, averaging 2.2 per cent over the five years between 2014 and 2018. In 2018, oil and gas production accounted for over 90% of exports and approximately half of government revenues. Foreign direct investment remains low and is directed almost exclusively towards the hydrocarbon sector, which in turn supports the financial services and construction industries.

Expert analysis estimates that Nigeria’s 2020 fiscal break-even oil price exceeds USD 130 per barrel, which is higher than most other oil exporting countries. The economy’s reliance on the oil and gas sector leaves it extremely vulnerable to energy price volatility, demonstrated by the global oil price shocks in 2016 and more recently at the start of 2020, which sent the country into recession. Continued insurgencies from militant groups such as Boko Haram are an additional source of volatility for the oil sector.

A consequence of the COVID-19 pandemic has been the severe downturn in global economic activity, and with it a decreasing demand for oil. This exacerbated an already low price following production disagreements between OPEC+ members in March, before many of the mandatory lockdowns were in place. The sharp fall in oil prices during the first quarter of 2020 has worsened Nigeria’s fiscal position. An extended period of low oil prices is expected to see the economy contract by 5.4% in 2020, an 8-percentage point drop compared with pre- COVID-19 projections, according to the International Monetary Fund (IMF).

Inflationary pressures may increase over the short-to-medium term if the Nigerian government’s fiscal budget is not met and its foreign currency reserves diminish. Higher inflation may introduce volatility into insurers’ claims costs, although the associated elevated premium growth could partially offset this.

A high inflationary environment would affect some insurers more adversely than others. Motor insurers, sensitive to the impact of foreign currency fluctuations on the cost of imported vehicle parts, could be especially impacted.

AM Best expects consumer demand for insurance to wane during 2020 (and potentially beyond) as declining economic activity stemming from the global pandemic and Nigerian government-mandated lockdown places downwards pressure on the local market’s GWP.

AM Best expects that one of the immediate effects of the lockdown will likely be a positive impact on claims frequency for motor writers. However, any positive impact is expected to be offset by the effect of the projected economic contraction on other lines of business, as well as increased volatility in financial markets. This may adversely impact the insurance sector’s profitability and solvency.

Capitalisation and Changing Regulatory Requirements

In 2007, NAICOM raised its minimum capital requirements for the insurance market by over 1,000%. While this led to a widespread recapitalisation, AM Best has since observed a steady increase in insurers’ underwriting leverage. Regulatory data shows that across the market, GWP growth has outpaced capital generation since 2014. This trend continued for 2019, according to AM Best’s analysis, with a projected ratio of GWP to capital and surplus for the market of approximately 115 per cent, up from 75 per cent in 2014.

In a bid to strengthen the capitalisation of the market and to limit the volume of premium flowing out of the country, NAICOM’s 2018 circular outlined its plans to further increase minimum capital requirements for (re)insurers. The proposed changes were met with substantial opposition, culminating in a court ruling that the proposed regulation was not compliant with the Insurance Act of 2003. Therefore, no changes were made.

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