Commissioner for Insurance Sunday Thomas.
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Chuks Udo Okonta
The successful implementation of the new capital standards would be favourable for Nigeria’s insurance sector, as they should drive a market-wide strengthening of capital adequacy, 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, market consolidation, and the resultant reduction in competition would help alleviate fierce pricing pressure and improve underwriting discipline, stressing that however, unlike a risk-based capital setting approach, the new requirements fail to account for each insurer’s unique underwriting, asset, and operational risks.
It posited that there are no constraints on the volume of business that each insurer can write, as long as the minimum capital requirements are met. As a result, market underwriting leverage is likely to continue to increase over time.
Risk-adjusted capital requirements – as measured by AM Best’s capital model, Best Capital Adequacy Ratio (BCAR) – for insurers in sub-Saharan Africa tend to be driven by asset risk rather than underwriting risk.
“There are 57 insurance companies operating in the Nigerian market according to the latest regulatory data. The NGN 426 billion (USD 1.2 billion) of GWP generated in 2018 represented growth of 14.5% over the previous year. In the five years between 2014 and 2018, the compound annual growth rate of total GWP grew on average by 8.6% per annum.
“Although growth has seemingly been strong, when viewed in real terms, the market has contracted by approximately four percentage points as inflation averaged 12% over the same period. Market-wide GWP (excluding health insurance premiums) grew broadly in line with inflation to reach approximately NGN 490 billion (USD 1.3 billion) at year-end 2019, according to Nigerian Insurers Association (NIA) figures.
“A key factor driving the relatively slow real GWP growth has been the low insurance penetration in retail lines, leaving the industry reliant on the commercial sector. Low retail penetration can be partly explained by the low level of awareness and trust in insurance, as well as the absence of strong financial literacy across large parts of the population. Furthermore, the extremely shallow level of economic growth in recent years has affected both the demand for insurance as well as the value of insurable assets across a number of lines of business,” it said.
The rating agency maintained that penetrating the retail insurance sector has posed a number of challenges for insurers, including how to increase consumer awareness of insurance as well as ensure the enforceability of mandatory covers, adding that in October 2019, reports quoted NIA figures claiming that as many as 80 per cent of the 12 million recorded road vehicles in Nigeria were uninsured, despite motor insurance being compulsory.
“This suggests the industry is missing out on around NGN 50 billion which would have boosted market GWP by approximately 12 per cent in 2018 (based on a motor third-party liability [MTPL] rate of NGN 5,000 per vehicle). To help close the protection gap, AM Best notes that insurers need the support of government to enforce and promote the benefits of insurance.
“Over the past five years, many Nigerian insurers have successfully offset underwriting losses with investment returns. Furthermore, since the introduction of “no premium no cover” legislation in 2013, AM Best has observed a significant decrease in insurance debtors,” it said.
AM Best noted that it is expected that the improved collectability of premiums has played a part in improving underwriting results due to fewer bad debt write-offs. As a result, the overall profitability of the top 15 insurers has been solid over the cycle, demonstrated by a five-year (2014- 2018) average return on equity of 16 per cent, adding that this compares to an average rate of inflation of 12 per cent over the same period, resulting in net income that is positive in real terms.
It said the Nigeria’s insurance market continues to present potential for significant growth and development, but however, additional steps need to be taken to enforce the uptake of mandatory covers in order to close the protection gap.
At the same time, insurers could improve their distribution and premium collection capabilities via mobile applications to reach a greater proportion of the population, it said.
It maintained that while the implementation of minimum pricing on certain lines of business and new minimum capital requirements will go some way towards alleviating the negative trend in the market’s underwriting leverage, the benefits may be short-lived. “In AM Best’s view, a rules-based capital setting regime lacks the sophistication that a risk-based approach has to adequately capture company-specific risks that stem from their underwriting and investing activities,” it posited.
The rating agency maintained that overall, the market has been profitable, which puts it in a better position to withstand the consequences of the COVID-19-driven global recession in the medium-term, stating that it believes that those players with robust balance sheets will be more resilient and able to take advantage of market growth when the economy starts to recover.