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The menace of premium under-pricing, which is also called premium rate-cutting has been a clog to growth of insurance industry. The Chief Executive Officer FBS Reinsurance Fola Daniel, spoke with Chuks Udo Okonta, on the sideline of a training program on Fire Insurance & Reinsurance Accounting jointly organised by FBS Re & Munich Re, what reinsurers have done to stem the menace and the resultant effects.
There used to be massive rate cutting in this market and indeed a number of Africa countries? What is reinsurance firms doing to stem the menace?
What we have done locally and even at international levels by reinsurers, is to rate risks based on loss experience and fix a benchmark rate that will enable a commensurate premium for various risks. The reinsurers do not control what insurance companies do. In fact, they can underwrite a risk for free, but what reinsurers are saying generally, is that, if for this class of business, the rate is less than the minimum, you cannot cede it to the treaty. You can take it for your net account, thus self-reinsuring. The real strength of an insurance company is the reinsurance backing it has. So, if you do not have reinsurance backing, you would be wise, to curtail the level of your acceptances to reside within your risk tolerance levels. In Nigeria, The Professional Reinsurance Association (PRAN) took keen interests in the rating of risks, to curtail rates abuse. These measures are certainty yielding positive results in driving rates and pricing sanity.
This minimum rate prescription is not static. This is because, a risk can be volatile in the past, but as a result of improvement measures introduced by the insurance companies or the owner of the business, the risk can improve . For instance, in a housing estate where you have had one or two fire out breaks, and the insurer advises the residents to introduce sprinkler system, which would reduce the risk of fire damage and its consequences. If an insured introduces risk reduction measure, instead of classifying the risk under A, it can be B. Because they have introduced measures to reduce the risks, the premium can also come down. The evaluation to ascertain appropriate rates/premiums is dynamic. It is subject to periodic reviews.
*Why the training?
The training program is anchored jointly by FBS Reinsurance and Munich Reinsurance of South Africa, and it is aimed at addressing technical knowledge gaps in the insurance industry. A good number of underwriters presently rely on software applications to do their underwriting. Experienced driven underwriting is fast fading away. Of course, in an era of artificial intelligence, there is virtually no subject you cannot interrogate and get an answer for, but you still need experience, as there are aspects of insurance that artificial intelligence cannot do for you. For instance, marketing. People need to see your face; you need to talk about the company profile. You can do that in prints, but it creates a better impression when they meet you, speak with you and ask questions which answers cannot be obtained from the publications on your website. So, the purpose of this training, having recognized the knowledge gaps, in the Nigerian and other African market, is to bridge the technical knowledge gaps, 0thus, impacting the much-needed knowledge.
Expectations from the training
I do expect that participants would be better informed. Though, the training is not covering every facet of technical insurance, what we are focusing on is fire insurance, consequential loss and a bit of reinsurance accounting.
Impacts of economic headwinds on insurance pricing
Generally, with the devaluation of currency, most sum-insureds have become grossly inadequate. If you bought a vehicle for N80 million last year and you continue to insure it, may be with be depreciated by 25 per cent, and you insured for N60 million at renewal, it makes book sense, but insurance is about indemnity, placing you in the position you occupied before the loss. So, with the current price at N200 million, the depreciated value of N65 million will not confer indemnity, as a result of the combined force of inflation and currency devaluation. In the event of a loss, the insured may not be able to replace the car at the current selling price. This is one of the effects of the devaluation. We relate that to vehicle, what of building? As at this time last year, a bag of cement was N5000 by April last year, in April this year, cement was sold for N12,000. So, if you valued your property, looking at the factors of construction – cement, labour and others, at N10 million. A N10 million indemnity today will not build a house. So, there is a need to upscale the values in line with inflationary trends to be able to receive a realistic indemnity.
Impacts on Insurance
Why do people insure in the first place? They insure because they hold assets at risk. They utilize insurance medium to offload their risks to insurers, for payment of small amount of money and have the rest of mind, knowing that if the loss occurs, insurance companies would provide succor. The preservation tendencies among the insuring public or corporate world is higher when there are inflationary trends. It makes good economic sense to preserve what you have and free resources for other needs,
What is the mind set of regulators concerning Local Content in insurance contracts?
I don’t know the mind of the regulator, but I do know that insurance regulators do not complain, but rather set standards, rules, guidelines, and in the event of noncompliance, applies appropriate sanctions to correct or deter anomalies. I also believe that insurance operators are respecter of rules, therefore law abiding. Let’s look at the system, how do you take your risks abroad? You are expected within the law to satisfy the available local capacity, prior to ceding risks overseas, following approvals by the regulator. If ABC company reinsure their business abroad using foreign exchange, they cannot go to Central bank to access foreign exchange without showing evidence of regulatory approval, evidenced by a letter of attestation.
Meanwhile, the local content act states that every insurable interest must be domiciled here to the extent of 70 per cent. That 70 per cent is not a straight line, because if you are insuring a helicopter, under the local content act and the helicopter is worth $1 million, one hundred per cent capacity of it can be obtained in Nigeria. So the 70 per cent prescribed by law is the minimum. If the insurable interest falls within the capacity of Nigerian insurers, the 100 per cent must be domiciled here. It is when there are big risks beyond the capacity of the market, for instance, oil and gas where you have multi-billion dollars that it is taken abroad.
So, I think the law is being revised because when you talk about 70 per cent; the question is 70 per cent of what? You can only talk of 70 per cent of what you knew. But If the sum insured were to be N50 billion, do we have capacity to absolve 70 per cent locally?. The answer is no. So, my guess is that the regulator will adopt a case-by-case evaluation of the risks to determine the local capacity.
