By Dr. Pius Apere (PhD/FCII)
(Actuarial Scientist and Chartered Insurer)
Chairman /CEO Achor Actuarial Services Limited
There had been a lot of great expectations from the investors and the insuring public when the insurance regulator first announced the recapitalization guidelines for the insurance companies operating in the Nigerian insurance industry about two years ago. The recapitalization exercise had been designed to provide the required capital base to address some critical challenges facing the industry over the decades in order to reform the sector for sustainable economic growth and development. The key critical challenges to address are inability to pay genuine claims, lack of innovation in product development, lack of consumer education and awareness, poor digitalization (ICT) of insurance operations, inability to underwrite bigger risks, low market penetration, inadequate human capital development, just to mention a few.
The most obvious potential impacts of the covid-19 on insurers are the pressure on sales from reduced business activity, the upsurge in claims arising from life, health, travel and business interruption insurance etc. Furthermore, the global economic slowdown due to covid-19 pandemic had driven interest rates even lower, market volatility and increasing credit risk exposures leading to more credit insurance claims. The above impacts are likely to affect the solvency position of many insurers which would require regulatory scrutiny with appropriate solvency tests to ensure insurers can withstand the immediate and knock-on impacts of the covid-19. This no doubt had already affected the implementation of the recapitalization guidelines; hence the recent extension of the recapitalization deadline to 30th September 2021, which is a welcomed development. The extension would allow insurers space to review their strategic initiatives/plans to meet the recapitalization deadline.
This write-up highlights some critical lifestyle changes, possible challenges and opportunities which could arise from recapitalization and/or covid-19 pandemic that would affect the Nigeria insurance industry.
2. Conduct of Insurance Business
Marketing and distribution channels
The impact of covid-19 on businesses (e.g. business interruption), economy (e.g. volatility of markets) and human lives (e.g. death) has put pressure on insurance business sales resulting from reduced business activity e.g. less use of face-to-face channels, social/physical distancing etc. Thus, the insurance industry is likely to experience reduced sales and attendant losses in the covid-19 period even after the recapitalization exercise. The foregoing would affect the insurers’ profitability and solvency over the short term, in which case the industry may appear to be over capitalized if the benefits of the recapitalization could not be achieved. On the other hand, the impact of covid-19 may also create deeper awareness of the importance of insurance cover. Therefore, there is optimism that more persons and institutions are likely to embrace insurance in post covid-19 era (i.e. over the long term), leading to an increase in sales of insurance products and profitability in the recapitalization era.
Covid-19 has induced a considerable use of direct marketing (i.e. internet, telephone, social media, such as Twitter and Facebook) both for marketing and selling insurance products, as information about customers could be obtained from online sources. In this regard, insurers may need actuarial services to cope with the operational challenge of quickly adjusting pricing models in a fast-changing business environment. This underscores the importance of actuarial units for insurers in the recapitalization era.
The collective responsibility of all stakeholders in the insurance industry is needed to combat the menace of unethical (rate cutting) business practice which had hampered the insurance penetration, profitability and solvency of insurers over the years, otherwise the industry may not thrive even after the recapitalization. Thus, a pragmatic (self-regulatory) approach could be used to checkmate its existence such as “premium quotation comparison and monitoring approach”. This approach would mandatorily require insurers to submit to Nigerian Insurers Association (NIA) the rates they intend to charge for a particular class of business at the next renewal cycle which will be compared with the actual premium quoted in practice within the monitoring period. Defaulting insurers will face the laid down disciplinary procedures with the regulator being carried along.
Life cover for Covid-19 frontline healthcare workers
The Nigerian insurance industry has provided the Federal Government with a group life insurance cover (effective 14th April 2020 for a period of 12 months) for a maximum of 5,000 covid-19 frontline health workers, a covid-19 palliative which is a good gesture.
However, any covid-19 health worker employed in the public or private sectors prior to Coronavirus pandemic is expected to have been covered under the Group Life Insurance Policy (for a minimum sum insured of three times the annual total emolument of the employee) maintained by his/her employer as required by section 4(5) of Pension Reform Act 2014. Thus, the rationale behind in providing the Covid-19 life cover (an unusual product design) for this group of employees by the insurance industry could be mainly to avoid the exclusion clause in the Group Life Insurance Policy under Pension Reform Act 2014 which might not cover the Covid-19 (coronavirus) pandemic.
Thus, the insurers and Federal Government should also bear in mind that the Covid-19 health workers might view the Covid-19 life cover as a yearly renewable contract with the expectation of automatic renewal, moving forward as long as the Covid-19 exists.
Digitalization of Insurance Systems and Processes
Recapitalization will provide an insurer with the required resources to invest in acquiring appropriate modern software and hardware technologies (e.g. laptops, mobile devices, remote connectivity systems, video conferencing facilities etc.). Insurers with these capabilities will be in a much stronger and competitive position than others in terms of creating new digital products, underwriting, claims management, and administrative processes. Thus, non-digitized insurers are likely to be exposed to the risk of losing customers to more digitally-enabled competitors going forward, particularly in personal lines (e.g. motor insurance) where many customers’ patience with non-digitized processes is gradually getting low these days. Digitalization will no doubt lead to an increase in sales, insurance penetration and profitability of an insurer over the long term.
Change in Work Culture
The concept of working remotely from home is not new in the advanced economies but it could be entirely new to developing economies where the level of digitalization is low. Companies in covid-19 affected countries including Nigeria have been compelled to implement a widespread change in work culture from total reliance on physical co-locations of people to remote working (i.e. use of virtual work-place) as required in covid-19 lockdown period. In this case, a greater percentage of the staff workforce are expected to be working from home, with only a fraction of staff on-site for managerial duties and/or critical jobs that cannot be done remotely. Despite the fact that the change in work culture had simplified the paperwork needed at the workplace, there still remains a challenge in dealing with complex operations such as high value claims where evaluating the physical evidence and obtaining expert reports in-person is frequently a key part of the claims management process.
The insurance industry should embrace the new work culture moving forward (even in the post covid-19 era) because, if it is well managed, it would increase the efficiency and profitability of an insurer. This is particularly ideal in a city like Lagos where the man-hour wastage of employees is very high when commuting to and fro workplace.
Recapitalization would enable insurers (with bancassurance arrangement) to be more innovative and competitive by taking advantage of digitization to help analysis large volumes of data (big data analytics) in order to support the insurer’s proposition in areas such as product/customer identification, underwriting/pricing, claims management etc.
For example, the insurer could analyse the trend in spending of customers through banking data with which to identify any insurance gaps and improve risk classifications for individual customers. Data analytics could help identify customer segments and needs through lifecycle. This evaluation helps insurers to assess policy lapse propensity and the propensity to purchase additional products by identifying people who can actually afford and/or maintain the insurance cover by looking at their bank accounts.
3. Human Capital Development
The recapitalization would also place all insurers at least on the same level playing field in terms capital base being the most important critical success factor. The second key critical success factor for an insurer is the availability of appropriate human capital (i.e. the crop of professionals with good change management and leadership skills). Thus, a company’s staff recruitment and training policy is crucial in the recapitalization era.
Staff Recruitment and Training
The insurance industry is at the crossroad to recruit and retain a new crop of professionals in order to meet the new challenges that will face the insurance companies during the recapitalization era. A highly trained workforce (with innovative ideas, analytical and computer skills etc.) is also required for successful implementation of the new work culture (e.g. working remotely from home, social/physical distancing etc.) at the workplace being currently imposed by the covid-19 pandemic, which is likely to be maintained beyond post covid-19 pandemic
Thus, the importance of retraining of existing employees (e.g. CIIN qualified members) to bridge the skills gap in order to keep abreast with modern and international best business practices cannot be overemphasized. Therefore, there is an urgent need for the insurers to have small functional libraries equipped with adequate study resources (e.g. CIIN study materials, basic and/or advanced Excel textbooks etc.) for self-training purpose. The Chartered Insurance Institute of Nigeria (CIIN) has recently restructured its curriculum in line with international best standards and the production of appropriate study textbooks to meet the new curriculum is a step in the right direction.
Virtual Learning and Online CIIN Examinations
CIIN has the primary responsibility of catering for the manpower development needs of the Nigerian insurance industry. Covid-19 pandemic had made it impossible for CIIN to fulfil this importance duty i.e. the usual face-to-face learning process and conduct of professional examinations have been hampered as result of Covid-19 lockdown. There is still great uncertainty whether the industry will ever return back to status quo prior to covd-19. Thus, CIIN should be prepared to move forward by considering alternative ways in fulfilling its primary responsibility even beyond covid-19 pandemic.
As an alternative, virtual learning process and online CIIN Examinations could be introduced, as similar learning methods and examination process have been deployed successfully by some international professional bodies during the period of covid-19 lockdown. Although there are likely to be challenges in conducting such online professional examinations in Nigeria due to unreliable internet network connectivity, irregular electricity power supply, candidates without personal computers and/or typing skills etc. Despite these challenges, the online examinations could be conducted successfully, after careful planning process, particularly for the Foundation Courses to start with where the number of student enrolments may be high, using the following process:
1. Online examinations can be written by candidates in their respective companies using their office computers being set in a training or Board room. This would guarantee access to reliable internet connectivity, the supply of electricity power, availability of computers provided by employers and meeting the social/physical distancing requirements.
2. At least two qualified CIIN members in the company may be trained as invigilators to avoid possible cases of examination malpractices such as plagiarism, collusion etc.
3. At the start time of any examination, candidates will access the written examination paper from the CIIN online platform.
4. Answers will be typed if there is no provision for handwritten answers allowed for the particular examination. In this case, answers will be typed into either Word or Excel depending on the examination.
5. At the end of the examination the electronic ‘examination scripts’ will then be uploaded onto CIIN online platform.
6. A separate arrangement (i.e. using one examination hall) will be made in the CIIN office for the few very candidates without employers.
It is noteworthy that the insuring public and/or insurers are having the expectation that the regulator will soon provide appropriate regulatory guidelines, as moving forward to the recapitalization era, to address some of the challenges including the impact of covid-19 affecting the market development process in the Nigerian insurance industry, which may include but not limited to the following:
• Underwriting of covid-19 (coronavirus) life insurance cover since the insurance industry has recently provided the unusual group life insurance policy for covid-19 frontline heath workers.
• The current rules and regulations of insurance operations are conflicting with the digital system needed even in the covid-19 period e.g. physical signatures (often called “wet” signatures) rather than e-signatures are still required for most insurance contracts and/or agreements.
• Fast tracking the turnaround time of claims settlement which has always been a challenge over the years and a penalty on genuinely delayed claims.
The challenges from covid-19 had no doubt impacted on the recapitalization exercise leading to the recent extension of the deadline by the regulator. Therefore, the insurance industry stakeholders are expected to be prepared to manage the above challenges effectively to achieve the benefits of the recapitalization moving forward.