Economic Recession and the Insurance Industry

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By Funmi Babington-Ashaye 

With the latest macroeconomic data from the Bureau of Statistics, it is now confirmed that Nigeria is no longer in a technical recession but full economic recession.  Evidence of this lies in the consecutive negative growth of gross domestic product (GDP) in the first two quarters of 2016, the current double digit inflation rate of 17.5% in July, prohibitive cost of investible funds of about 25-30%, high unemployment rate of over 20%, dearth of foreign exchange and continuous slide in the value of the Naira. With one USA dollar exchanging for #440 in the 4th week of September, 2016, business entities are experiencing very difficult times while consumers are no longer able to meet their needs as they use to. The value of the purchasing power is dwindling by the day so much so that the minimum wage of N18,000 per month can no longer buy a bag of rice! Local Airlines are suspending their operations because of operational challenges..

It is fair to say that these are not the best of times for households, businesses and even managers of the economy. To put it mildly, all sectors and players in the economy are challenged operationally and financially. Although a lot is being done by the government to reverse the negative trend, the impact of the policies are long in coming because of the lag effect of monetary and fiscal policies. Not a few are now calling for the sale of national assets to rescue the economy from the recession which is the worst, according to analysts, in 25 years. In spite of this, I am persuaded that the current challenges hold a lot of opportunities for discerning players in the economy and in particular, in the Insurance Industry.

INSURANCE AND BUSINESS

Insurance is an intangible product which provides comfort to investors and risk takers. It restores the policyholder to the position he was before the occurrence of the disaster he hedged against.  In this manner, insurance takes away the fear of the unknown and encourages the potential policyholder to take advantage of opportunities in line with his risk appetite. In this way, insurance oils the wheels of business and commerce.

Expectedly, when the economy is growing steadily, economic activities will also increase in number and value raising the need for insurance protection. Indeed, economic growth leads to more insurance business as more risky investments are undertaken requiring insurance cover. Put differently, a byproduct of economic growth is a booming Insurance Industry with diverse products created to cater to the needs of consumers. The reverse is also true. A slowing down of the economy will necessarily imply a decline in insurance business. For instance, with a shrinking economy, a number of employment opportunities will be lost, contributory pensions by employees will decline, life assurance (whether group or personal) will decline, life assurance policies may be cancelled or surrendered, premium will be lost and the going concern of insurance companies may even be threatened, manufacturing companies, Airlines etc are closing down and hence not renewing their polices.  Here lies the need for creativity in the insurance industry in order to salvage the situation. There is need for insurers to think outside the box to stay afloat. Insurers need to leverage the current economic crisis to launch out. 

THINKING OUTSIDE THE BOX

Purchase of Insurance Bond Products

From experience, during recessions, as we currently have, the level of trust is regrettably low. Even when people want to meet their obligations, they are unable to do so because of unemployment or low purchasing power. On the side of corporate entities, companies are experiencing poor sales, low turnover, high operational costs, low or no profits, etc., and therefore are often unable to meeting their maturing obligations. In other words, economic difficulties can raise default risks with negative impact on credibility and trust. Under the scenario, banks will be unwilling to give out loans because the borrower may not be able to pay back as an when due; the government will not be sure that the contractor will execute a contract in line with the terms of the award if it is mobilized with some funds; manufacturers will not be certain that their suppliers will deliver raw materials after receiving some advance payments. Here lies the efficacy of insurance bonds.

The insurance industry has a variety of bonds:  performance bond, advance payment bond, etc. These are products that should be activated and aggressively marketed to stimulate business activities which would in turn give rise to other insurance business. With these bonds, the banks, the government and manufacturers will be given some level of comfort that will persuade them to take risks by releasing moneys for various economic activities.

Pursue Vertical Growth

At a time like this, insurance companies should take advantage of the benefits of vertical growth through mergers and acquisition. Through mergers, they will certainly reap the synergistic benefits of scale of operations, reduced overheads, increased branch network, technical and human capacity.  

Importance of Consumerism

Given the current economic challenges, the insurers must step back and re-evaluate their product offerings. The industry must take its bearing from the market place if it is to survive. Its product offerings should reflect the dynamics of the business environment and the needs of its diverse customers. The Insurance practitioners must deliberately strive to identify the needs of their consumers, plan products that will adequately meet those needs, properly price, promote and distribute those products such that both parties will mutually benefit from the process. Especially significant is the need to innovate as conditions change. This innovation may require the modification of existing covers or providing totally new options. The insured should be delighted by the quality and variety of product/service he gets such that his patronage is assured.

 Whether we like it or not, the whole business of insurance must be built around the customer to guarantee his brand loyalty. Accordingly, insurance companies must continue to carefully develop products based on the information they obtain from the market place and package them in a manner that will both be beneficial to the insured and insurer. The managers and employees in the insurance industry must strive to define and understand the purpose of the insurance business, provide affirmative responses to why certain things are done and why a policy is issued. They must appreciate the essence of their functions and tasks, if they must be able to create value. They must learn to add personal touch to the sale and marketing of insurance policies. The introduction of Customer Relationship Management is a critical success factor in this respect. Insurers must imbibe this market-focused philosophy because, companies that can tailor their product lines and distribution channels to tested customer needs, with a focus on service, will win competitive advantage

 The bell tolls for everyone

In this season, the insurers must ensure that risks are properly evaluated and fitted into the risk profile of their companies. They must be careful about the cover he provides. He must conduct due diligence and properly assess the risk before accepting to underwrite. Secondly, the brokers must ensure that the insured’s interest is protected by explaining the details of insurance contracts to them. They must promptly remit insurance premium collected to the insurers, ensure that disasters are promptly reported and evaluated as well as ensure that verified claims are promptly settled. If there are disputes, he should ensure that loss adjusters are invited to mediate and that claims are agreed and settled as soon as possible. Above all, the regulators must ensure full compliance to regulations and code of best practices by stepping up the tempo of supervision. This, they can do, only if they hire the right technical personnel and invest in training. In a liberalized, recession-ridden market, such as we now have, enforcement of rules is crucial to the maintenance of discipline and sanity in the industry.

–Funmi Babington-Ashaye, FCII, is the MD/CEO Risk Analyst Insurance Brokers Ltd