The insurance sector witnessed a mixture of good and bad in 2016, writes Ebere Nwoji
The insurance sector, like other sectors of the economy shared in the negative effects of the economic recession which left many businesses stagnant in 2016. However, industry also reaped the fruit of improved awareness of insurance by Nigerians.
The sector, was none the least of sectors whose activities were slowed down by the effects of the recession as operators lamented that given its usual position as the last in the scale of preference of an average Nigerian, patronage of the industry was at very low ebb during the year while premium payment suffered major setback in spite of the ‘no premium no cover’ regime in the country.
Apparently, the industry’s abysmal performance has its root cause from the overall poor performance of the economy due to the recession.
In the year 2016, after three consecutive quarters of negative growth of the nation’s Gross Domestic Product (GDP) as announced by the National Bureau of Statistics (NBS), Nigeria’s economy gradually slipped into recession as announced by the Finance Minster, Kemi Adeosun.
The overall poor performance of the economy, which trickles down effect impacted negatively on the insurance sub- sector, started from the budget side.
The late implementation of the federal government budget during the year due to the some controversies, compounded the nation’s economic woes. Firstly, the missing of the original copy of the appropriation bill as presented by President Muhammadu Buhari and secondly, the padding imbroglio, all which resulted in delay in government’s spending and consequently inability of government’s Ministries, Departments and Agencies (MDAs) to engage in new insurance policies, renewals and payment of premiums.
The 2016 Appropriation Bill of N6.07 trillion passed by the National Assembly was signed into law by President Buhari in May.
Factors that affected other sectors also affected insurance. Though the insurance sector witnessed positive growth in the first quarter of the year as a result of improved awareness of many more Nigerians on insurance and ability of the sector operators to block some loop holes through which operators suffer premium drip to fake operators, it became beclouded by economic downturn throughout the remaining quarters of the year during which the GDP also witnessed negative growth culminating to the present recession. These affected the performance of the insurance sector. Thus, apart from the prevailing little or no insurance culture by Nigerians, the economic downturn contributed to the low patronage witnessed in the insurance sector in 2016.
Deepening insurance penetration
Consequently, the much desired insurance inclusiveness and insurance penetration to the grass root with the proposed introduction of micro-insurance, was not totally achieved even though the National Insurance Commission (NAICOM) introduced guidelines for the operation of “Takaful”, a model of micro-insurance based on Islamic principles.
Although only two companies had been issued with Takaful licences, they are yet to commence operations. The introduction and acceptability of any other form of micro-insurance became elusive because it is when the people are economically well off, that they will be disposed to pay premiums for any insurance policy.
But towards the end of the year, the Commission introduced the use of alternative channels of distribution tagged Referral / Partners/ agents. While it suspended previously existing alternative channels for security reasons.
The insurance commissioner, Mohammed Kari said the preliminary work and draft guidelines for the new channels had gone far just as he acknowledged that the market and the players could meet challenges in seeking to establish these channels.
The industry, however, could not fully achieve the much desired enforcement of the six compulsory insurances, one of the major objectives of instituting the Market Development and Restructuring Initiative (MDRI) launched in 2009.
But the industry has recorded tremendous improvement in insurance awareness among the people compared to what was obtainable before 2009.
The compulsory insurance policies include: Builders liability insurance under the Insurance Act 2003 and the Lagos State Building Control Law 2010,Construction All Risks insurance; Occupiers liability under the Insurance Act 2003 and Lagos State Law; Employers Liability (Group Life) under the Pension Reform Act 2004; Healthcare Professional Indemnity under the National health Insurance (NHIS) Act 1999 and Motor third party liability under the Insurance Act 2003.
Though insurers in 2015 celebrated timely payment of federal government for its workers’ group Life Insurance, 2016 contrarily witnessed delay in payment of Group life insurance by government as up till date, the federal government is yet to fulfill its annual insurance (group life insurance) obligations to the federal civil servants as well as the renewal of insurance of its assets located in various parts of the country. The group life insurance of federal civil servants and the insurance cover for government assets expired since August, 2016. With this expiry, civil servants and the assets are exposed to risks of uncertainties to the extent that in event of any disaster, no insurance company will be held liable since the principle of “no premium, no cover” applies.
Recent statistics released by the Nigeria Insurers Association (NIA) shows that insurance industry paid a total of N74.24 million to deceased police officers for 2014 under the group life Insurance.
Although, the budgetary provisions made for insurance premiums in the 2016 Appropriation Act for the Office of the Head of Civil Service of the Federation, which presides over the federal government’s insurances was N5.739 billion, the Permanent Secretary (Common Services Office), Yemi Adelakun, who oversees the scheme, said that the amount required for the group life insurance of civil servants is usually N5.4 billion annually. But this amount is yet to be released by the ministry of finance for payments to 20 insurance companies given certificates of no objection to participate in the under writing of the group life insurance by the Bureau of Public Procurement (BPE). As a result, no cover is provided yet by the insurance companies which list has not been made public by the Head of Service, Mrs. Winifred Ekanem Oyo-Ita.
The issue of capital inadequacy of insurance companies, which had continued to constitute a militating factor against their capacity to independently handle or underwrite big accounts in oil and gas, aviation, among other high risks sectors of the economy like their contemporaries in developed countries of the world was not addressed during the year by the regulatory body, NAICOM and the ministry of finance. This was despite the fact that earlier in the year, the Minister of Finance, Mrs. Kemi Adeosun, had noted the declining level of the nation’s insurance sector when compared to the expansion in the banking sector and the growth of the recently reformed pension sector calls for worry.
Expressing concern over the issue, Adeosun said there is need for a fresh round of recapitalisation and consolidation in the industry to strengthen the industry operators’ financially.
The need for this was late in the year buttressed by the Nigerian Insurers Association (NIA), which in its periodic insurance industry digest, stated that about seven insurance firms during the year operated with shareholders’ fund below the minimum capital base.
The association, also in the publication, said about 10 insurance firms operated during the year with shareholders’ funds that is slighted above the minimum required capital, calling for beef up of the operators’ capital.
The finance minister in her remarks on the financial strength of the insurance sector said: “There is a need to immediately address the decline in the Nigerian insurance industry as it is lagging behind global and African peers. Despite being the largest economy in Africa, the Nigerian insurance industry remains largely underdeveloped. The industry has under-performed the Banking sector and even the recently established Pensions sector.”
While citing the extent of backwardness in capitalisation of the insurance sector, Adeosun said in 1981, the minimum capital requirement for banks was N1million while that of composite insurance companies was N0.8 million.
However, she observed that by 2014, banks had grown theirs to N25 billion while composite insurance companies grew to N5 billion, showing that banks had grown capital requirements eight times faster. To rectify the anomaly, she said: “The industry needs to recapitalise. Capital levels were last raised in 2007. To take true advantage of the opportunity for the industry, we must recapitalise and reposition. The top three banks have capital in excess of N300 billion each. The top three insurers have capital of between N14 billion to N25 billion.”
She added that the insurance sector needs to raise minimum capital requirements in a manner that is comparative to what happened to the banking sector in the last two to three decades.
“Increased capital will provide funding for publicity and product development. It will raise the clout of insurance companies in policy formulation and will enhance our capacity to hire the best people and deploy the technology and marketing, product awareness and investment needed to support the industry,” she stated.
Improving corporate governance
As the directive for recapitalisation of insurance companies is still being awaited, NAICOM, however, has recorded a pass mark in instilling good corporate governance on the operators. So far, it has with the assistance of Economic and Financial Crimes Commission (EFCC), recovered over N66 million stolen by unnamed former chairman of an undisclosed insurance firm. In addition to this, NAICOM is presently recovering the cost of shares fraudulently acquired by some company directors without payments.
However, in all, much is expected to be in insurance sector to enable it contribute positively to the nation’s GDP and remain competitive among other developed nation’s insurance sectors.
From the positive point of view, the regulator and the industry operators made remarkable preparation to achieve deeper penetration of insurance nationwide.
The Commissioner for insurance , Kari, from the beginning of the year said his main area of focus would be on awareness creation.
According to him, the moment Nigerians become aware of what they stand to gain from insurance, they will be willing to buy insurance and the problem of apathy towards insurance will be solved.
With this in mind, he mainly collaborated with the media to spread the good news of insurance to Nigerians.
Insurers’ Committee introduced
Also in a bid to ensure effective control of the industry by ensuring that operators play according to rules in order to build good image for the industry through checks and balances, the commissioner instituted the insurers’ committee, a body similar to the bankers’ committee where the regulator and the chief executives of the various operating firms meet bi -monthly to discuss critical issues affecting the industry.
The body has six sub-committees among which is the subcommittee on publicity and communication saddled with the responsibility projecting the image of the industry to the insuring public.
Risk Based Supervision
The commission also took a major step in its bid to place Nigeria insurance industry on the global best practices pedestal through the introduction of the Risk Base Supervision ( RBS) model.
The Commission, during the year successfully designed and released a blue print document for the implementation of the model for the insurance industry.
It gave the operators four weeks to peruse through the document, give their recommendations and return to the commission for final approval.
The RBS, is an European Insurance market supervisory initiative, and according to the World Bank, is a supervisory approach that considers each of the risks that companies face and through a structured process, identifies the risks that are most critical to the financial viability of the institution.
Under the model, the supervisory on-site review process looks at the management of the key risk areas of a company and focuses attention on the critical net risk exposures.
NAICOM, said in introducing the model, which is expected to place Nigerian insurance industry on global best practices pedestal, it would ride on the van of Solvency 2 supervisory principle in regulating the activities of Nigerian insurance industry operators. The commission said the model will kick start in 2017.
The commission also made no comprise in the implementation of the corporate governance structure especially as regards exit of directors and this saw mass exit of the directors concerned.
The awareness creation embarked upon by NAICOM, supported by some arms of the industry like the Chartered Insurance Institute of Nigeria( CIIN), yielded positive result as some industry operators said despite the recession, their performance looked better during the year compared to previous years.
Among such firms that recorded positive results is Royal Exchange Plc whose group Managing Director Alhaji Auwalu Muktari, said his company’s performance looked better than before.
“If I am to talk particularly for my company Royal Exchange, I will say that we did very well business wise. In fact, I can even tell you I did better than I did in 2015 despite the challenges and economic crisis in the country. But still we can do better if situations were normal and things were in the right position. We can do better if everything is going well with other sectors of the economy,” he stated.
He said the recession actually had negative impact on insurers’ activities but that Royal Exchange was able to overcome it through aggressive marketing activities and good customer service.
“I want to assure you that at Royal Exchange, we have so far this year achieved almost 34 percent above our income last year.”
On the overall experience of operators in 2016, Muktari said: “Premium generation has not really been a serious problem to insurers during the year 2016, but huge claims experience coming their way particularly this year as a result of negative effects of climatic change.”
“In the year 2016, we envisaged a lot of claims coming our way due to climatic change. There has been heavy rain in the northern part of the country, before now, it has not been like that. With the climate change, there is heavy rain in the north this year .We have not seen that before in the north we have only seen it in the south so they are not prepared for it. So many houses have been affected. Also, the terrorists’ activities have caused a lot of pipeline vandalism, the terrorists activities in the north, in form of Boko Haram, many police, soldiers were killed, and these have group life cover. Houses were damaged, all these brought a lot of claims to the industry in 2016. There are a lot of factors that have affected claims rate in this 2016,” he stated.
On the way forward for the industry, Muktari, said the most important thing is how to increase operators’ capacity of doing businesses so that the industry will have larger capacity to accommodate more risks instead of ceding huge risks outside the local market.
He said with improved capacity, operators can focus and reposition the industry so that they can retain more risk in the local market and with retention of more businesses locally, there will be creation of more jobs for the teeming population of Nigerian youths.
He said with improved capacity, there will also be rapid growth of the insurance industry and there will be a lot of funds for share holders to enjoy while the industry will become one of the greatest in Africa and the world in general.