Insurance Firms Still Reeling from the Recession

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Although Nigerian has exited the recession, its adverse effects on the insurance sector are yet to dissipate, writes Ebere Nwoji

Recently, the media was awash with reports that 50per cent of insurance firms in Nigeria are more or less without adequate reserves. The situation is a major source of concern, not only to the board and management of the affected firms, but other stakeholders in the insurance industry.

This is because, given the position of the insurance sector as the pillar on which every country’s economy stands including Nigeria, any indisposition on the part of the sector, directly or indirectly affects the economy.

Apparently, though the sector has not had it so rosy over the years due to poor patronage and low level of insurance awareness in Nigeria, the present situation which depleted some operating firms’ reserves was not unconnected with the recession that hit Nigeria two years ago. Though the recession similarly affected other sector operators, its negative impact on insurance was more pronounced mainly because one, by its nature, insurance is risk mitigating business that has to do with claims payment irrespective of the state of the economy. Secondly insurance often occupies the last position in the scale of preference of an average Nigerian as such any need for adjustment in their list of expenses affects the sector.

Against this backdrop, during the recession, the twin problem of insecurity situation in the country and federal government’s Forex policy exposed the insurers to huge expenses on claims coming from wanton destruction of lives and properties and claims from dollar denominated policies taken when the exchange rate of Naira to dollar was low during the recession when the exchange rate was at its highest.

This unarguably exerted pressure on some insurance firms and compelled them to deep hands into their reserves to meet up their claims challenges.
The ugly situation which has set some stake holders in the sector jittery is already taking its toll on the sector’s workforce as currently, it is no longer news to hear that some insurance firms owe their workers arrears of salaries even as some have devised means of shirking claims through misinterpretation of their policy statements.

But thanks to the sector regulator, the National Insurance Commission (NAICOM), which has put on eagle’s eye in its efforts to ensure that public interest, is protected to the last in terms of claims payment.
A critical examination of operations of some insurance firms depicts a picture of prominent scares left on their financial stature by the recession especially in their 2016 reports, to the extent that some shy away from publishing their annual reports in popular newspapers but merely published them in less popular papers just to fulfill regulatory obligations.

Indeed, about 23 of the existing 58 insurance firms recorded losses in their 2016 business outing and as such could not give returns to their shareholders. For the 2017 report which is yet to fully come out, there is yet no much evidence that some firms will fare better.

Prominent among factors that affected the performance of the firms within the period are huge claims from insecurity situation in different parts of the country especially since the emergence of the Boko Haram insurgency, kidnapping and climatic change which damaged lives and properties in addition to incessant fire outbreaks in major markets and factories.
For instance, there have been reports that frequent tragedies befalling Nigeria’s security agencies, especially the Nigeria Police Force (NPF), have shot up the insurance claims paid to victims’ families by over 300 per cent in two years.

Against this backdrop, there is fear that the development, if not checked, is likely to increase the N5.4 billion annual budgets for federal government workers’ Group Life insurance scheme.
According to data on this from the Nigeria Insurers Association (NIA), life insurance operators paid over N312.85 million group life claims to the Nigerian Police Force on deceased officers in 2016 as against N74 million paid in 2014.

This according to NIA, represents over 300 per cent increases.
NIA , in the latest edition of its annual insurance digest, reported that no less than 29 out of the existing 58 insurance firms reported negative reserves amounting to N93.15 billion in 2016. The report further revealed that 15 non- life operators posted N51.79 billion, while 14 Life operators posted N41.36 billion.

The negative reserves may not be unconnected with the recession as many insurance firms who underwrite dollar denominated policies, during the period had to pay the claims from their reserve due to the high inflation rate and rise in the exchange rate of Naira to dollar.
Speaking on the development, stakeholders said the insurance industry needs urgent attention as negative reserves is an indication of imminent crisis.

At the heat of the recession, the Managing Director International Energy Insurance, Mr. Peter Irene, had in an exclusive interview with THISDAY, raised the alarm that the dearth of Forex occasioned by the collapse of oil price and the prevailing government Forex policy then, had compelled firms which underwrite dollar denominated risks, to fall back to their internal operations to settle claims at the expense of their comprehensive income.
He had also observed that insurers who delayed settlement of dollar denominated claims until the country plunged into recession and the attendant astronomical rise in forex would have difficulty settling such claims. He noted but because of influence of the sector regulator that the National Insurance Commission (NAICOM) on such firms, the firms would resort to their reserves to settle such claims, a situation which he said would be suicidal for such firms.

“Most insurance firms had their treaty agreement in Naira even when they accepted dollar risk. What it means is that for example, you now have a claim, you have to pay in dollar but at the time you took up the risk, even though some people placed it in dollar, the exchange rate at that time was a fixed rate. Because of that, most insurance firms have to cough up huge claims in dollar.”

He said closely connected to this is the fact that most treaties in Nigeria are denominated in Naira and most of them were translated at the exchange rate ruling at that time the contract was signed.
Furthermore, he said: “If you have to pay, it means that you have to cough up money from your internal operations to make up when you are paying claims in dollar that were denominated in Naira.

Another problem he noted was that most of the dollar claims that were not paid before, will have to be paid now and to do that, operators have to pay more and that will impact on their comprehensive income.
The international Energy Insurance boss said those were the issues adding that many insurance companies have been caught up with this and cautioned other operators to be careful in their business.
Two years down the line, the insurance firms are facing the negative impact of the recession in form of negative reserves as predicted by the IEI boss.

Meanwhile, industry analysts said this portends danger for the industry and it signals the negative state of health of most operating firms in the industry.
According to the analysts, if 29 of the existing 58 insurance firms, representing about 50 percent have negative reserves, it means the entire industry has to tread with caution in their business operations.
Some industry stakeholders said the insurance industry needs urgent attention as negative reserves is a pointer to crisis.

Managing Director Lancelot Ventures Limited, Adebayo Adeleke, who is also a prominent member of Independent Shareholders Association of Nigeria (ISAN), speaking to an online news agency Inspenonline on this, noted that if 29 firms which is half of numbers of firms in the industry, have such challenges, it means the industry is really in trouble.
According to him, negative reserves denote that shareholders’ funds have depleted and that the firms are not making profits.

He called on the NAICOM to look into operations of most firms and encourage ailing ones to merge before they collapse and erode policyholders’ funds.
A researcher, Obinna Chikezi, said many reasons such as having claims above reserves, poor reinsurance protections for covers provided, high management expenses, low capitalisation and others could induce negative reserves