Insurance Industry: Growth Driven by Reforms

In the last decade, the growth of the Nigerian insurance sector has been largely reform-driven. Despite appreciable expansion in premiums, especially in the posts consolidation era, Nigeria’s insurance sector remains primarily in a state of infancy. From a largely fragmented operating environment characterised by a weak regulatory framework, the industry has seen radical changes shaped by concentration levels and raised the attractiveness of the industry to investors.  Recent reforms have however come at significant costs, as mandated provisioning for receivables and fair value equity losses tend to have dented reported earnings.

Gross Premium Growth
The average aggregate growth rate of the Nigerian insurance industry over the last 12 years is 23%. Life and general insurance businesses grew at an average of 25.40% and 20.67% respectively. Interestingly, the growth rate of live insurance business is significantly higher than the general business over the period, 2010 to 2012. Recent performance of life insurance business is thrilling and it seems to be riding on a new wind of change. Life insurance grew at an annual average of 36% over the last five years compared to 18% annual growth of the general businesses during the same period.

Performance Ranking
Life insurance business currently holds the largest market share of 27.9% among all the classes of insurance businesses. Other classes of insurance that contributes significantly to the Nigerian insurance industry are motor vehicle 20.3%, miscellaneous 15.2%, and general accident insurance 12.9%. The top four classes of insurance business account for 76.3% of the industry as at 2012. It was noted that gross premium of life insurance business overtook that of motor vehicle business for the first time in 2011. This is even wider as indicated in 2012 performance figures.

Claim Payout Ratio
Claim payment remains a major driver of insurance industry’s perception by the Nigerian public. There is an age long impression that insurance companies are sticky and slow regarding claim settlement. Our analysis shows that about 27% of total gross premium went to claim settlement in 2012. The claim payout ratio tends to have moderated from 34.2% in 2007 to 27% in 2012. Life businesses showed a historical high claim payout ratio relative to the general insurance business. For instance, in 2011 and 2012, life insurance firms paid 32.8% and 34.5% of their gross premium as claims relative to 21.8% and 20.0% claim payout ratio for general business respectively.    

Management & Other Expenses Ratio
Management and admin expenses as ratio to gross premium are trending down. The aggregate industry ratio stands at 15.4% for 2012 financial year. Interestingly, the life insurance firms posted a significantly lower expense ratio compared to the general insurance firms. It was noted that life insurance subsector may have achieved a more efficient cost structure because most of them ride on the back of group advantage or consolidated business structure. In all, the operating cost structure of the insurance industry is relatively lower than other industries with the exception of professional service sector.

Brokers’ Commission Expected to Rise
With the new policy of the National Insurance Commission (NAICOM), on the licensing of all insurance brokers in the country, we feel strongly that the new licensing cost will be passed on to the underwriters. The annual licence processing fee set for brokers by the commission is ₦2.5 million. About 350 insurance brokers and 15,000 agents bought over 60% of new insurance mandates in 2012. As insurance underwriters set to play deeper in the retail segment of the market, crafting a new market penetration strategy is germane. According to a PricewaterhouseCoopers (PwC) 2012 report, insurance firms urgently need to rethink their sales and market strategy.

Insurers Must Change Strategy
According to findings by PwC, the unsettled state of the global economy in some jurisdictions, a growing regulatory burden, and the longer-term challenge of regaining public trust in Nigeria post a threat to insurers.

The report shows that only 15% of those surveyed expect any improvement in the socioeconomic condition in the country in 2013. The clamours for low interest rates are seen as a particular challenge for the industry by some of the insurance chief executives. It means that the largest sources of income for the industry are under pressure and the effects will most likely accelerate over time because insurers tend to invest for the long run.

The diverging trajectories of growth are increasingly making customers to demand more transparent and accessible products. Technology that is revolutionising risk analysis, customer profiling and the overall speed of change are some of the developments that are putting existing insurance business models at risk. The insurers that wish to top the industry will focus keenly on the customer and have a superior capacity for innovation and reinvention. They will be able to anticipate change and how it affects them, as well as be nimble enough to quickly capitalise on emerging opportunities.

The market is still fragmented with remarkable pricing and brokage anomaly. The top five companies account for 50% and 35% of market share for life and general businesses respectively. Products and service differentiation, size and group advantage, efficient cost management and integrity of claim settlement are the key factors that are increasingly setting the top industry players far apart from other operators.