New ways of deepening insurance penetrations in Nigeria

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By Favour Nnabugwu

DESPITE enormous challenges, the insurance industry at the global level and in Nigeria, have been reporting unprecedented growth in both life and non-life insurance segments.
According to the industry data, the Global Insurance Industry maintained steady growth in 2019 as premiums increased by 3.0 percent to $6.3tn after crossing the $5.0tn mark in 2018. This represented 7.2 percent of Global GDP.
Growth was supported by the improvement in both life and non-life insurance segments in China and the non-life segment in advanced markets.
The non-life segment recorded an impressive 3.5 percent growth in premiums to $3.4tn in 2019 while life insurance premiums grew by 2.2 percent to $2.9tn.
Across regions, emerging markets led the growth in premiums with China reporting 5.6 percent and 12.0 percent increase in life and non-life premiums respectively.
Declining yields on treasury instruments due to the accommodative monetary policy of global systemically important central banks pressured life insurance profitability in 2019.
However, improved pricing and underwriting conditions supported the profitability of non-life insurance.

Nigeria

The National Bureau of Statistics, reported that in the Nigerian Insurance sector, growth was faster than the country’s economic growth of 2.3 percent, as the sector expanded 3.6 percent in 2019 from 6.1 percent in 2018.
And according to the NIA, the volume of business written by insurers last year rose by 15.55 percent to NGN490bn ($1.3bn) in terms of premiums in 2019, compared to N365.1bn in 2017, with the life segment primarily responsible for the impressive growth.
The industry operators say that the growth could not have been possible without the concerted effort of the regulatory body and the key players in the industry.

What They Did

The Commissioner for Insurance,Mr. Sunday Thomas repeatedly told the newly licensed insurance and reinsurance companies to develop innovative products. Over the years, insurance operators have remained stuck in time and failed or refused to design innovative new product unlike their counterparts in South Africa.
Therefore, in order to get more Nigerians (individuals and enterprises) to understand and buy insurance products, the National Insurance Commission (NAICOM) and some committed players in the industry have in recent years, research and develop new strategies to boost growth , especially penetration and density.

NAICOM’s micro-insurance companies

Mr. Thomas, noted that to leverage the nation’s large and growing population to boost growth, it is pertinent that micro-insurance policies – which are specially designed for the low-income market, micro and small-scale enterprises- are promoted.
In this regard, NAICOM recently licensed two full-fledged micro-insurance companies, GOXI and Cassava Micro-insurance companies, to offer life and general micro-insurance services in Lagos state.
“Alongside the promotion of micro-insurance, we believe less-restrictive Bancassurance guidelines and the removal of the ban on partnership with Mobile Network Operators (MNOs) would allow for low-cost distribution of insurance products and deepen insurance penetration, especially at the low-income segment of the Nigerian market”.
“We see recent developments in the form of the partnership between Axa Mansard & Carbon and agri-business insurance boosting premiums and awareness for the sector, although there are inherent risks.,” he said.

Bancassurance

The Commissioner, also lauded the recently inteoduced Bancassurance Model of the Access Bank Plc and Coronation Insurance Plc, pointing out that it will give the insuring public an opportunity be able to get enlightened as to what insurance products they need to have at any point in time, to be able to protect their assets.,”
In a keynote, during the company’s webinar themed ‘ Managing Business Risks at a Time of Uncertainty’, the Commissioner urged the insuring public, especially small business owners, to take up insurance products
in the management of their businesses.
Represented by Mr. Taiwo Adeoyin, Technical Advisor to the Commissioner, he said :
“At this time we are in now, what comes to the mind of everyone is how do I reduce cost, how do I reduce the amount of the expenses I incurred as a business, because there are high inflation and recession”.
However, the rationality paradox theory tells us that sometimes, what we gain in terms of reducing costs could even be more in terms of what we lose.
“You could say that , Oh, this is not the time to take up insurance, this is not the time to insure some assets, but I tell you that at the end of the day, you might end up eating down into your portfolio and into your bottom line, to be able to find your feet in sustainability”.
“At this point in time, it is good to reduce costs but in terms of insurance, we should ensure that all our assets are adequately insured. It’s also important to have a good management framework and be able to manage our insurance assets,” he said.

Rebranding projects

Former chairman of the Nigerian Insurers Association, NIA, said that despite enormous challenges, the industry had continued to perform its role.
“It is expected, because of the various initiatives embarked on by the association in conjunction with other stakeholders such as financial inclusion, microinsurance, the insurance industry rebranding project and Unstructured Supplementary Service Data (USSD), a communications technology to deliver mobile financial services”.
“Also, the Nigerian Insurance Industry Platform for Sale of Third Party Motor Insurance coupled with other strategic efforts by the regulator will further deepen insurance penetration and encourage insurance uptake by the public,” he said.
Smart said that the coronavirus pandemic posed a serious challenge to the association and the entire Nigerian insurance industry.
He explained that the virus had not only disrupted businesses but also forced member companies to activate their business continuity strategies.
“We are happy that our members have responded adequately to the challenges posed by the disease, such as remote working, deployment of technology, use of web conferencing technology for online meetings, maintenance of physical distancing.”
“Social distancing in the work place and sale of insurance policies through online platforms have become part of a new norm,” he said.

Recapitalsation Drive

The industry is undertaking a third round of recapitalisation to boost capacity after two previous exercises in 2003 and 2007.
Indeed, the reason for another recapitalisation is not farfetched: stark realities have made a fresh injection of capital rather inevitable.
The Coronavirus pandemic has disrupted the activities of most companies, including the insurers.
This is why the NAICOM has given insurance firms in the country one more year to recapitalise.
According to NAICOM, “The incidences of Covid-19 pandemic have made it difficult to proceed with the Dec. 31, 2020 recapitalisation deadline.”
The principal objective of the reform is to have bigger and stronger players in the industry with enhanced capacity to reach and cover the majority of the Nigerian populace.
In the meantime, insurance companies are expected to meet at least half of the capital requirements by the end of 2020. The final deadline for full recapitalisation is now September 2021.
This is the third time an extension has been granted since the recapitalisation programme was first announced in May 2019. Initially, NAICOM had extended it from June 30th, 2020 to December 31st, 2020.

Rules of engagement

The recapitalisation programme requires life insurance firms to meet a minimum paid-up capital of N8 billion, up from N2 billion; general insurance companies are expected to increase their paid-up capital to N10 billion from the earlier N3 billion.
Composite insurance (those that operate both general and life insurance) have been asked to recapitalise to the tune of N18 billion as against the pervious amount of N5 billion, while reinsurance businesses are now required to have a minimum capital of N20 billion from N10 billion that obtained in the past

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The big insurance companies and the newly registered ones have already met the capital requirements some smaller ones that are yet to meet the recapitalisation target are pushing against it: because of the impact Covid-19 has had on their businesses and their inability to raise the needed capital.
The House of Representatives recently passed a resolution demanding that the NAICOM suspend its planned December 31, 2020 mandatory deadline for the first phase of 50%– 60% of the minimum paid-up share capital for insurance and reinsurance companies.
According to the House of Representatives, “the suspension is expected to last for six months from January – June 2021 and is necessary to give the insurance operators soft landing, as well as cushion the effects of Covid-19 and other unforeseen circumstances they might have suffered.”
Some shareholders too have risen up against the planned recapitalisation and have gone to court. The suit was instituted by the Incorporated Trustees of Standard Shareholders Association of Nigeria and Mr Godwin Anono. They are asking the court to halt any further steps by NAICOM towards implementing the directive for the companies to recapitalise, pending the hearing and determination of the main suit.
It is true that Covid-19 adversely impacted the insurance industry but before Covid-19 it was a well-known fact that insurance companies would be asked to recapitalise since it become obvious that some of them were having difficulties settling claims.

Claims Settlement

Claims settlement is at the core of insurance business. The trust deficiency that the insurance industry suffers today is due to the long-held belief that insurers do not like to settle claims or downright refuse to settle claims.
To build trust in the industry, NAICOM is pushing for the recapitalisation of insurance companies so that claims settlement will be carried out without much acrimony thus encouraging the public to have trust in the insurance industry.
To make things easier for the insurance companies, NAICOM has split the recapitalisation process into two phases with the first phase terminating on the 31st of December 2020 and the second and final phase to terminate on the 30th of September 2021.
Under the recapitalisation guideline, insurance companies must meet 50% of the new minimum capital requirements while reinsurance providers are required to meet up to 60% of the new minimum capital requirement.
Moreno, under the revised guideline, Life insurance underwriters are to have a minimum capital of N4billion by 31 December 2020 and have fully paid-up capital of N8billion by 30 September 2021. General insurers are expected to meet a minimum paid-up capital of N5billion by 31 December 2020 and N10billion by 30 September 2021 respectively.
For Composite insurance underwriters they are expected to have a minimum of N9billion in paid up capital by 31 December 2020 and N18billion by 30 September 2021 while reinsurers have been told to have N12billion in minimum paid up capital by 31 December 2020 and N20billion by 30 September 2021.

Why recapitalise

According to the Corporate Finance Institute, “Recapitalisation is a type of corporate restructuring that aims to change a company’s capital structure. Usually, companies perform recapitalisation to make their capital structure more stable or optimal”.
Recapitalisation essentially involves exchanging one type of financing for another – debt for equity, or equity for debt. One example is when a company issues debt to buy back its equity shares.”
Recapitalisation are usually required to reduce financial burden; to prevent hostile takeover and for reorganisation during bankruptcy.
This is why the Federal Government of Nigeria through NAICOM decided to increase the minimum share capital of insurance companies. Therefore, a transparent process where interested investors can visit your website or through your social media accounts know the status becomes imperative.
Most insurance operators believe that “The decision to extend the deadline is reasonable under current circumstances. The coronavirus pandemic has ravaged global economic and financial systems thus making it more difficult for an already unattractive insurance sector to raise much-needed capital.”
“We note that several players have initiated the process of raising the needed funds from their existing shareholder base via the right issues. However, we highlight that some of the players currently have a negative book value of equity and are trading below their par values. Hence, raising equity capital does not appear feasible. That said, we expect to see a flurry of mergers and acquisitions in the industry once conditions become more favorable,” they said.
However, at 0.3 percent, Nigeria has the lowest insurance penetration level amongst notable African countries. Currently, South Africa is at 14.7percent, Kenya at 2.8 percent, Angola at 0.8 percent and Egypt at 0.6percent. Similarly, the sector’s insurance density is still one of the lowest when compared to its peers.
While receiving the licence issued to Heirs General Insurance, the chairman Tony Elumelu said the new insurance company will develop products.
According to him, “That is one of the things we will bring to the sector. We understand market research, we understand what consumers want, we know how to reach them and surpass their expectations and there is always room for improvement especially with technology.”

Conclusion

It is true that the insurance industry was badly affected by Covid-19, however before the coronavirus pandemic struck, the insurance industry had been suffering from existential threats which can only be addressed through recapitalisation.
These include: obscurity – out of the 57 Insurance companies and two reinsurance companies in Nigeria, less than half advertise their products. Fraudulent small players –fringe insurance players with little or nothing to lose swindle innocent policyholders thus giving the industry a bad name and reputation.
Low premium, poor assets– because many insurance companies receive premiums below market value, they are unable to invest in quality assets that will help them generate income and weak product development. One issue that kept on recuring during the licensing of new insurance companies in November 2020 was lack of innovative insurance products that will attract policyholders to the industry.
The Commissioner for Insurance believes that with recapitalisation of the industry and more capital to play around with, the management of insurance companies can now in campaigns or adverts, force small fraudulent insurance companies to either emerge and be reckoned with or be acquired by bigger credible players and recruitment of smart innovative staff to help drive market value premium for better asset acquisition.
Truly, If successfully executed, the planned recapitalisation will result in the ability of companies to underwrite bigger risks e.g., in oil and gas, improve settlement of claims and sensitise the public through continuous marketing on the need to buy more insurance policies.

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