The Sun News Online

The Group Managing Director of Standard Alliance Insurance Plc, Mr. Bode Akinboye has said that Nigeria as a nation, might not develop on the right economic path without the insurance industry. Mr. Akinboye who said this while addressing insurance professionals in Abeokuta, the Ogun State capital, called on the insurance industry operators to wake up and take their rightful place in the nation's financial service sector.

He said, “the financial services sector encompasses a broad range of organizations that deal with the management of money. These include Banks: universal, mortgage, micro-finance, investment, commercial etc; Insurance companies: composite, general, life, re-insurance, brokerage etc; Investment funds: mutual, open-ended, closed, asset managers, pension fund administrators and custodians etc; Capital market operators:

stock brokers, underwriters, advisers etc. and other companies like these.
This sector's contribution to the nation's Gross Domestic Product (GDP) between 2003 and 2007 stood at 32percent- behind agriculture 41 percent and ahead of oil & gas 24 percent.

Considering that agriculture in Nigeria is mostly agrarian and local content (including employment) in oil & gas is still low, the financial services sector is actually the largest private employer of graduates in Nigeria - directly and indirectly, and is presumably of more impact than any other sector on this audience.

A preliminary issue to consider is: in terms of fulfilling the first stage of achieving the Millennium Development Goals (MDG), which is to reduce the incidence of poverty by half by 2015, of what use has the financial services sector been?

It is instructive that the World Bank, through its various executives, has described Nigeria's plan to achieve this in the face of current realities as “very ambitious.”
It is therefore sufficient to reason at this juncture that for any sector to be regarded as vibrant, it must contribute meaningfully not only to the GDP, but also to the achievement of national developmental goals.

In the last twenty years, banking institutions have dominated the financial services sector in our nation. For instance, comparing with insurance, the gross income of the banking industry is in the trillions, while the insurance industry could only generate about N100 billion in gross premiums in 2007.
In terms of capital base, while insurance companies collectively have a capital base of about N200 billion, this about equates the paid up capital of one out of the 24 universal banks currently operating in the country.

It has been estimated that as at May, 2008, banks account for about 63 percent of the total market capitalization of the Nigerian Stock Exchange (NSE). Hence, though co-venturers in the financial services sector, the insurance industry in Nigeria has consistently been seen as “poor cousins” to its banking counterparts.

There is no better way to illustrate this point than to argue that banks account for about 50 percent of the annual gross premium income in the insurance industry: asset accounts of banks yield about N25 billion in premium income annually, while transactions intermediated through banks make up the difference.
We should note however, that banking and insurance constitute the main channels by which the citizenry access the financial services sector in Nigeria.

Thus, as we consider below theory, challenges, and implications relating to establishing a vibrant financial services sector in Nigeria, this paper is principally a call for the insurance industry to wake up and take its rightful place in the firmament of finance within the nation.
Financial systems and development

It is apposite before we look in-depth at the challenges militating against the financial services sector, to consider the correlation between financial systems and development.
The role of the financial sector in the process of development goes well beyond the traditional concerns about resource mobilization to finance investment.
First, financial intermediaries produce financial services, which are consumed by consumers and used as input by producers in other sectors of the economy.

We must note that as a producer of services, the financial sector is very much a genuine part of the “real sector”. Unlike the generic postulations currently being paraded in this regard, money and finance are not just a veil; but a catalyst in the mix of “real” production.

Second, the financial system has an overwhelming influence on the allocation of the resources it mobilizes- even within the system itself; this is evident in our example above of banks exerting strong influence on the insurance industry: they are more effective in mobilizing the resources that generate insurance premiums, so they strive to control the business; and they appear to be succeeding.
One thought that should suffuse our minds now, as insurance practitioners is: how do we break the strangle hold of these banks on our industry?
The experiences of the 1980s have led many developing countries to reconsider their approach to development.

Although countries differ in the scale of government intervention and in the extent to which they have already stabilized and restructured their economies, most have decided to rely more upon the private sector and market signals to direct the allocation of resources.
To obtain all the benefits of greater reliance on voluntary, market-based decision making, they need efficient financial systems.

Another question to consider is: can a financial system be efficient if it only consists of banks and their appendages? (I'm assuming that the insurance industry is gradually losing its independence and turning into an appendage of the banking industry).
A financial system provides services that are essential in a modern economy. The use of a stable, widely accepted medium of exchange reduces the costs of transactions.
It facilitates trade and, therefore, specialization in production. Financial assets with attractive yield, liquidity, and risk characteristics encourage savings in financial form- in other words, they become a store of value.

By evaluating alternative investments and monitoring the activities of buyers of financial products, financial intermediaries increase the efficiency of resource use.
I aver that access to a variety of financial instruments enables economic agents to properly pool, price, and exchange risk.

It has also been adduced at various fora that trade or commerce, the efficient use of resources, saving, and risk taking are the cornerstones of a growing economy- you only have to look at the exploits of the so called “Asian Tigers” and the BRIC countries (Brazil, Russia, India and China) to reach this conclusion.

Therefore, conditions that support the development of a more robust and balanced structure will improve the ability of domestic financial systems to contribute to growth and national development.
The emphasis in my opinion is on balance - a financial services sector that is not balanced cannot be robust, and a sector that is not robust cannot be vibrant.
A natural progression as we sees is that the financial services sector in Nigeria is not robust and vibrant enough mainly because the insurance industry is lagging behind.

The challenges of a vibrant financial service sector
In considering the challenges we face in building a vibrant financial services sector, I must reiterate that for the financial services sector to be vibrant, it should be an engine of growth and national development.
To be an engine of growth, the financial system must itself be strong. This is generic as are the indices of strength in the financial services sector, which can be broadly categorized into two:

“Increasing the quantity of resources channeled through financial institutions- for banks this would mainly refer to deposits, while for insurance we would be looking at premiums - they both revolve around the number of customers they're able to attract and keep i.e. enticing or encouraging more people to partake of banking and insurance products. This has a lot to do with awareness, branding, sensitization, service culture etc.

“Improving the way the financial system allocates resources to generate a higher rate of return - this relates mostly to operational efficiency, corporate governance, capital & reserves etc. all designed to ensure that financial institutions can meet their obligations.”
We must be honest with ourselves and agree that the banking industry has been more proactive in addressing these issues than the insurance industry.

In fact, the insurance industry usually reacts to the banks when it comes to the issues mentioned above.
For instance, we started paying attention to branding and awareness issues after the banks had gone very far in such matters. Same applies to consolidation, increase in capital and corporate governance.
So will highlight the challenges faced by the insurance industry in transforming itself into a means of improving the vibrancy of our financial services sector.
The banks have mostly played their part - Nigerian banks now rank amongst the best in the world; it's our turn.
Implications and prescriptions
Sadly for the insurance sector, the pest/swot matrix and industry analyses above contains a litany of opportunities and strengths un-harnessed, weaknesses not adequately tackled, and threats receiving very poor response.
Recapitalization and consolidation of players
The question I would ask on the recent recapitalization and consolidation in the insurance industry is whether we are making the required mark post-recapitalization particularly in the area of risk management within the nation's financial system.

When you consider that risk management is a “structured approach to managing uncertainty related to a threat through a sequence of human activities”, the insurance industry should be the principal risk management instrument in the financial services sector, going by this definition.

The principal reason why the insurance industry had failed in this area is insufficient capital. The recent regulator induced increase in capitalization amongst insurance companies was a good step; but it's not enough to earn the confidence of other stake-holders in the financial services sector.

It is necessary for another non-regulator induced round of capitalization to take place and Standard Alliance Insurance has set the ball rolling by raising N18 billion from the capital market in March, 2008.
But apart from risk management what have we done with the capital we raised? Have we improved the computerization of our operations, including the IT skills of our employees? What about our business outlets: are they better in ambience and convenience?

Are we exploring aggressively viable alternatives to our current “brick and mortar” outlets e.g. e-portals and what I have tagged Automated Insurance Machines (AIMs) similar to the ATMs of the banks? How has the improved underwriting capacity arising from recapitalization played out?
My experience is that Oil & Gas companies still do compulsory reinsurance of their risks abroad on our behalf, thus depriving us of a major part of the income arising from those risks.

Diversification of products and services:
It has been determined that there are insurance business opportunities available in abundance in Nigeria. But the insurance culture is low and should be raised!
Indeed many products are “underutilized” e.g. Household Insurance, Professional Liability Insurance, Travel Insurance, Product Liability Insurance, Public Liability Insurance, Mortgage Protection Policies to mention a few.

Also, local insurance penetration in the Public Sector as well as Oil & Gas is weak. When you consider that truly, the scope of business is limited without insurance; and that the financial services sector and, by extension, the entire nation, cannot develop without insurance, then we're failing in our duty.
We need to do whatever is necessary to make people believe in insurance and its efficacy. We cannot achieve our objectives focusing solely on the concentrated client bases (largely corporate) we all currently pursue.

We have to expand the market to reach our goals. Research and Development activities are weak in insurance. A lot of us pay lip service, for instance to developing the retail market.
Certainly, the lack of a national identity system and a fully functioning credit bureau will make this difficult. But how many practitioners are willing to make the investment to move the notion of retail insurance forward? Not many, considering the results we have achieved thus far.

Cost of doing business/ state of public infrastructure
It may be trite but commercial banks, which are what we have in abundance in Nigeria, are not really built to develop infrastructure.

It has been said that development in the 21st century must be private sector led i.e. government must let go of the “commanding” heights of the economy for us to make any real progress; and we can see this playing out in Nigeria with the telecoms revolution and the debacle we currently face with power. We would develop faster if the insurance industry were stronger.
First, if insurance companies build up their reserves as they are supposed to do, these can be legally invested in building up the nation's infrastructure.

Secondly, strong insurance companies have a role to play in underwriting large infrastructure projects to give local and foreign investors the confidence to embark on such ventures.
As we have seen, it is a “catch 22” situation: if infrastructure is not developed, the financial services sector (and the nation at large) suffers and is retarded; infrastructure will remain undeveloped for longer than necessary, if the insurance industry does not rise up to the task. Our destiny lies squarely in our hands.

Unethical practices/ Premium receivables/Competition:
These issues are connected and critical. I will not comment here on the issue of unethical practices, which manifest in huge premium receivables, except that they are not restricted to brokers; we all know they exist and what they are.
However, it's disturbing that we're all still perambulating around the same market - we're not expanding it. The Agusto report tells us that financial assets in Nigeria double every three years mainly because of inflation.
Hence, the growth we see in our figures (which is still grossly inadequate) is not necessarily a growth in market share. Remember that we share this market with banks i.e. insurance companies and banks are all competing for the same purchasing power decisions within the economy. We cannot overemphasize that we're losing out. To compete effectively, the present situation calls for an insurance company to innovate or perish.

Regulatory oversight:
Regulators are generally impervious to change; at best, they change slowly. The Nigerian Insurance Association must therefore assert itself by promoting initiatives required to move the industry forward.
If regulators are not made to see why some measures need to be taken, they will unnecessarily be a clog in the wheel of progress. Part of these initiatives should focus on how to strengthen the institutional framework in which insurance companies operate, particularly relating to claims settlement, and to develop the necessary know-how and human capital.

We should, however, hail NAICOM's effort on Monday August 25, 2008 when it decided to take the issue of Compulsory Insurance of Public Building under section 64 & 65 of Insurance Act to the next level, threatening to send defaulting owners and even tenants of such structures to jail.

Challenges of awareness and need for united efforts:
I am of the view that there is need for pooling our collective resources together for a united frontal awareness creation exercise for our business.
It is when the industry becomes a household brand that has stuck to every mind that we can have the volume of patronages that we quest for.

It is important at this stage to provide a brief profile of four world-class Insurance and Financial Institutions to further reinforce the potentials of and value inherent in the insurance industry in Nigeria.
AXA is an insurance company headquartered in France, one of the world's largest with its 189,000 employees and a revenue of $150 billion. Focus: Life Insurance, Health and General Insurance, Investment Management.

AXA has Five operating business segments: Life & Savings, Property & Casualty International Insurance (Including reinsurance), Asset Management & other Financial Services.
American Insurance Group, Inc. (AIG) is the world's leading international insurance and financial services organization with operations in more than 130 countries and jurisdictions.
Global Focus: Financial services, retirement services, asset management.

Its financial services business include: Aircraft leasing, financial products, trading and market making.
AIG also has one of the largest U.S retirement services businesses through AUG SunAmerica and AIG VALIC, and is a leader in asset management for the individual and institutional markets, with specialized investment management capabilities in equities, fixed income, alternative investments and real estate.
AIG common stock is listed on the New York Stock Exchange as well stock exchanges in London, Paris, Switzerland and Tokyo.
It is also the principal sponsor of Manchester United F.C.
ING is a global financial services company providing banking, investments, life insurance and retirement services.

Based on market capitalization, 31 March 2008, ING is one of the 20 largest financial institutions worldwide.
ING covers 75 million private, corporate and institutional clients in 50 countries with a workforce of over 115,000 people.
ICICI LOMBARD is a General Insurance company in India with over 114 Branches; Million Policies, 11,200 Sales Agents, 5,500 full time employees, 2007 revenue of $860m (N100 billion). This represent about the same figure the entire insurance industry in Nigeria recorded in 2007.

Recommendations:
The need for government to set up a task force or empower the NAICOM with the sole aim of enforcing strict compliance on insurance regulations by the people and government bodies. Our government needs to borrow this leaf from its Canadian counterpart. That the Canadian insurance industry controls the country's economy is as a result of the actions of such a task force set up and given much power to carry out its duties by the government. It must be a task force that can bite.

Receipt of premium to be made compulsory before any Insurance Institution issues policy.
Payments of Premium directly to Insurance companies to be made compulsory while penalties be put in place for failure by any insurance company to remit commission due to Brokers within 5 working days after receiving value.

Brokers need to focus more on value based consultancy
Support services such as Loss Adjusters, Engineers and consultants. Assistance services needs to be re-organised and refocused to create a better image for the industry.
Micro/Retail Insurance: That just like the banking industry now runs micro-finance institutions, the industry should be thinking of micro-insurance to take care of the insurance needs of the lower range of the society which are actually in the majority.

As we mull over the challenges thrown up, we must also consider that perhaps the mindset of the average insurance practitioner should change.
Insurance practice in Nigeria, unlike banking, is something of a closed circle; and we can see how dominant banking has become in the nation's financial services sector relative to insurance. Insurance is beginning to open up; but not fast enough.
I surmise that Nigerian insurance companies should see themselves as financial services firms, rather than just collecting premiums and spending it.

Why don't we have venture capital products, derivative hedge products, mortgage development products and so on? The principal difference between an insurance company and a bank is that a bank is a depository financial institution, while an insurance company is a non-depository financial institution i.e. a bank by law is permitted to hold public sector deposits in its vault, but insurance companies are technically able to do everything that banks do except keep deposits.
I hope that we shall all make a common commitment to raising the level of the insurance industry in Nigeria.