By Chiamaka Ajeamo [email protected] 08060655687
When the National Insurance Commission (NAICOM), the apex regulatory body in the insurance industry in May 2019, announced the plans to recapitalise the sector; it was received with mixed feelings.
While some stakeholders opposed the exercise alluding that capitalisation was not the major problem of the sector, some embraced it with the belief that the exercise could be a watershed in the industry. In fact, majority of the stakeholders were upbeat that the recapitalisation exercise was the game-changer needed to transform the structure of the industry, noting that the persistent Naira devaluation has reduced the strength of the industry’s capital since the last recapitalisation exercise in 2007.
Although some insurers had strengthened their capital base through earnings retention, the ability of most industry operators to solely underwrite large ticket transactions has dwindled based on the lower value of the capital in USD terms.
As at December 31, 2020, the industry had an estimated capital base of $1 billion, significantly lower than $2.2 billion recorded as at December 31, 2007. As a result, the National Insurance Commission (NAICOM) raised the minimum capital to N8 billion from N2 billion, N10 billion from N3 billion, N18 billion from N5 billion and N20 billion from N10 billion for life insurers, non-life insurers, composite insurers and reinsurance firms respectively.
However, the recapitalisation exercise suffered some setbacks particularly as the COVID-19 pandemic ravaged the global economy, Nigeria inclusive. Consequently, NAICOM postponed the deadline for the recapitalisation exercise which was later stratified into two phases; December 2020 and September 2021. In addition, the #EndSAR riots, litigation by some industry operators and aggrieved shareholders resulted in the postponement of the December 2020 deadline for the first phase of the recapitalisation exercise; and up until now, the exercise is still on hold.
Notwithstanding the setbacks, lower premiums, on the back of reduced economic activities, coupled with lower investment income which pressured the profitability of insurers in 2020; stakeholders are advocating for the resumption of the recapitalisation exercise noting that; in addition to the benefits of the exercise accruing from a larger capital base from a risk underwriting perspective, improved investment management practices will be upheld by a larger investment portfolio driven by a need to generate adequate returns, and the exercise will definitely elicit mergers and acquisitions needed to consolidate the industry.
To this end, Afrinvest Research in its 2020 insurance sector report themed ‘Recapitalisation-launching into the deep’, has highlighted the need for the continuation of the recapitalisation exercise of the sector.
An analysis of the report showed that the premiums of the global insurance sector performance in 2019, stood at $6.3 trillion after scaling the $5 trillion mark in 2018 as the non-life segment surpassed forecast and reported a 3.5 per cent growth in premiums to $3.4 trillion while the life segment premiums also increased 2.2 per cent to $2.9 billion mainly due to a recovery in China.
It further stated that Sigma Research had expected both non-life and life premiums to contract by 1.0 per cent and 1.5 per cent respectively in 2020 similar to that of the Global Financial Crisis (GFC) in 2008 due to the effects of the pandemic on the insurance business.
Afrinvest Research noted that while it cannot ascertain the specifics of the global insurance sector performance in 2020 as Sigma Research – the research subsidiary of a global insurance firm is yet to release its annual report, it gleaned from the International Association of Insurance Supervisors (IAIS) to obtain insights into performance especially, to examine the impact of the pandemic on the sector.
Lower premiums, on the back of reduced economic activities, coupled with lower investment income pressured the profitability of insurers in 2020 according to IAIS. Data of the second quarter (Q2:2020) also showed that solvency ratios declined on an aggregate level across business lines and regions resulting from investment losses that accrued from financial market volatility during the period; the report stated.
Furthermore, it added that lower profitability increased claim payments, and declines in asset values, a result of financial market volatility have forced some insurers to discontinue some pandemic-related insurance policies and remove clauses that expose insurers to pandemic-related claims in existing policies in order to contain claims.
“Coming from the stunted growth recorded since it contracted to 2.9 per cent in 2019, the Nigerian insurance sector recorded a negative 15.3 per cent growth in 2020 according to the National Bureau of Statistics.
“In terms of global relevance, the Nigerian insurance sector lagged significantly with a total contribution to global premiums at 0.03 per cent as it ranks 63rd out of 88 countries profiled by Sigma Research in 2019.
“Compared with sub-Saharan peers, the narrative is similar, the sector’s insurance penetration remains poor at 0.3 per cent with South Africa (13.4 per cent), Morocco (3.9 per cent), and Kenya (2.3 per cent) advancing in reach. Similarly, the sector grapples with low insurance density (Gross Premium Written per capita) of $8 compared with South Africa ($803), Morocco ($127) and Kenya.”
According to Afrinvest, the Nigerian lawmakers in the House of Representatives decision last year to suspend the phased recapitalisation programme, citing the economic hardship in the country as a result of the pandemic, the #ENDSARS protests and the need for increased liquidity to boost growth; creates a Déjà vu scenario relatable to 2018 when a class action by insurance companies’ shareholders resulted in NAICOM cancelling a proposed Tier-based recapitalisation.
The report stated that, although the pandemic fueled lockdowns and resulted in lower premiums from some insurance policies as well as refunds from some auto insurers and escalation of other insured risks, on the bright side, it necessitated the need for fast-paced adoption of technology and digital channels in the industry.
Hence, it is advocating that the recapitalisation of the industry remains crucial to replicate growth similar to the banking sector experience.
The report said; “the Nigeria Insurers’ Association (NIA) reported a total of 1,661 protest-induced claims as a result of the #EndSARS protests, of which 143 substantiated claims worth N105 million has been settled.
“We believe the settlement of claims is key to emphasising the purpose of insurance among the Nigerian populace and encouraging uptake of insurance policies although this would imply higher cost and depressed profitability for insurers.
“We continue to advocate for increased mergers and acquisitions in the sector to consolidate the influence of companies, deepen insurance penetration and enhance the retention of heavy-ticket risks in Nigeria. We also advise increased collaboration with telecommunication companies and banks as well as micro-insurance to capture value at the retail end of the population.
We have seen some banks (Guaranty, Sterling, and Access Bank) applying for the Holding Company (HoldCo) licence and upon the expected resumption of recapitalisation program, we anticipate that these banks would consider insurance subsidiaries.
“Already, Access Bank, EcoBank, First Bank, and Guaranty Trust Bank have Bancassurance relationships and equity stakes in insurance companies while Zenith Bank, Unity Bank, and Stanbic IBTC Bank have fully owned insurance subsidiaries. We expect full HoldCo structure frenzy to boost banks’ investments in the insurance sector and while this may stifle competition for the industry, it would boost growth and insurance penetration,” the report concluded.