Nigerian Insurance Industry: Overview, Challenges and Opportunities

Despite the lingering apathy for Insurance by the Nigerian populace, driven largely by cultural & religious beliefs, the Industry remains resilient, recording a compounded annual growth rate (CAGR) of 10.2% in gross premium Income (GPI) since 2012. In 2016, the Industry’s GPI grew by an estimated 10% to ₦356 billion[1]. Growth was upheld by the enforcement of compulsory insurance policies, particularly in the group life and motor insurance business lines. However, the Industry’s performance was dampened by the downturn in Nigeria’s fortunes which had its roots at declining global crude oil prices since 2014.

Life insurance business recorded significant feats in the last 2 years on the back of growth in annuities following the passage of the Pension Reform Act 2014 which allows pension funds administration (PFAs) transfer funds for annuity purpose to insurance companies. The impact of this Act was particularly evident in the 84% growth in life premiums in 2015. Nonetheless, the performance of the life business segment going forward will be shaped by ongoing discussions between the National Pension Commission (PenCom) and the National Insurance Commission (NAICOM) on the custody of annuity funds. The National Pension Commission in November 2016 released a circular requesting all life insurers providing retiree life annuity under the Contributory Pension Scheme (CPS) to transfer all corresponding assets in their custody to the Pension Fund Custodian (PFC) of their choice within a stipulated timeframe. All new annuities purchased following the release of the circular are domiciled in dedicated accounts with the PFCs. Subsequently, the treatment of existing retiree life annuity funds is to be decided following the issuance of a joint regulation in June 2017.

Figure 1: GPI by Business Line

The Nigerian Insurance Industry continues to record increased claims payments as is typical in periods of recession. In 2016, net claims paid by operators amounted to an estimated ₦100 billion ($327.9 million @ ₦305/$), a 19% growth over the preceding year. This translated to an average loss ratio of 43.7% (FY2015: 43%). We expect this upward trajectory to be sustained in 2017 as the weak macroeconomic climate persists.

Figure 2: Growth in Claims Paid by the Industry (2013-2017f)

The Industry’s performance continues to be upheld by investment income which reached an estimated ₦54.5 billion ($178.7 million @ ₦305/$) in 2016 on the back of favourable yields on government securities. In view of the tight monetary regime adopted by the CBN which is characterized by high interest rates, we expect a marked growth in investment income as operators take advantage of higher yielding government securities. The Nigerian financial market is relatively small and nascent with a limited number of financial instruments to invest in. We believe that investment options of the Industry need to be broadened to take advantage of higher yielding securities while protecting shareholder value.

Overall, the Insurance Industry’s return on equity (ROE) which hovered at around 8.4% in 2016 (FY2015: 8.6%) is expected to weaken slightly in 2017 as the economy recovers from the recession. The Industry’s low ROE reflects its weak profitability compared to the average yield on 364-day treasury bills of 13.7% in 2016. In our opinion, profitability is hampered by weak investment returns, rising maintenance & acquisition expenses as well as increasing claims.

Nonetheless, we project a stable outlook for the Nigerian Insurance Industry in 2017 as the negative impact of the recession will be moderated by the positive factors. The 53% naira devaluation in 2016 increased the value (and subsequently reduced the risk cover) of assets such as motor vehicles. These assets will need to be revalued to accommodate the impact of the devaluation and avoid “underinsurance”. Underwriters are advising clients to increase premiums especially on motor vehicles policies and we believe this will support growth in 2017. We note however that weak consumer purchasing power may moderate expected growth.

Overall, we foresee an 8% growth in GPI in 2017 on the back of a probable further devaluation and a continued growth in the life business.

Emerging threats amidst macroeconomic uncertainty

The Nigerian Insurance Industry, like most other industries, is affected by the macroeconomic environment. The downturn in Nigeria’s fortunes which had its roots at declining global crude oil prices since 2014 has triggered changes in the consumption pattern of insurance products in recent times. While contributions from the non-life business segment have been on a decline (particularly in the oil & gas line), the Industry has seen increased surrenders in the life business segment. The Consumer Price Index (CPI) which measures inflation rose to 18.6% in December 2016 (the highest in over a decade) and impacted the value of long term savings. In a high inflation environment, long term savings loose value over time. As such, at an average inflation of 18.6%, ₦100 saved now is worth only ₦43 in 5 years and ₦8 in 15 years. This discourages savings and consequently, there is a preference to invest in high yielding securities. Rising inflation also has a direct impact on the Industry’s operating costs which in turn reduces profits. In 2016, about 28% of the Industry’s GPI was paid out as underwriting expenses (including acquisition and maintenance costs).

Nonetheless, enormous Untapped Opportunities  With an estimated insurance penetration rate[2] 0.4% and only 1% of the population holding any form of insurance policy, the opportunities in the Nigerian market are enormous. The Nigerian economy is expanding and new risks are evolving, hence a growing need for companies and individuals to insure businesses and protect themselves in the event of unexpected losses. By this, the economy is able to rebuild and recover from losses quickly. When we compare the country’s insurance penetration to economies like Kenya and South Africa which boast of insurance penetrations of 2.9% and 14% respectively, we see a clear lag.

In an attempt to ascertain the reasons behind the Industry’s low penetration, Agusto & Co concluded a retail consumer survey on insurance in January 2017. One of our major findings was an untapped female retail insurance market waiting to be served.

–          Women are increasingly becoming empowered in Nigeria, enabling them to make spending decisions. About 22% of female respondents from the survey earned above ₦10 million ($33,000 @ ₦305/$). In addition, female entrepreneurs are becoming a growing part of the real sector as 24% of the female respondents were self-employed and managers of various small and medium sized enterprises (SMEs). This highlights the need for insurance products specified to underwrite risks involved in small and medium sized enterprises (SMEs) as well as life policies for female entrepreneurs.

–          From our survey, we discovered that 57% of female respondents preferred direct sales agents as an avenue in purchasing insurance policies. This somewhat reflects a knowledge gap as women would prefer to relate one on one with sales agents in order to build trust and be given opportunities to ask questions in order to deepen their understanding of insurance. This point is buttressed by a significant 72% of female respondents who indicated mistrust of insurance companies and policies offered as the reason for not subscribing to insurance policies.

–          Operators need to equip their agents to market products with an adequate understanding of the products offered and the needs of clients. Our survey revealed that 42% of respondents had not had any insurance products marketed to them in the last 12 months.

Agusto & Co believes that it is imperative for both operators and regulators to work together to increase awareness and educate the populace on the benefits of insurance. We need to take a cue from countries like Kenya and South Africa who have adopted various strategies including the support of other sectors such as telecommunications to drive penetration of insurance. Industry operators must be more aggressive in their marketing approaches, offering products and services that are bespoke to the Nigerian environment and populace.

By Ada Ufomadu, Analyst, Financial Institutions unit, Agusto & Co  Nigeria

This article is published in Africa’s Insurance Markets Uncovered. Please download by clicking: INTO AFRICA PUBLICATION: MAY 2017 EDITION.

Contributor’s Profile

Ada Ufomadu is an Analyst within the Financial Institutions unit at Agusto & Co. She holds a Bachelor of Science degree in Biochemistry from the University of Lagos (Unilag), Nigeria. Prior to joining Agusto & Co, Ada worked in Treasury Operations, Product Development, Corporate Banking and Core Treasury departments in Fidelity Bank Plc. At Agusto & Co, Ada’s core functions include industry research and financial institution ratings. Ada is the primary analyst covering key industries such as Quick Service Restaurants (QSR), Confectioneries, Renewable Energy and Telecommunications. In addition, she is the lead analyst for the Insurance Industry in Nigeria and the coverage analyst for the Nigerian Banking Industry. Ada is a Level 2 candidate of the CFA Programme.

[1] Agusto & Co Research

[2] This measures Gross Premium Income (GPI) as a percentage of Gross Domestic Product (GDP)