Insurance companies are in the business of managing uncertainty and risk. The job of insurance companies is to value the risk of customers and for a charge provide protection (which is called a premium) to guard the customers against such risks, if they were to occur. Looking at the global insurance landscape, insurance companies play an important role in the performance of the financial markets. These companies provide long-term funding to banks and constitute a large segment of the institutional investor space (they also partake in equity investments and users of risk hedging tools such as derivatives). The sector is facing important changes in international regulation and accounting standards. In addition, their business models and balance sheets are particularly exposed to the low-interest rate environment due to the long duration of their liabilities compared to that of their assets. The purpose of this post is to introduce the reader to the insurance landscape in Nigeria.

Need to know

❯❯Premium The amount of money       an insurance company charges to provide the cover described in the policy or bond	❯❯Investment portfolio A collection of assets bought with the money insurance companies receive from premiums. Portfolios make money from interest, dividends, and capital gains on trade stocks
❯❯Excess The financial contribution the customer must bear on an insurance premium.	❯❯Investment income The income an insurance company receives from the investment of premiums and reserves.
❯❯Surplus Insurance companies are required to hold a surplus in reserve	❯❯Policy The contract between an insurance company and its customer
❯❯Profit The return received by insurers from the growth and interest on their investments, or by selling insurance to customers at the right price, or by having few claims.	❯❯Loss A result of not charging enough in premiums, a fall in the price of investments, or by having large claims to pay out to customers.
❯❯Solvency The ability of a company to meet its long-term financial obligations	❯❯NAICOM  The National Insurance Commission was established to supervise and regulate insurance business in Nigeria

The insurance landscape in Nigeria

Bringing the focus to Nigeria’s insurance space, it is clear that insurance has not taking off the way banking has in the region. Current developments within the insurance space have a lot to do with NIACOM introducing risk-based recapitalisation within the space. This had led to a 3-tier system of companies to be introduced in 2019. Tier 1 category are expected to increase their capitalisation to N15bn from N5bn, those interested in the same tier but operating Life insurance business are mandated to upgrade their capital base to N6bn from N2bn, while non-life insurers planning to play in this tier are expected to raise their capitalisation to N9bn from N3bn. Nigeria’s insurance industry is characterised by a low penetration rate (0.32%) average over the past 10 years. Recent regulations introduced by NIACOM (the regulator) will increase capitalisation across the industry, thereby creating 3 tiers of companies in the insurance space.

SWOT Analysis of Nigeria’s Insurance sector

Strengths

·   Regulator (NAICOM) drives growth through introduction of policies such (e.g. compulsory motor insurance)

·   A wide array of products exist e.g. health insurance, fire insurance, marine insurance, savings products etc

·  The introduction of compulsory Group life  for businesses in Nigeria has helped the industry-employers of business must insure employees

·  Nigeria’s annuity business has grown size of the insurance market considerably

Weaknesses

·   Not enough has been done to build awareness

·   Low individual insurance

·   Low level of interaction between industry players and customers

Opportunities

·   Risk based capitalisation supports growth of the sector

·  Digitalisation provides opportunities for players in the space to introduce better customised products for customers within various communities

·   Digitisation could lead to enhanced insurance penetration over the next 10 years

·   The growth of pension supports key activities of the business

·   Rising population growth supports economic and infrastructure development, which support insurance products

·   The 3-tier system encourages aggressiveness (competition and innovation) within the space across various niches

·   Foreign investors are taking notice of the insurance space as a result of recent developments and opportunities

Threats

·  Low penetration rate (on average 0.32% rate of penetration over the past decade)

·   Geographic location does not require individuals to have various insurance products compared to other countries, where it is mandatory to do so

Charging premiums in exchange for insurance coverage, and then reinvesting those premiums into other interest-generating assets are the main ways insurance firms make money.  Reinsurance is when insurance companies buy insurance to protect themselves from excess losses due to high exposure. Reinsurance is an integral component of insurance companies’ efforts to keep themselves solvent and to avoid default due to pay-outs. insurance firms pool all the premiums from customers together and invest them in various asset classes. Its holds assets in the form of bonds, stock, mortgages, and real estate.

The fundamentals: underwriting, investments and reinsurance

 NAICOM is the biggest driver of growth in the insurance sector in Nigeria. It is important for the insurance industry to be well regulated in order for it to work properly. Regulators monitor the insurance industry to make sure that insurers can pay claims. NAICOM requires insurance companies to buy their own insurance—called reinsurance—to ensure they can meet their financial liabilities in full. This covers the insurance companies’ own risks so that if, for example, they have a lot of claims at once, or if one client has a huge and unexpected loss, they can afford to pay without experiencing financial difficulties.

A financially savvy population in the country to is also key to the growth of insurance related products.In Nigeria’s case, there will need to be an industry wide focus on building awareness within various communities. 

To properly analyse insurance firms requires looking several important dimensions. These include analysis across premiums, investment income, profitability, reserves, liquidity, and solvency (the ability of a company to meet its long-term financial obligations) dimensions. The key to proper analysis of an insurance insurance companies’ financials  is to look at the numbers from a safety perspective. Safety here means that a company has enough to meet the claims obligations. This is different from, lets say an industrial company where analysis of companies focuses on seeking higher returns in the future.

In my opinion, the Nigerian insurance market will greatly benefit from micro insurance firms providing product offering for rural communities in the future. The growth of micro insurance firms seems likely, because majority of Nigerian insurance companies would not be able to raise N15bn capitalisation to qualify as tier 1 companies by 1st January 2019 deadline. 

Historically, Nigeria’s insurance sector hasn’t not been very successful in raising funds from private investors. As investment opportunities abound as a result of the risk based recapitalisation,  there would be a likely emphasis on return on capital invested within the insurance industry.

Also, expect to see more mergers within the space due to the recapitalisation exercise. as alluded to earlier, increased digitisation and population growth, would drive a higher rate  penetration over the next 10 years in the insurance space.  

Key takeaways:

• Insurance companies are an integral part of the financial markets
• Insurance companies provide useful hedging opportunities for individuals to protect their assets
• Charging premiums and investing are the main ways insurance firms make money
• Insurance companies also reinsurer (reinsurance) their positions to hedge risk
• The focus of analysing insurance companies is to ascertain of the company has enough to run it business and pay claims in the future