Credit Rating Agency predicts forging ahead despite economic challenges
The pan-African Credit Rating Agency, Agusto & Co, has unveiled its 2021 edition `of the insurance industry report, which provides a comprehensive review of the sector’s landscape in Nigeria and expectations for the Industry.
Contained in the report is a review of the coronavirus pandemic, as it affects insurance industry and strategies adopted by insurers to minimise the associated disruptions, while optimising the opportunities provided by the pandemic.
Agusto & Co. estimates a 15 per cent growth in Gross Premium Income (GPI) for the financial year ended December 31, 2020. Innovation in product distribution induced by the pandemic, regulatory-backed opportunities including the digitisation of marine insurance certificates and increasing awareness of the benefits of insurance products were some of the GPI growth drivers during the 2020 financial year.
According to the agency, the violence that trailed the #EndSARS protest in October 2020 adversely impacted the Industry in terms of additional claims, which in turn impaired profitability for the 2020 financial year and would moderate the performance of some insurers in 2021.
The report said nonetheless, the riot that trailed the protest emphasised the importance of insurance products, particularly with the absence of a robust social security system in Nigeria. Agusto & Co stressed that the violence/riot trailed the protest could be a catalyst for insurance uptake, given that the insurance penetration rate has remained less than 1 per cent in Nigeria.
Agusto & Co. expects the on-going recapitalisation exercise to change the structure of the industry. It stressed that the persistent naira devaluation has reduced the strength of the industry’s capital since the last recapitalisation exercise in 2007.
Although some insurers, according to it, have strengthened their capital base through earnings retention, the ability of most industry operators to solely underwrite large ticket transactions have dwindled based on the lower value of the capital in USD terms.
As of December 31, 2020, Agusto & Co. said the industry had an estimated capital base of $1billion, significantly lower than $2.2 billion recorded as of December 31, 2007.
As a result, the National Insurance Commission (NAICOM), the apex regulator in the industry raised the minimum capital to ₦8 billion (from ₦2 billion), ₦10 billion (from ₦3 billion), ₦18 billion (from ₦5 billion) and ₦20 billion (from ₦10 billion) for life insurers, non-life insurers, composite insurers and reinsurance firms respectively.
The recapitalisation exercise has suffered some setbacks particularly as the COVID-19 pandemic ravaging 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 report said the 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.
Notwithstanding, the setbacks, Agusto & Co. believes the recapitalisation exercise could be a watershed in the industry. In addition to the benefits 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.
According to it, the recapitalisation exercise has elicited mergers and acquisition transactions in the industry as the shareholding structure of most insurers is expected to change in the near term as some investors leverage the exercise to either gain or increase exposure to the industry. With the gradual rebound of the global economy, more foreign investors are expected in the industry, given that the naira devaluation has reduced the value of insurance companies (in USD terms), despite the undisputed opportunities in the Nigerian insurance industry. Agusto & Co. said the entry of new players after the embargo that lasted over a decade was a key point in the industry.
In November 2020, six new operators were licensed in the life, non-life and reinsurance segments of the industry. The firm anticipates the entry of more players, particularly from existing financial institutions seeking opportunities for diversification of income. Agusto & Co. believes that the new players will intensify competition in the industry. New insurance products and business practices are also expected from these new players.
Agusto & Co. expects a better performance by the industry in the near term if opportunities accruing from the pandemic and #Endsars are optimised. The gradual increase in the prevailing interest rate will also support the investment income of insurers. It is expected that more innovative product distribution channels will be introduced to reduce the dominance of insurance brokers. Notwithstanding, Agusto & Co. believes the insurance brokers will remain strategic to the Nigerian insurance industry given the wholesale focus of the Industry.