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‘Why insurers shun N323 billion annuity business’

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About five life operators in Nigeria’s insurance industry have cut down on their annuity business portfolio as volatility, inflationary pressure, and low returns on investment continue to hit the bottom line.

While three of the concerned firms have suspended annuity business, for now, two of them have reduced their volume as profit from this portfolio dips.

The National Insurance Commission (NAICOM), had earlier said the insurance sector life annuity fund portfolio stood at about N323billion as at the end of the second quarter of 2019.

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The underwriters reduced their risk appetite for annuity due to the current low profitability, just as more are expected to either suspend or slash their annuity volume in the next couple of months.

Worried that the shrinking profit, if not addressed forthwith, could negatively affect their financial reports and ability to give good returns to shareholders, AIICO Insurance, African Alliance Insurance, LASACO Assurance, Niger Insurance, Royal Exchange, cut back on annuity underwriting, at least for now, until things changed for the better.
While Royal Exchange, African Alliance Insurance, and LASACO Assurance suspended annuity to concentrate on the older businesses, Niger Insurance and AIICO Insurance limited new businesses they take.

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Analysts believe many more may toe this path soon, unless NAICOM and the National Pension Commission (PenCom), as joint regulators of annuity business, come up with a tangible solution to address this trend.

Investigation revealed that annuity pay-out is eating deep into the capital of the affected companies, as some of them are already posting negative results due to too much exposure.

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Of the 11 life underwriters who wrote annuity in the 2018 financial year, five of them posted losses, an indication that operators were finding it difficult to excel in the business.

Further findings show that paying annuitants for life has not been favourable to most life insurers, as pricing and inflation continue to suck the premium paid.

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The fact that some pensioners are actually living longer than in the previous years has made annuity a risky business for some insurers.

Some of the affected insurers, who spoke to The Guardian, stressed that prior to the recent development, annuity business was more profitable, but recently, it is beginning to be bad business for them, especially those with too much exposure, thereby highlighting pricing as a major challenge.

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Moreover, the restrictions placed by the Central Bank of Nigeria (CBN) on Open Market Operations (OMO), where insurance companies and Pension Fund Administrators (PFAs) used to be major players, have further compounded the woes of annuity players, thereby restricting operators to limited investment outlets.

There are palpable fears among life insurers that if they fail to cut down on annuity business now, it might be difficult in the future to pay some annuitants, as stipulated by the product.

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However, there are indications that the concerned underwriters may increase their annuity portfolio in the near future if the business climate improved.

Speaking in an exclusive interview with The Guardian, the Managing Director/Chief Executive Officer, Niger Insurance Plc, Edwin Igbiti, said interest rate and pricing of Annuity plan are a major challenge, adding that many companies decided to reduce annuity intake and concentrate more on annuitants already in the books of many operators.
He said currently, operators are paying annuitants as and when due, noting that limiting new annuity is purely a business and investment decision.

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Low awareness of annuity, as well as de-marketing of annuity plans by desperate PFAs to stall pensioners’ interest, are issues that must be addressed to realise the full potential of the annuity.

He said: “the way annuity business is now, it is better to concentrate on what (annuitants) you have on your books than bringing in new annuity business.

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“To get the pricing right, you need an in-house actuary because you need to be monitoring the pricing on a regular basis. Annuity business still has potential if the investment climate is right.”

Earlier, the General Manager, Life Business, LASACO Assurance Plc, Dimeji Olona, said his firm has stopped taking new annuity business since the beginning of the year, even though the company has never been a major player in the market.

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“We are not a major player in annuity, and the way the fund works, you have to be careful so that you don’t run the fund aground. Because of the low yield and another interest rate, what we have done is to stop further taking of new annuity, and ensure that all current annuitants are paid as and when due,” he pointed out.

He said every annuitant of LASACO gets paid on the 22nd of every month, hence, they are not affected by the new development, adding that, “But the new ones, we need to be very careful because LASACO is based on integrity, and trust is very important to us. For us, we are very sensitive to what is happening around us, and we have not taken any new ones, we are servicing all our existing annuitants.”

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Similarly, the Managing Director/Chief Executive Officer, African Alliance Insurance Plc, Mrs. Funmi Omo, said: “Our Q4 2019 financials show marked progress in our strategy to expand our retail presence, and aggressively grow our market share despite suspending our largest line of business, annuity.”

Stating that the firm’s commitment to customer satisfaction is also clearly exemplified by its claims payment in 2019, she added that, ‘For us, the customer is our life blood, and we will always bend back to satisfy them every time they call on us.’

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To this development, the Deputy Director/Head, Research, Statistics & Strategy Directorate, NAICOM, Gbolahan Adewale Suleiman, in one of the industry events explained that the two regulators are reviewing current regulation on annuity business, which is gradually attracting the needed attention from retirees.

He said the review became necessary due to prevailing trends around annuity business, noting that when the guideline becomes operational, only insurance agents will be allowed to sell annuity plans on behalf of underwriters.
He stressed that any insurance broker that is interested in the sale of annuity should be ready to earn agency commission, adding that the step is taken to protect annuity funds against huge commissions earned by intermediaries.
The Acting Commissioner for Insurance, Sunday Thomas, expressed optimism that a substantial part of the N10 trillion pension assets will find its way into the insurance portfolio.

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NAICOM, he said, is working assiduously to put in place measures to protect the expected funds, which informed the move to engage actuarial analysts, who will help measure and manage insurance associated risks.

“Annuity requires day-to-day measurement and management of its activities. As I speak with you right now, annuity accounts for about 40 per cent of our portfolio. That actually requires our attention.

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“We have also read that contributions into the pension portfolio are in the neighbourhood of N9.9trillion, closed to N10trillion. So, a substantial part of it is supposed to empty itself in the insurance portfolio. How do you manage this if you do not have those who have what it takes to measure and manage the associated risks?” he queried.

The Retiree Life Annuity (RLA) is an insurance product and one of the available retirement benefit options for retirees. The product can be purchased from a Life Insurance Company licensed by the NAICOM and authorised to sell RLA under the regulation of retiree life annuity.

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