Global and local perspectives: Insurance sector’s value-addition to GDP

This treatise advances with a reality check. Developed and emerging countries are confronted with serious socio-economic challenges, which so far, are yet to effectively and systemically respond to unique policy interventions and political calculations. The UK for example, in a radical September 2022 minibudget announcement cut taxes by19% amidst rising national debts as a proportion of gross domestic product (GDP) – the total value of all final goods and services produced within a country – from 84.5% in 2016; to 103.7 % in 2021.

However, that has barely enhanced market confidence. On the contrary, those interventions spooked the markets upon the evidence of sterling’s 5% crash against the dollar to USD1.035; the Bank of England’s rather unusual intervention in the bond market in part due to underperforming gilts futures, which itself imperilled pension funds and mortgages. Such was the global apprehension that the International Monetary Fund expressed real concerns about the profound budget announcement.

The story is not dissimilar in the USA where the Federal Reserve Bank raised interest rates from 2.50% in July 2022 to 3.25% in September 2022 with a view to stemming running away inflation, currently at 8.50% and down from 9.1% (the highest since 1981!). Although the jury is still out on the effects of the rate rises, the expectation is that it will help to dampen consumer spending when counterbalanced by the fact that there were 4 preceding rate rises in March, May, June and July 2022 respectively.

In sub-Saharan Africa, the economic outlook in Nigeria, Ghana and South Africa upon the evidence of high interest rates makes for grim reading. The interest rate in Nigeria is 15.5%, up from 13% in May 2022; Ghana 23.50%, up from 19% in May 2022 and South Africa 6.25%, up from 4.75%. In May 2022. Of course, the Russian Ukrainian debacle has heightened inflation spiking unforeseen demand for energy supplies in the West as winter looms and Russia’s moratorium on gas exports to the European Union following economic sanctions by the latter.

That’s the socio-economic context upon which analysis of the insurance sector’s contribution to GDP is anchored. What is the insurance sector’s contribution to GDP sampled countries for example? Do the statistics inspire any confidence in the markets? With investors? Could nimble light-touch legislative and policy interventions be a viable option to stimulate markets? Are there genuine global best practice models which are reasonably adaptable to suit discrete environments?

Prior to deconstructing those posers, the hypothesis is that insurance is a loose term which often means different things to different people, although in one sense there are seminal commonalities of understanding amongst the majority of folks. For example, whilst idiomatic expressions like ‘make hay whilst the sun shines’, ‘save for the rainy day’, ‘never put all your eggs in one basket’, ‘to fail to prepare is to prepare to fail’ and avoid ‘skating on thin ice’ resonate axiomatically, nevertheless, they implicate the concept of insurance in not so explicit terms. And so is intergenerational wealth preservation under the agency of trusts and wills. That’s because the critical point which underpins them all is identifying early, the risk of an unpleasant outcome in one’s personal or business life, and taking practical, prudent and consistent steps to mitigate the potentiality of its occurrence. So, it could be mitigating the risk of unemployment, fire, travel, injury, critical illness, theft, litigation, negligence, or other financial or non-financial loss et al.

It follows that the risk mitigation arrangement undertaken is the insurance, whereas the legal mechanism by it is actualised, is colloquially articulated as the insurance policy. It is therefore a process by which a legal entity, widely defined, contractually undertakes to fulfil an obligation of compensation for a specified loss, damage, illness, or death in return for the payment of a specified periodic payment (premium) by the insured natural or unnatural person. Insurance is the lifeblood of any progressive society because it enables people, businesses and governments to flexibly allocate and/or reallocate daily and/or occasional risks thereby freeing their investment and growth opportunities.

Whilst there are umpteenth insurable risks, the main types fall under two key headings: life insurance and general insurance. The first would typically cover life terms, critical illness, income protection, pension plans and unit-linked plans. The second, general insurance, would axiomatically include employers’ liability, health, fire vehicle, travel, marine insurance et al. Marine insurance, as the name implies, engages insurable risks within the admiralty realms. It includes professional and indemnity (P&I) insurance for all maritime liability risks pertaining to the operation of a vessel.

Insurance is necessarily a subset of the financial services industry in that it is underpinned by the fundamental elements of the law of contract, including a definitive offer and acceptance of agreed terms, an explicit intention to enter binding legal terms, crystallized by adequate and the sufficient monetary consideration. The rational orthodoxy of ensuring societal order and inspiring public confidence in financial systems across the world, invokes the logic of tough regulation in the insurance industry.

To illustrate in Nigeria, notwithstanding policy overlaps relative to the Pension Reform Act 2014, the National Health Insurance Scheme Act 2014 and the Employees’ Compensation Act 2010; the Insurance Act (IA) 2003 and the National Insurance Commission (NAICOM) Act 1997, specifically regulate the industry. Section 2 (1) IA 2003, establishes two main classes of insurance: 1) life insurance business; and 2), general insurance business. Regarding 1) life insurance, the statute specifies 3 categories viz (i) individual life insurance business; (ii) group life insurance and pension business; and (iii) health insurance business.

Whereas concerning 2, general insurance, the Act establishes 8 categories viz (a) fire insurance business; (b) general accident insurance business; (c) motor vehicle insurance business; (d) marine and aviation insurance business; (e) oil and gas insurance business; (f) engineering insurance business; (g) bonds credit guarantee and suretyship insurance business; and (h) miscellaneous insurance business.

Swiss Re’s Sigma report on World Insurance affirmed that insurance contribution to GDP rose from 3.76% in 2020 to 4.2% in 2021. Although the 2021 report envisaged that the strong global economic recovery from COVID-19 would lead to historically high global real GDP growth of 5.8% in 2021, the projection was not borne out by the facts: as insurance contribution rose to 4.2%, not 5.8%; nonetheless, that was a positive variation of 1.6%. The report forecast key market premium growth forecast at 6.3% for China, 1.7% for the US, 2.8% in Western Europe and 5.6% for emerging markets.

Indeed, actual performance in the USA only marginally exceeded Swiss Re’s 2.8% projections for 2021 according to the US Department of Commerce, Bureau of Economic Analysis as the actual figures were 2.9%, a positive variation of 0.1%. Likewise, China recorded a 4.0% increase in insurance contribution to GDP in 2021 according to the National Bureau of Statistics of China.

The percentage increase of insurance contributions to GDP in the USA and China reflects, in part, the reality that both have the largest global economies on the one hand, and on the other, there is greater digitisation and consumer awareness in those climes. The latter factor presumably driving demand for insurance given the pernicious aftershocks of the COVID-19 pandemic given heightened sensitisation of the value of health and protection-type offerings.

In Nigeria, for the full year 2020, the National Bureau of Statistics (NBS) confirmed that the insurance sector’s contribution to GDP was minus (-)13.29%; a serious cause for concern, notwithstanding the countervailing harsh realities of the pandemic. Furthermore, the NBS analysis establishes that the Finance and Insurance Sector consists of the two subsectors, Financial Institutions and Insurance, which accounted for 90.53% and 9.47% of the sector respectively in real terms in Q3 2021.

As such the sector grew at 26.46% in nominal terms (year-on-year), with the growth rate of Financial Institutions as 28.79% and 7.86% growth rate recorded for Insurance. The overall rate was higher than that in Q3 2020 by 20.55% points, and higher by 28.32% points than the preceding quarter. Quarter on Quarter growth was -3.04%. The sector’s contribution to the overall nominal GDP was 2.70% in Q3 2021, higher than the 2.46% it represented a year previous, and lower from the contribution of 3.21% it made in the preceding quarter. Axiomatically, there is no question that the insurance industry needs to optimise market penetration in a country with a population exceeding 218 million people (World Population Review 2022).

Ghana is another interesting example. As at Q3 2021, finance and insurance activities contributed over 3.43 billion Ghanaian cedis roughly USD 499.4 million to the GDP. This was a decrease from the preceding quarter, when the value added was around 3.7 billion GHS, approximately USD 541.5 million. Within the period analysed, the GDP contribution of finance and insurance services in Ghana fluctuated between a minimum of approximately 2.8 billion Ghanaian cedis and a maximum of roughly 4.2 billion cedis.

Concluding, it is clear that the contribution of the insurance sector, as a sub-sector of the financial services sector have underperformed relative to GDP contributions in emerging economies, using Ghana and Nigeria, as mini sample proxies and positive outlier effects in China. The downward trend has to be reversed with targeted policy interventions from the industry too.

Thus, the emanating recommendations are for: 1) greater sensitisation of the value of insurance given the known unknowns of socio-economic challenges and the absence of robust welfare schemes in developing economies; 2) more proactive insurance penetration by industry players; 3) because economic growth stems from the velocity of productivity and therefore increases the propensity of market participation by prospective clients, nations have to catalyse productivity; 4) developed and emerging economies should develop and utilise innovative and nimble policy and legal frameworks without impeding free market dynamics which in turn, will facilitate job creation, fiscal revenues and positive multiplier effects across supply chains; and 5) greater quantitative and qualitative research to identify common challenges, to better drive the formulation of more effective policies on a regional collaborative basis, which of necessity, will sharpen capacity development across the board.
Ojumu, Esq, is the principal partner, Balliol Myers LP, a firm of legal practitioners based in Lagos, Nigeria. T. 07016303208 E. info@balliolmyers.com