Ongoing moves to recapitalise the insurance industry hold both apprehension of possible upheaval and the promise of a more robust risk management industry ahead. Pundits are banking on more foreign players buying into the Nigerian underwriting firms, mergers and acquisitions and, perhaps, a spurt in the bourse where equities’ prices have been flat for some years. The National Insurance Commission will need to skilfully guide the process, working closely with operators and other financial sector regulators to ensure a bigger, stronger risk management sub-sector.
For an industry that is still far from realising its potential, the recapitalisation offers no easy ride. A report that more foreign firms buying into local underwriters may be the tonic to energise Nigeria’s local financial risk management industry underscores the dilemma of operators grappling with new capital thresholds rolled out by NAICOM last May. In its circular, the regulator prescribed new minimum capital requirements for insurance and reinsurance companies, and fixed a deadline of June 30, 2020 for compliance.
Though long canvassed and hinted at by NAICOM’s CEO, Mohammed Kari, the move flustered underwriters who fret at the challenges of raising new capital in a mere 13 months, amid an inclement operating environment and a depressed capital market. They have a point. When the last recapitalisation was undertaken (2005-2007), the operating environment was more promising; the stock market was bullish, propelled by a just-concluded banking sector recapitalisation that birthed 25 big banks flush with funds and an upbeat economy. Though investor interest in insurance stocks was nowhere near the attraction of banks, mergers and acquisition as well as initial public offers reduced the number of underwriters from 103/4 to 49 post-consolidation. Some split their licences, others merged and fresh investments brought the number of underwriters to 58 by 2013.
Now, life insurance companies are to raise their minimum capital base from N2 billion to N8 billion; General Business underwriters from N3 billion to N10 billion; Composite Insurers, from N5 billion to N18 billion, and Reinsurance firms from the current N10 billion to N20 billion. Today, of the 25 listed insurance service providers quoted on the Nigerian Stock Exchange, highest price quotation was N1.86 kobo (as of Friday August 23), reflecting the low profile of the sub-sector despite a surge that saw 903.13 million shares change hands. Unlike in 2005-7, when the bourse was hyperactive, a general disinterest by investors makes recapitalisation fraught at this time. Value of equities dropped by 13.9 per cent, representing about N1.9 trillion, in 2018 to close at N11.72 trillion by December 2018, compared to N13.6 trillion by December 2017, the NSE reported. Total Foreign Direct Investment in Nigeria dropped to $2.2 billion in 2018 compared to Ghana’s $3.3 billion; even portfolio investors have been taking flight, pulling N1.87 trillion from the market in the four years to June 2019, according to the NSE. Investor confidence, in the face of the glaring incompetence of the Muhammadu Buhari government, unstable oil prices and insecurity in the country, is still low.
Moreover, the Central Bank of Nigeria is working out modalities for a fresh recapitalisation programme for the banking sector that is likely to attract greater investor interest than insurance. NAICOM has also barred operators from raising loans to meet the new capital base requirements, adding pressure to the need for creative options.
The need to recapitalise and reposition the insurance industry to make greater impact on the economy is not contested. Those fretting over the new move are only questioning the timing. Insurance, by guaranteeing that individual financial loss is shared, offering security to enterprises by replacing loss and damage, providing employment and mobilising resources and funds for long-term investment, is a critical sub-sector that should be encouraged. But Nigeria’s is regarded as underdeveloped compared to its peers; insurance penetration is a dismal 0.3 per cent (2018), measured as Gross Premium Written as a proportion of GDP, according to Afrinvest, compared to South Africa (14.7 per cent), and Kenya (2.8 per cent). South Africa dominates Africa’s insurance market, accounting for $41.96 billion of total GPW of $60.7 billion in 2016 compared to $1.15 billion GPW in Nigeria. NAICOM says 90 per cent of oil and gas premium in the country is ceded to foreign reinsurers as a result of weak domestic capacity despite the noble intentions of the Nigerian Local Content Act. Recapitalising can help reduce this. Insurance contributes only about 0.4 per cent to Nigeria’s GDP, says NIA, while the financial and insurance sector contracted by -7.6 per cent in the first quarter of 2019, from -1.76 per cent in Q4 2018 said the National Bureau of Statistics.
Yet, a robust insurance sector offers tantalising hopes of low interest long term investible funds, sorely needed in Nigeria today, beset with dwindling public revenues, mounting public debts, poor infrastructure and high unemployment. The highly coveted life assurance segment is dismal, unlike in South Africa where life insurance, at 12 per cent penetration, is one of the world’s highest.
Operators and NAICOM will need to work hard to sell the scheme to local and foreign investors, collaborating closely with the CBN and the organised private sector. Investment by foreign players, already playing out, may be one major option in addition to mergers and acquisitions. Between 2014 and December 2017, 12 foreign investors acquired interest in Nigerian insurance industry, including AXA, Allianz, Swiss Re, Prudential and Liberty, major global players. The more the better.
Locally, NAICOM must be effective in compelling compliance to the rules. The industry still suffers from a public perception that views some underwriters as unwilling to meet legitimate claims obligations; lax enforcement of the “no premium, no cover rule” perpetuates the distrust of the public in a relationship ostensibly underpinned by the principle of “utmost good faith.” As the industry is set for a retool and the inevitable attrition, the challenge for stakeholders should be how to deepen awareness and penetration, expand the frontiers of the business, adopt cutting edge technology, eliminate sharp practices and build a formidable reputation for the business in Nigeria.
