Asset replacement cost pushes insurance industry loss ratio to 80%

High cost of asset replacement, fuelled by dollar scarcity during the 2017 financial year has shut up insurance sector loss ratio from 35 percent to 80 percent.
This will undermine profitability of insurance companies in 2017, when last quarter and full year results of companies performance begins to roll in, analysts told BusinessDay.
Loss ratio is the ratio of losses to gains such as the ratio of paid insurance claims, including adjustment expenses, to premiums earned.
As a result of high cost of imported items particularly motor spare parts due to dollar scarcity in 2017, insurance companies in keeping to their own side of the contract paid huge sums of money (claims)to replace assets, and this is more particular on motor business.
This is made worse with high inflation rate, which more than doubled the prices of imported item, especially motor parts.
Yinka Adekoya, managing director, Wapic Insurance Plc who confirmed the rise in loss ratio in the industry in 2017, said the exchange rate of naira to the dollar, and the economic recession that Nigeria just came out of affected performance, as the industry spent more money to replace lost assets.
“The industry loss ratio has increased very significantly in the last two years owing to exchange rate differential, which made us pay more to replace loss assets in the form of claims,” Adekoya said.
Funmi Babington- Ashaye, president, Chartered Insurance Institute of Nigeria, reviewing the past year said the industry is confronted with huge claims, which was as result of economic recession, as well as increasing consumer awareness.
Babington- Ashaye also noted that with high exchange rate, the tendency is that insurers will spend money to replace lost assets, having witnessed price increase on imported motor spare parts as a result of exchange rate difference.
According to industry analyst, Toyota Corolla Cars that were insured at their original price of N8 million before the recession rose to as much as N25 million, meaning that, to replace its parts after an accident under the new exchange rate, a lot of money will be spent. That is why claims on accident vehicles went up so high, the analyst argued.
In July 2015, the National Insurance Commission (NAICOM) gave insurance companies till September 30, 2015, to settle all outstanding claims in their records or face severe sanctions. This led to payment of huge claims by the insurance companies and as the end of 2016, the Complaint Bureau, a department in NAICOM saddled with the responsibility of helping consumers resolve claims disputes settled 218 cases amounting to N5.5 billion.
Ada Ufomadu, analyst, Financial Institutions Unit, Agusto & Co in a report on Nigerian Insurance Industry: Overview, Challenges and Opportunities in 2017, had said that the insurance industry continues to record increased claims payment as is typical in periods of recession.
She said that in 2016, net claims paid by operators amounted to an estimated N100 billion, a 19 percent growth over the preceding year. This translated to an average loss ratio of 43.7 percent (FY2015: 43 percent).
“We expect this upward trajectory to be sustained in 2017 as the weak macroeconomic climate persists.”
According to Ufomadu, the industry’s performance continues to be upheld by investment income, which reached an estimated N54.5 billion at the end of 2016 on the back of favourable yields on government securities.
Overall, the Insurance Industry’s return on equity (ROE) which hovered at around 8.4 percent in 2016 (FY2015: 8.6 percent) is expected to weaken slightly in 2017 as the economy recovers from the recession. The Industry’s low ROE reflects its weak profitability compared to the average yield on 364-day treasury bills of 13.7 percent in 2016.
“In our opinion, profitability is hampered by weak investment returns, rising maintenance & acquisition expenses as well as increasing claims,” said Ufomadu of Agusto & Co.