• Saturday, July 13, 2024
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FG’s failure to pay group life premiums to hit insurers’ profits


The failure of the Federal Government to pay premium on group life insurance for its employees, assets, as well as for men and officers of the Nigeria Police for 2019 will have negative impact on the revenue and profits of the industry this year.

Government, being a large spender in the industry/economy either through direct spending on payment of premium or on infrastructure development, impacts heavily on insurance companies, so not spending on the sector this year will mean that the industry will have to suffer shortfall from that segment of the business.

The implication of this is that the insurance industry is denied opportunity for growth and expansion, which will result in non-creation of new jobs to help address rising unemployment in the country.

But most worryingly is that dependants of deceased employees and the men and officers of the Nigeria Police who have died during this period were not adequately compensated.

Besides, their vulnerability and risks profile have increased since they have nothing to fall back on, having lost their breadwinners without insurance compensation.

According to figures from the Nigerian Insurers Association (NIA), group life and annuity had pushed life insurance premium up by about 40 percent in the last five years.

Federal Government’s group life insurance, which is domiciled in the office of the Head of Service of the Federation, was effective last in April 2018 when premium was paid. Since that time, insurance companies that had hitherto provided the group life cover as provided in the Pension Reform Act 2004 as amended in 2014 have not picked up new claims in line with the ‘No Premium No Cover’ law.

Dependants of employees who died between the past year and nine months had nothing to claim from insurance companies, and so the Federal Government has been falling back on its budget for monies meant for other things to pay compensation.

Section 9 (3) of the Pension Reform Act 2004 as amended in 2014 stipulates that every employer, both in the public and private sector which the Act applies, must maintain life insurance policy in favour of the employee for a minimum of three times the annual total emolument of the employee.

The policy provides cover to the insured against death and the insurance cover is mandatory for all employees as long as they are in employment. This means that the policy provides for the payment of the sum assured in the event of the death of a member of the scheme from any cause, natural or by accident.

“The business environment was very harsh as insurers suffered the non-payment of premiums on group life account from the office of the head of service,” said Funmi Omo, managing director/CEO, African Alliance Insurance, while reviewing the operating environment in 2019.

“You know group life insurance contributes significantly to our premium, so it was not a good one for the outgoing year,” she said.

According to Omo, the major impact is that families of deceased employers did not get insurance compensation since there is already a policy on ‘No Premium No Cover’.

Omo, however, noted that insurance companies have had to device other means of expanding their revenue base to cover the shortfall.

Stakeholders say insurers have to mimic the banks and be more innovative if they want their return on equity (ROE) to be strong after recapitalisation.

Femi Ademola, executive director of investment banking, Cordros Capital, said operators in the industry should enforce compulsory insurance, and that a lot of hospitals have liability insurance.

“The operators need to change with time. The young generation do not buy cars these days. Some big phones are more expensive than a car, but there are no covers for products like this,” Ademola said.

The average return on equity (ROE) of listed insurers was 3.41 percent in 2005 when the industry was first recapitalised. Then it fell to 0.43 percent in 2008, and the ratio dipped to a negative region of -1.05 percent from 2009 all through 2012, according to a recent data from the Nigerian Stock Exchange (NSE).

However, ROE rose to a positive region of 1.15 percent in 2013 and 2.55 percent in 2014, but it dipped into a negative region of 0.58 percent in 2015, according to the report. 

Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders’ equity. It is considered a measure of how effectively management is using a company’s assets to create profits. 

Recent trends have shown that insurers are barely covering their cost of capital, let alone providing returns above or matching the rate of inflation as the tough business landscape continues to pressure firms’ profit.

“It is not surprising that the Nigerian insurance industry lacks profitability,” said Guy Czartoryski, head of research at Coronation Merchant. “We have already seen how, over the past 10 years, the industry has barely grown in real terms. One effect of lack of growth is that companies are unable to create economies of scale for their front and back office operations.”

Generally, scale is evaluated by relating the operating cost (claims and operating expenses) of insurers to their output level.

Bode Ojeniyi, executive director at Wapic Insurance plc, said it was worrisome that insurance stocks are least attractive despite volumes traded. He said operators need to invest in the latest technology and that they should launch products that would attract the young generation.

Adeosun Dolapo, associate director, deal advisory and private equity group, KPMG, said the injection of capital would make operators more creative in product launch.

“There has to be collaboration between insurers, banks, and telecommunication companies,” said Dolapo.

Yetunde Ilori, director general, Nigeria Insurers Association (NIA), said the solution to receding profit is cost cutting, and that huge costs are incurred during product launch.

“Our retained earnings and contingent reserve have to be recognised,” said Illori.

When compared to other jurisdiction, the Nigerian insurance industry is relatively small and ranked 162nd in the world with a total premium volume of $1.64 billion, according to recent data by NSE.

According to the NSE, the total Nigerian insurance market accounted for 0.20 percent of the global premium in 2018.

“The larger the balance sheet, the more likely we take on more risk. We can reach a wider market and seek returns from Fintech companies,” said Eric Idiahi, co-founder/partner, Verod Capital Management Limited.