Insurers grow profits on better costs, risk control

Insurance firms quoted on the floor of the Nigerian bourse are growing earnings amid a drop in oil price and a weaker naira, as cost cuts and solid risk management practices helped to catapult underwriting profits.

The cumulative underwriting profit of 15 insurance firms that have released third quarter 2015 results showed underwriting profit increased by 8.80 percent to N30 billion from N27.53 billion in the previous year.

This growth is higher than the 5 percent recorded in 2014 financial year.

“It shows that insurers are practicing effective risk management in the selection of their risks and they are also aggressive about investment returns,” said Muritala Ahmed, an analyst at FBN Insurance, in a telephone interview.

“The few businesses they have in their books are good or profitable business. They are no longer writing volumes. They manage how they utilise their funds,”  Ahmed said.

Underwriting expenses ratio (UER) for the 15 firms reduced to 20.23 percent in 2015 as against 22.15 percent last year.

A lower UER means an insurer is efficient in producing, underwriting and administering its insurance business.

As expected, these companies recorded combined ratios (CR) of 44.41 percent in the period under review, compared with 33.33 percent the previous year.

A combined ratio in the insurance world is the combination of claims ratio and expense ratio.

When the combined ratio is under 100 percent, underwriting results are generally considered profitable; when the combined ratio is over 100 percent, underwriting results are generally considered unprofitable.

Aiico Insurance recorded the highest CR with 98 percent, followed by Continental Re, 90.12 percent; Royal Exchange, with 73 percent; Cornerstone,  72.13 percent; Wapic and Sovereign Trust, 66.67 percent a piece; and Equity Assurance 56.17 percent.

Analysts across the board also agreed that the firms are paying more claims as they do not like to carry over the claims to the next year in, order to keep a high reserve.

“This could be because claims processes are now becoming more efficient,” said an actuary who did not want his name mentioned.

While bottom lines are improving, premium penetration remains low, as Nigerian growth slows.

Economic growth slowed to 2.84 percent in the third quarter of the year, from 6.23 percent in the corresponding period on oil contraction.

Inflation has risen to 9.3 percent in October, higher than the Central Bank’s target of 6 percent and 9 percent.

A slowing economy means Nigerians have less disposable income, meaning a lot of people will not spend money on insurance when they don’t have money to buy necessities like food.

As a result of the aforementioned challenges, the cumulative gross premium written of the 15 companies rose more slowly by 2.47 percent to N128.11 billion in 2015.

Net premium income rose by 1.7 percent to N81.09 billion.

“General and Motor insurance are linked to the economy. The elections of 2015 and tough operating environment make the year a tough one for insurers,” said Debo Ajayi, Chairman TAF Consulting Group in a telephone interview.

Nigeria lags other African peer countries in insurance premium penetration.

According a 2015 report by KPMG on the Nigerian insurance sector, there are 32 non-life insurers, 17 life insurers, and 10 mixed companies catering for a total market of $1.6 billion (N320 billion).

This compares with South Africa, which has 179 insurance companies, serving a market of $51.6 billion (N103.20 billion), according to the report.

There is however positive prognoses for the sector as a potential rebound in growth next year and the CBNs move to spur lending by cutting interest rates are expected to have a positive impact on general insurance.

“As they give loans, lenders will make sure the funds are insured. Most banks will partner the insurance companies to increase credit lines to the real sector. In the United Kingdom and the United States entrepreneurs drive the economy,” said Ahmed.

BALA AUGIE