• Friday, July 19, 2024
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Insurers’ underwriting profit falls by 22.10% in Q3 as expenses mount


The largest listed insurance companies’ underwriting profit for the first nine months of 2019 fell by 22.10 percent compared to the same period last year, while industry combined ratio weakened from the prior period, according to analysis by BusinessDay.

The industry underwriting income reached N21.87 billion in September 2019, which is lower than the N28.11 billion recorded last year, thanks to rising underwriting and management expenses, while claims continue to mount.

“We are making profit but we are not efficient, as evidenced in rising combined ratio, which means management expenses have to be curtailed,” said Owolabi Salami, executive director, Allianz Nigeria.

The combined ratio for the 18 largest listed insurance companies climbed to 111.11 percent in September 2019 from 108 percent the previous year, as a range of persistent market pressures continue to challenge the profitability of operators in the industry.

The combined ratio is the sum of an insurance company’s loss ratio and its expense ratio. The industry norm is to achieve a combined ratio of less than 100 percent and the target is to bring it as low as possible.

The implication is that a combined ratio of over 100 percent equates to an unprofitable company, though insurance companies can still be profitable with combined ratios of 100 percent by having other income streams, such as fee income from asset management subsidiaries.

The continued deteriorating combined ratio underscores analysts’ view that companies have to be more cost-efficient so that they deliver higher returns to shareholders in form of bumper dividend and share appreciation.

However, some of them have bucked the trend. NEM, Mutual Benefits, Regency, and AIICO Insurance recorded a ratio of 92.0 percent, 99.40 percent, 92.50 percent, and 96.90 percent, according to BusinessDay calculations.

Insurers’ return on equity can’t cover their cost of capital because of rising operating expenses. However, it is expected that all Nigerian service industries have high costs thanks to inefficient energy supply and transportation.

Analysts at Coronation Merchant Bank said that cautious underwriting can pass up on growth opportunities and that high costs can also mean high levels of investment in technology to prepare for future growth

The cumulative management expenses of insurers quoted on the bourse increased by 22.97 percent (higher than October inflation figure of 11.24 percent) to N46.06 billion while combined average expense ratio moved to 33.0 percent in the period under review from 30.80 percent as at September 2018.

A high ratio means a firm is spending more in running its operations to generate each unit of revenue.
Tope Smart, executive director, NEM Insurance, said the company’s expenses in each year are based on the topline (revenue) performance, which has enabled it grow profit.

He added that the issue of cost saving becomes irrelevant and that what matters is how the money is spent.

“Driving of our service delivery through technology has enabled us to cut off wastages with improved turnaround time. This has a positive impact on our claim payment, underwriting process and has contributed immensely to our customers’ satisfaction and retention,” said Smart.

Obligations to policy holders, which resulted in deteriorating profit margins, are piling. This has forced operators in the industry to be cautious of the businesses they admit into their books.

Claims suffered in recent times came from the oil and gas, and aviation sector which have resulted in losses, while rates are falling due to unhealthy competition.

Digging into the financial statements of these firms shows that Custodian and Allied recorded a 34.87 percent reduction in underwriting profit to N3.22 billion in the period under review, while having combined ratio of 123.90 percent in September 2019 from 117.10 percent the previous year.

AIICO recorded an underwriting loss of N3.77 billion as at September 2019, but a reduction in total underwriting expenses and a double-digit growth in premium income resulted in improved combined ratios.

AXA Mansard’s underwriting profit fell by 3.40 percent to N4.29 billion as at September 2019, while combined ratio increased to 112.0 percent.

Continental Reinsurance’s underwriting profit dipped by 72.27 percent to N492.19 million in the period under review, but combined ratio is as high as 149.25 percent.

Cornerstone Insurance’s underwriting profit increased by 10.98 percent to N1.30 billion as at September 2019, while combined ratio increased to 139.60 percent in September 2019 from N1.46 billion the previous year.

Niger Insurance’s underwriting profit fell as at September 2019, while combined ratio increased to 153.37 percent from 110.10 percent the previous year.