Insurers underwriting profit hit as replacement cost rises above 100%

Insurance companies in Nigeria are grappling with declining underwriting profits, arising from falling rates, as well as growing cost of asset replacement, on account of high inflation and dollar scarcity in the economy.

As a result of growing competition and the desperation to get a bigger bite from a dwindling market, particularly corporate accounts, operators have resorted to rate cuts, which have further eroded premium volumes and underwriting profits, as well as put pressure on bottom lines.

Consequently, claims are rising at an unprecedented rate, particularly since the economic recession, with more Nigerians seeking to take advantage of every opportunity to earn extra income or reduce expenditure.
Incidentally, insurance has seen increasing claims filing, particularly on motor insurance policies, which were previously largely ignored by most of the insured publics.
Analysts say the cost of replacing lost assets has risen to over a 100 percent, whether in imported vehicle parts, machineries or building materials.

“We have seen a situation whereby a vehicle, say a Toyota Camry, which we insured at a market value of N8 million a year ago, now costs N18 million, and if you are to replace a part in the vehicle, say headlamp which ordinarily would have cost N25,000 a year ago, it would cost over N50,000 today. This is what insurers are facing, says Ganiyu Musa, group managing director/CEO, Cornerstone Insurance Plc.
Musa said the industry is presently experiencing claims in their large numbers, whereas premium is dropping in many business lines, due to economic hardship.

Larry Ademeso, managing director, Custodian and Allied Life, says a major challenge affecting insurance business in the country today is rates. “Rates are down and it is seriously killing the business”, Ademeso observed.

Edwin Igbiti, managing director/CEO, AIICO Insurance Plc responding to enquires on why his company rejected some businesses based on pricing, said, “We are conscious about the risks we admit as company. If the rate does not meet our actuarial specification, then it’s a bad risk and we will not issue such policy.

“Mind you, is not about giving out your policy, the key element in insurance is being there for the insured when the risk crystallises. If we are not comfortable with the rate, we reject the risk because we have set a standard for our self and that is to honour our claims obligation when they happen”, Igbiti stated.

The insurance industry globally is under intense pressure to sustain profitability and make good returns to shareholders, as a result of huge claims and increasing exposure to natural and catastrophic risks.
These problems, analysts say, have continued to impact on the industry’s earnings locally and in other parts of the world.
The analysts further contend that unless insurance companies strive to increase their income from investment, the industry may find itself struggling to pay dividend to shareholders.
Analysts from Afrinvest (West Africa) in their report on the insurance industry, noted that underwriting profitability has been adversely impacted by increased claims, thereby necessitating increases in premium rates across most developed economies.
According to them, in addition, exposure risks have been on the increase, in the face of rising violence and natural catastrophes.
“This has exerted pressure on premium rates and adversely impacted underwriting results”. We do not expect a sharp reversal in interest rates to pre-crisis levels, and foresee rate’s rising gradually, as inflationary growth assumes a headwind, especially in emerging markets, Afrinvest stated.
Meanwhile, industry players agree with analysts view, that there has been consistent growth in claims in the past years, which they say is affecting undermining performance.

Like most other industries operating in Nigeria, the insurance industry was adversely impacted by the downturn in the economy which had its roots in declining crude oil prices since 2014. The Nigerian economy went into a recession in the third quarter of 2016 following two consecutive quarters of negative GDP growth. This slowed down activities in various industries, including the insurance. Inflationary pressures also had a negative effect on cost of operations, as well as the value of long term savings.
“Reduced consumer purchasing power threatened gross premium growth and increased surrenders in the life business segment. In the non-life segment, we observe a preference for less expensive insurance covers, such as third party insurance cover, as against comprehensive motor insurance cover, says Analysts at Agusto & Co.
“The competitive landscape remains intense across major business lines, such as motor, fire, general accidents, oil& gas and life insurance.”

 

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