Life insurance firms managing annuity business have become cautious in admitting new deals in their portfolio due to increasing decline in return on investment (RoI) over volatility in the environment.
The decline on returns has been significant since early 2019, when average market rates dropped from 15.07 percent in January to 10.15 percent in December same year.
This was worsened by the Central Bank of Nigeria’s (CBN) directive effective October 23, 2019, excluding individuals and local corporates from investing in Open Market Operations (OMO) auctions, which has been the most attractive window for annuity investment.
This also was further exacerbated by fluctuating oil prices, making it difficult for investment managers to successfully hedge against their risks, and this has impacted substantially on annuity business, according to players in the market.
Annuity for life policy is a retirement instrument option for retiring employees offered by a life insurance company licensed by the National Insurance Commission (NAICOM). As it is popularly called, it is a type of insurance contract that provides in return for a lump sum, a monthly or quarterly payment starting immediately after retirement and continuing for the rest of the retiree’s life.
The contract is often purchased by retiring persons who want an income that is guaranteed to last for the rest of their lives, no matter how long that might be.
Section 7(1a) of the Pension Reform Act 2014, states that an employee on retirement shall procure Annuity for Life Policy or Programmed Withdrawal. The lump sum for the procurement of Annuity for Life Policy or Programmed withdrawal must have been accumulated through series of employer/employee contributions into the Retirement Savings Account of the retiring employee throughout his/her working career.
This law opened a golden opportunity for insurers to grow their life business, and this has been so for quite some time now, but declining rates and other challenges in the environment have become source of concern for investment managers.
Olabisi Adekola, executive director, Finance at African Alliance Insurance, explains that insurance companies are faced with difficulties of matching assets with liabilities at this time in business of annuity as a result of poor operating environment.
She states that in the case of African Alliance, its growth in volume during the 2019 financial year was underpinned by claims from annuity, “Unfortunately, while we obviously made more sales, we paid much more claims which impacted negatively on our balance sheet.”
She said. “The bulk of our claims were in annuity business, which has been affected by our operating environment vis-à-vis the average market rate and limited investment vehicles. We all know annuity business is basically about hedging assets against contract liabilities, so when the market forces are unfavourable, returns on investment will be affected too.”
Though she is positive about the firm’s ability to turn the bend going forward by its corporate strategy, but however admits that this poses a huge challenge on annuity.
As at the end of second quarter, the National Pension Commission approved a total of 2,941 applications for retirement under life annuity, bringing the total number of retirees receiving their retirement benefits through the annuity plan to 68,857 from inception.
The 2,941 retirees paid premium of N17.53 billion to insurance companies and with monthly annuity of N184.50 million. This brought total premium of N371.21 billion and monthly annuity payments of N3.70 billion as at the end of second quarter 2019.
Oladimeji Abiola Olona, general manager, LASACO, had explained that annuity business meant you were going to collect money, so you must be sure where you were going to invest the money to yield the kind of returns that would match the risks you carrying.
According to Olona, do not forget that it is a promise to pay for life, and a lot of the retirees are living up to 40 years in retirement, meaning you will have to pay the person till the last day of his life without stopping.
“So, you must also ensure that you do not kill the institution that you have inherited from some people, so that is why we are being cautions. We may not be a major player in annuity, but we may be in oil and gas, and we may be in motor business or group life,” he said.
