Analysis of the Top 24 Nigerian insurance companies reveals that, year-on-year, combined ratios has exceeded the international accepted threshold for some of the largest players in the market in 2019 as underwriting profitability dipped for the cohort.
This means that they are paying out more money in claims and other expenses than they are receiving from premiums, which raises concerns about their underwriting disciplines.
The average industry combined ratio hit 125.89 percent in December 2019, which higher than the 100 percent benchmark, according to data gathered by BusinessDay.
The combined ratio is calculated by taking the sum of incurred losses and expenses and then dividing them by the earned premium. A ratio above 100 percent means a firm is inefficient and it is making underwriting profit.
The deteriorating underwriting performance can be attributed to technical costs which are related to claims, reinsurance and other costs incidental to risk undertaking.
An industry expert who spoke to BusinessDay on condition of anonymity said business acquisition expenses are also a major driver of cost line, and he added that macroeconomic inflationary pressure has been squeezing margins of operators in the industry.
“Rate cutting prevalent in the industry directly results in high claims ratio as the risks covered were not adequately priced ab initio,” said the expert. The total claims expenses for the 24 companies increased by 14.31 percent to N144.54 billion in December 2019 from N126.43 billion the previous year.
The mounting costs of insurers are becoming worrisome as they collectively incurred N132.05 billion in management and underwriting expenses in 2019, which is 50 percent of combined net premium income of N264.24 billion.
With slow growth in premium income, rising obligations to policy holder and huge change in annuity fund, the top 24 insurers reported a combined underwriting losses of about N25.01 billion as at December 2019.
In 2018, the National Insurance Commission (NAICOM), the body that regulates insurance in the country had put a cap on the expenditures of some firms. The body said the decision was taken to ensure that companies did not spend unnecessary to the extent that they would not be able to attend to claims and other relevant matters.
The combined ratio of Niger insurance Nigeria Plc increased to 187.89 billion as at December 2019, from 102.38 percent as at December 2018. The insurer’s management expenses are 1.37 times net premium income.
Similarly, Veritas Insurance’s combined ratio fell to 187.89 percent in the period under review from 102.38 percent the previous. Interestingly, its management expenses are 1.31 times net premium income.
However, Leadway Assurance bucked the trend as its combined ratio of 78.13 percent is below the threshold, which means it is efficient in taming costs while contemporaneously increasing profit.
