Nigerian pension industry growth points the way to insurance sector

With over N8.4 trillion sitting as Asset under Management (AUM), the Nigerian pension industry has a lot to teach the older insurance sector.

Making the Contributory Pension Scheme compulsory in 2004 has helped the Nigerian pension industry grow its asset from zero to as high as N8.4 trillion as at end of November 2018, according to data obtained from the National Pension Commission(PenCom), the industry regulator.

But the same meteoric growth has not been recorded in the insurance sector, despite having a headstart over the pension industry.

With only about N703 billion assets under management compared to pension industry’s N8.4 trillion, industry experts blame the insurance sector’s woes on its non-mandatory nature.
“Two fundamental things made the pension industry successful,” said Misbahu Yola, managing director, FCMB Pensions Limited, formerly Legacy Pension.

“The pension industry is backed by law that you must open an account and your employer must contribute and if you don’t follow it you are in trouble. That is the major fundamental pushing up the pension industry, but this is not the case with the insurance sector,” Yola told BusinessDay in an exclusive interview.

Prior to the enactment of the Pension Reform Act, 2004, the Nigerian pension industry was in an abysmal state, bedevilled with several problems, including unfunded benefits and retirement budgets recorded annually.

These factors coupled with a lower penetration rate in the private sector exposed the industry to vulnerable shocks in light of resource constraints. However, with the enactment into law of the Pension Reform Act, 2004 by the then President Olusegun Obasanjo, the industry was able to scale up and eliminate the problems associated with pension schemes in the country.
“The insurance sector potentially is supposed to be bigger than the pension, but in Nigeria, it is smaller,” said Wale Aokunrinboye, head of research at Lagos-based Sigma Pension.

“In other countries where the laws are enabling, it forces everything to be insured and because of that, the insurance companies have large stash of cash,” he said.

Aokunrinboye explained that one reason the pension industry has come up is that its regulatory environment is a bit firm, and predictable, and as such gives people confidence to put down money.

“If we can raise the amount of insurance coverage in the country, I am sure you will see a tremendous boost in the economy, and part of it has to be regulatory and legally driven. Certain things have to be made mandatory,” Aokunriboye told BusinessDay by phone.

A report by Afrinvest,  a West African independent investment banking firm, on the growth of the insurance sector across the globe described the Nigerian insurance industry as a “sleeping giant’’ with low penetration and abysmal density.

Nigeria’s insurance sector is still one of the most underdeveloped compared to its peers, according to the report, despite the country having a population estimated at 196.1 million people, a growing middle class and increased life expectancy rate (54.5 years average for men and women in 2017 from 53.4 years in 2016).

At 0.3 percent in Q2 2018, Nigeria had the lowest insurance penetration level (measured as insurance gross premium written as a proportion of GDP) amongst notable African countries – South Africa (14.7 percent), Kenya (2.8 percent), Angola (0.8 percent), and Egypt (0.6 percent).
Similarly, the sector’s density (a measure of industry gross premium per capita), at $6.2, is still one of the lowest compared to its peers – South Africa ($762.5), Egypt ($22.8), Kenya ($40.5), and Angola ($30.5).

The sector suffered a setback in the last two quarters of 2017, contracting 1.9 percent and 15.7 percent in Q3 and Q4, respectively, despite growth recorded in the overall economy. It, however, rebounded in Q1 2018, expanding 18.1 percent relative to 1.95 percent growth recorded by the economy as a whole, according to data from the Afrinvest report.

“The insurance companies have not built trust and that is the issue. Trust is built on law and guidance which the industry seriously lacks,” Yola said.