The profitability of insurers could decline due to fall in yields on fixed income securities which constitutes the bulk of their assets, while COVID-19 crisis that led to business closure is expected to undermine premium income, according to a recent report by Afrinvest Securities Limited.
That is triple-fold whammy for an industry whose contribution to the economy is abysmally poor. Insurers rely on yields on invested funds to compensate for deteriorating underwriting performance especially in the face of unfavourable underwriting conditions.
In Nigeria, the combined ratio for most operators in the industry has crossed the red line due to huge claims and operating expenses, which makes it practically difficult for listed firms to deliver higher returns in dividend and share price appreciation.
For the year ended December 2019, the largest insurance companies in the country posted a combined underwriting loss of N15.156 billion as at December, but they posted a cumulative net income of N39.58 billion, thanks to investment income of N45.13 billion.
Insurance companies invest in government securities when yields are favourable with a view to earnings income, but yields have been dose diving since a late year as the central bank has prohibited individuals and local firms from investing in both its primary and secondary Open Market Operations ( OMO) auctions.
Nigeria’s treasury bill now hovers between 3.75 percent and 2.85 percent, respectively.
The future profit growth of insurers is in jeopardy because the renewal of policies may be poor due to lockdown policies impose by the government to curb the spread of the virus, which could also result in lower premium income.
Analysts at Afrinvest Securities said the overall profitability of companies would rely heavily on effective risk management and operational efficiency as a result of slower growth in premiums and rising claims.
“There is need for them to plunge the funding gap between assets and liabilities and also, rely on re-price policies in the light of the current interest rate environment,” said analysts at Afrinvest Securities.
The report, seen by BusinessDay, added that the broader fallout from the pandemic in terms of lower density and investment returns; a significant deterioration in the credit quality of fixed income securities and increased mortality rates from the virus could pressure earnings and reserves of the life insurance sector in 2020.
“For the non-life, a rise in Covid-19 related claims, premium rebates and lower interest rates could offset the increased demand for pandemic related and reduced profitability.
Nigeria, Africa largest economy, lags peers in Sub Saharan Africa in insurance penetration and density as lack of trust by policyholders towards operators and the claims settlement process, poor regulations, and economic downturn, continues to stunt industry growth.
