A stuttering economy characterized by stock market rout and low yield environment has prevented insurance float from translating into higher profit and increased investment returns.
Not all the money an insurance company accumulates are paid out immediately. Instead, they receive premium, invest the money, and then pay out claims as needed at some future date.
Therefore, the insurance float represents the available reserve or the amount of funds available for investment once the insurer has collected the premiums, but not yet obligated to pay out in claims.
This means the float is invested in stocks and bonds to generate returns that compensate for weak underwriting profit.
In his 2002 letter to shareholders, Warren Buffet, One of the richest men in the world, and Chairman Berkshire Hathaway, said that floats is the money we hold but don’t own.
“In insurance operations, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years,” said Buffet.
To understand what is going on, let’s return to a simple model. The moment policy holders pay insurers premium for indemnifying risk, that money has become a loan to these companies because not all customers will be involved in accidents or be hit by fire or flood at the same time.
“We generate premium but we are reluctant investing it because the economy is not doing well. Yields are falling and stocks have been stumbling,” said Moronfola Monsuru, senior actuarial analyst at Wapic Insurance Plc
“Some two to three years ago a lot companies were generating investment income that helped propel their profit before tax, but they are no more making money because the market turmoil and low yield environment,” said Monsuru.
The capital market is suffering from investor apathy as foreign investors have dumped Naira assets in search for riskless assets across the globe as the country’s economy continues to flatter.
Yields on short term securities, which hovered around 22 percent and 18 percent in 2017, now hovers between 13 percent and 14 percent.
The equity market has lost 11.95 percent since start of the year. The All Share Index opened at 31,430.5 points on January 2 and closed at 27,675.04 pts on Friday.
Insurers are reeling from huge underwriting losses caused by mounting claims, while margins are increasingly deteriorating, which validates NAICOM’s decision to jerk up minimum capital of insurers.
While the 17 largest insurers quoted on the bourse recorded a 13.31 percent increase in investment income to N20.15 billion as at June 2019-18, it is below the 35.25 percent uptick in 2018-17. The e combined net income dipped by 2.77 percent to N16.75 billion to N20.19 billion in June 2019.
Insurance index has pared 9.95 percent since January. It opened at 126.48 pts and closed 113.89 pts.
“In insurance there has to a matching of assets and liabilities. General Business will invest their money in short term investment because they don’t want a situation where they are unable to settle claims as at when due,” said Jide Orimolade, former Managing director and CEO of Law Union and Rock Plc.
“On the other hand, Life Business can lock their money in long term investment because they are in custody of funds belong to retirees. The investment person should look at the liability of the organization before putting money in either long or short term investment,” said Orimolade.
Gross domestic product expanded 1.94 percent in the three months through June from a year earlier, according to a recent data from the National Bureau of Statistics (NBS). That compares with a revised expansion of 2.1 percent in the first quarter.
The insurance industry is beset by apathy towards insurance, poor regulations, and literacy, which is why its contribution to the economy is abysmally poor.
The country’s insurance penetration is 0.31 percent and density of $6.0 of capita
That is abysmally poor when compared to South Africa’s penetration rate of 12.89 percent and density of $840; Namibia, ($390/7.25 percent); Morocco ($127/3.88 percent), and India ($74/$3.69).
Penetration rate is measured as the ratio of premium underwritten in a particular year to the GDP.
Insurance density, on the other hand, is the ratio of insurance premium to the total population.
“A weak macro environment presents lower investment returns, would see low investment income at the end of 2019 as yields continue to drop,” said an industry expert, who didn’t want his name mentioned.
Bala Augie
