Insurers’ profit to drop on higher claims, inflation

While modest profitability indices are projected for Nigeria’s insurance industry in the full-year 2021, a poorer performance is expected in 2022, thanks to higher claims and the inflationary pressures on the sector, according to the latest report by Agusto & Co. Limited, a pan-African credit rating agency.

In the financial year 2020, the insurance industry paid out net claims of N196 billion, up by 20 percent year-on-year (representing 37.6% of GPI). The claims, according to the 2022 edition report by Agusto & Co., were worsened by the violence that trailed the #EndSARS protest in October 2020.

“Modest profitability indices are expected in FY 2021 and to a lesser extent in FY 2022 due to higher claims, an aftermath of the protests as well as inflationary pressures on the Industry,” research analysts at the rating agency say.

Enhanced relationship between banks and insurance companies aimed at offering insurance products or insurance benefits to banks’ customers is expected to drive modest performance in the industry in the near term.

Also, new insurance products, particularly for the agriculture sector that have come on stream to boost gross premium income (GPI), are expected to contribute to the insurance growth.

“Furthermore, the sharp switch to virtual channels, one of the many rapid changes witnessed during the pandemic-induced lockdowns in 2020 should be sustained in the near term,” the rating agency states.

With improved digitisation, insurance companies can advertise and sell products via various digital platforms, and partnership with Fintechs will also galvanise growth. However, digitisation presupposes better management of cyber risks, it explains.

Agusto & Co. expects the violence that trailed the #EndSARS protest to serve as a catalyst for insurance uptake in the near term, given that the insurance penetration rate has remained less than 1 percent in Nigeria.

According to industry players, the #EndSARS protest emphasised the importance of insurance products, particularly with the absence of a robust social security system in a country with the most population in Africa.

Although some insurers have strengthened their capital base through earnings retention, the rating agency notes that the ability of most industry operators to solely underwrite large ticket transactions has dwindled based on the lower value of capital in USD terms.

The persistent naira devaluation has reduced the financial strength of the industry’s capital since the last recapitalisation exercise in 2007.

Agusto & Co., therefore, anticipate a resumption of the recapitalisation exercise in the short term. It believes that the recapitalisation exercise could be a watershed in the industry.

“In addition to the benefits accruing from a larger capital base from a risk underwriting perspective, improved investment management practices will be upheld by a larger investment portfolio as insurers strive to generate adequate returns,” it says.

According to the report, in the financial year ended December 31, 2020, the Nigerian insurance industry generated an estimated GPI of N520.1 billion ($1.4bn at N380/$), with growth muted by the outbreak of the COVID-19 pandemic.

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The lockdown following the COVID-19 pandemic negatively impacted insurance products distribution, especially with the inter-state travel bans restricting the movement of people and goods.

With huge potentials in terms of population, demography favouring the middle class, rich natural resources, every eye is on Africa to develop its insurance potential for robust economic growth, experts say.

Home to the region’s highest population and the continent’s largest economy, Nigeria is expected to be at the forefront of deepening Africa’s insurance but has as of now one of the world’s lowest penetration rates.

According to the Mckinsey report, most of the growth recorded in the insurance industry in Africa has come from the economic expansion of these countries and regions, not because of increased penetration, pointing to an opportunity for the players.

Largely dependent on corporate clients and institutions, analysts say the insurance industry should serve the larger and excluded segment of the market – small businesses with micro products that deal with the protection of life, health, and assets, including farmlands.

“We have the population but we have not been able to serve them well, so digitalisation is critical in reaching out to this large number of people in our continent,” Tope Smart, president, African Insurance Organisation, notes.