Insurers to battle for revenue, profitability as economic headwinds dim growth

With economic headwinds arising from dwindling oil prices, falling government revenue and heating political environment, businesses including the insurance industry will have to contend with strain on revenue, profitability and human capital management, analysts have said.

This could be avoided only if there is significant increase in production that would absorb the declining oil prices presently at $48.5 per barrel and showing signs of further decline.

Another challenge they foresee is that if government revenue drops, capital expenditure will suffer. What this means is that companies and businesses that rely on government accounts would suffer revenue drought, drop in underwriting income, investment income and there may be staff layoffs.

The nation’s insurance industry had just recovered for growth and stability after full year implementation of “No Premium No Cover Policy” with a number of insurance companies particularly the quoted companies posting growth in their 2014 half year result.

Analysts are afraid that the gains of 2014 would be strained by current challenges in the economy as well as volatility in the financial services market, where capital market lost over 60 percent in 2014 and still declining in the current year. This means that investment income would have been seriously challenged and this no doubt would impact on the bottom-line of industries including insurance.

“Insurance sector you know is an intuitional investor in the capital market, so it’s most likely that its investment income would have been challenged,” the analysts noted.

The analysts who spoke to BusinessDay in an exclusive interview said for 2015, a lot will depend on what happens in the economy and the political scene at large. “In the economy, we all know that the signs are not very good. Government revenue is likely to be less than half of what it had last year,” they said.

Oil sold last year at average of $95 or $90 per barrel because it closed at about $100 per barrel around December, so without any significant increase in production, that means government would have shortage in revenue. At the current price of $48.5, it then means all the budget will go to recurrent expenditure with almost nothing for capital exposure.

“When there is no money for capital project both at federal and state, then we could find ourselves back in the 90’s when there was no investment in infrastructure,” the analysts pointed out.

Companies that depend on government patronage for contracts many not get such this year, where they give, they may not be able to pay.

“Underwriting income might have some challenges for companies relying on government businesses, as they may not get enough businesses to cover their expenses, so these might pose some challenges, and you might find some companies trying to cut costs. So, you might see companies trying to lay off workers, not only for insurance but across the other sectors.

However, companies that have diversified earning base including the private sector and retail will business will do better in the current year, says the analyst.

Modestus Anaesoronye