Ada Ufomadu is a Senior Financial Institutions Analyst at Agusto & Co Limited, a credit rating agency. In this interview with Endurance Okafor, she gives growth projections for Nigeria’s insurance industry in 2019 while also sharing insight on the issues dragging the almost a century old industry. She also explains how Nigeria’s less than one percent penetration ratio can be increased to enable it catch up with its African peers. Excerpts:
Tell us about Agusto & Co. and how the agency provides insight into the various industries in Nigeria through its reports.
Agusto & Co Limited is the foremost pan-African credit rating agency registered in Nigeria as well as a leading provider of industry research. Agusto & Co started as a business information company with a long-term view of gathering and providing information on economies and select industries as well as assigning risk ratings to obligors.
Agusto & Co created the credit rating industry in Nigeria in 1992, and that was when we commenced assigning ratings to 120 banks in Nigeria on an unsolicited basis. This took place for a period of 5 years after which we commenced solicited ratings for banks and other financial institutions.
Today, the scope of our ratings has expanded to include insurance, corporates, municipals, primary mortgage institutions, microfinance banks, asset managers, securities firms, etc. Agusto & Co was licensed in 2001 by the Securities & Exchange Commission (SEC) as Nigeria’s first rating agency.
In 2013, the Company was approved and duly registered in the Capital Markets Authorities in Kenya and Rwanda as a credit rating agency.
In producing our industry reports, we meet with key stakeholders of specific industries which include regulators, operators, associations and even end-users of the industry’s products. The information we gather from these stakeholders deepen our understanding of the industry. We then marry this with our knowledge of the macroeconomic environment and are able to assess the impact of the macroeconomic environment on the industry and provide recommendations as thought leaders
How would you define the present state of the Nigerian Insurance industry?
The Nigerian insurance industry is a growing industry. There are about 59 insurance firms underwriting non-life and life businesses in Nigeria. The Industry’s asset base stood at N1.3 trillion as at 31 December 2018, reflecting a compounded annual growth rate of 17 percent in the last three years. However, total assets, Gross Premium Income (GPI) and profits are controlled by a few.
Top 5 players account for 45 percent of GPI, 42percent of total assets and 61percent of after tax profits. In 2018, the Industry generated premiums of about N448.6 billion, which reflected a 12 percent growth year on year. With this volume of GPI, the industry’s penetration ratio stands at 0.5percent, one of the lowest in Africa when we compare with countries like South Africa (17%), Kenya (2.8%) and Ghana (1.1%). This presents huge opportunities for growth and is the reason why we have classified the industry as one in a growth phase.
With the gross premium income of the Nigerian Insurance Industry sustaining its growth trajectory with the GPI rising by over 12perecnt in 2018 according to the Agusto & Co. report, where do you see the insurance industry by the end of 2019?
In 2019, Agusto & Co projects a 10 percent growth in the Industry’s GPI to about N493.4 billion. Growth will be driven by an improved operating climate as well as opportunities in oil and gas (particularly refinery) and engineering considering the Dangote projects that are on-going- the refinery and fertilizer manufacturing plant.
Agusto & Co growth projection of 10% for the sector in 2019 is less than the 12% is reported in 2018, why is that?
Like we all know, 2019 is a political year. Although it is a re-elected administration, it will take a while for them to settle in and we think it may slow down a bit on economic activities.
However, growth will come from a slightly better operating environment driven by an improved operating climate as well as opportunities in oil and gas (particularly refinery) and engineering, considering the Dangote projects that are on-going- the refinery and fertilizer manufacturing plant.
Do you see those favourable macroeconomic indices that drove the GPI maintaining the same trend in 2019?
Much of the growth seen in 2018 was driven by major projects that had previously been stalled due to the recession as well as efforts by stakeholders to increase insurance awareness. The macroeconomic environment was not a major contributor to GPI growth given that the country had just exited a recession and growth was fragile at 1.9percent in 2018.
However, macroeconomic indices favoured the Industry’s investment portfolio. There has been a significant growth in the Industry’s investment income due to higher yields on government securities. Though yields moderated in 2018 due to a change in the government’s borrowing strategy, we expect a pickup in 2019 as the government will borrow more to fund its budget deficit.
Despite the growth the sector recorded last year, industry experts say there are enormous opportunities that abound. Can you highlight some of these opportunities?
Agusto & Co believes that there are opportunities in the over 100 million Nigerians without any form of insurance policy. In addition, there is the potential to deepen market share of the pockets of already insured populace.
There are over 12 million registered vehicles in Nigeria for motor insurance; fire insurance for households and manufacturing companies; annuities as more people retire; life insurance policies for individuals. There are also opportunities in the agriculture value chain as the government continues to diversify its earnings away from oil.
What are your recommendations on how to harvest these untapped opportunities in the Nigerian Insurance Industry?
We recommend that operators listen to the market more and develop products that are consumer centric as well as create innovative ways to get these products to end users through digitalisation (distribution channels).
According to Nigerian Insurers Association (NIA), insurance companies in the country paid a total of N217.8 million as terrorism claims and paid N1.2 billion to settle claims arising from flooding in 2018. What kind of insurance do you think will be most viable for them in 2019?
I believe viable insurance policies would be those relevant to the Nigerian market and addressed to specifically meet the needs of Nigerians. Historically, motor and general accidents insurance have been the most profitable business lines with underwriting profit margins of 34.2 percent and 31.8 percent respectively in 2017.
We believe that these business lines will continue to drive underwriting profits. However, insurers are expected to underwrite risks across various sectors and not ignore any. This will diversify risks in the insurance pool.
How can the country’s insurance companies shore up their capital base, irrespective of the cancellation of the recapitalisation exercise by the National Insurance Commission (NAICOM), in order to enable them take on bigger risks which at the moment are being taken abroad?
Typically, capital can be shored up by injection of equity or debt and by retaining more profits. To retain profits, operators need to grow revenue. To grow revenue, operators require innovation, digitalisation and aggressively marketing strategies.
The issue of trust in the Industry also has to be addressed because insurance is a business of trust. To be attractive to providers of capital, there has to be good profitability as well as high corporate governance standards which include transparency, strong risk management framework, experienced board and management and so on.
Independent credit ratings provided by companies such as Agusto & Co provide an independent assessment of a Company which gives an extra layer of comfort to investors.
Despite the fact that Nigeria has larger capital base than some of its African peers, its insurance penetration rate remains low, standing at 0.6 per cent, compared with South Africa’s 15.4 per cent. How can it broaden its penetration?
Penetration can be deepened by getting more Nigerians into the insurance pool. How can this be achieved? We believe there has to be a strong collaboration of all stakeholders- regulators and operators to drive awareness. One of the major issues Nigerians have with insurance is mistrust.
To build trust, insurers need to educate the populace on the benefits of insurance and take them through the fine prints written on policies so that they have a clear understanding of what they are going into. Trust also requires that when there is a claim request, it is attended to and paid promptly.
In addition, products targeted at the middle and lower class, especially middle class, need to be developed.
