Analysts have highlighted that the risk of insurers and reinsurers being exposed to higher claims inflation is on the rise, with companies focused on longer business and those with lower reserve buffers being the most at risk.
Experts explain that an increasingly inflationary environment could mean that consumer lose appetite for a cover since their wallets are squeezed while combined ratios could spike on the back of rising claims and operating expenses as cost of replacement of assets would go up.
“Your premium incomes are not coming and the claims are growing more than expected. It will affect combined ratios and profitability,” said Moronfola Monsuru – Actuarial Analyst – Wapic Insurance Plc.
“We are in the business of paying claims. Imagine you had insured a car few years ago when inflation was low. If inflation starts to rise, it then means the cost of replacing a door will also increase,” said Monsuru.
The cumulative average combined ratio for the 19 largest quoted insurers that have released third quarter 2018 results stood at 83.30 percent, representing an improvement from the 86.80 percent in the corresponding period of 2017, despite persistent market pressures challenging the profitability of insurers, according to data compiled by Markets and Intelligence.
The combined ratio measures costs and claims as a percentage of premiums, so the further it is below 100 the more profitable underwriting has been.
Inflation for the month of November has inched to 11.44 from 11.28 percent in October, the first increase in seven months.
Analysts at CSL Stock Brokers Ltd have projected inflation to hit 15 percent and 20 percent in 2019.
Data compiled by Markets and Intelligence shows that in Q3 2018 the quoted companies claims expenses grew 15.29 percent to N62.98 billion, while underwriting expenses grew 12.83 percent to N36.84 billion, and management expenses climbed 9.54 percent to N39.0 billion.
As a result of improved combined ratio, quoted insurers recorded a cumulative underwriting profit of N30.60 billion in September 2018, representing a 32.51 percent increase from previous year’s figure.
“Operating costs are, of course, affected by inflation, organizations will have to sell more and be creative at driving cost efficiencies,’’ said Fola Lawal, Chief Financial Officer at Old Mutual
Jide Orimolade, former managing director and CEO of Law Union and Rocks said rising inflation if not factored into rates applicable on policies for non-life will have negative effects on their efficiency ratio.
“As for the Life policies the insured will be worse hit because of time value of money. Hence for Life people may not be interested in buying investment linked products from Life companies,” Orimolade said.
It is generally accepted that Life insurance is impacted by inflation more than any other product line due to the long term nature of the policies and the dependence on interest rates, as well as investment trends.
2017 audited financial statement of Leadway Assurance limited shows combined ratios fell to 53.60 percent from N77.61 percent the previous year, but a N49.31 billion increase in annuity fund resulted in an underwriting loss of N10.41 billion.
ARM Life Insurance Limited’s combined ratio improved to 47.42 percent December 2017 as against 57.58 percent the previous year.
First Bank Insurance Limited’s combined ratio fell to 44 percent in December 2017 from 49.54 percent the previous year, but a 255 percent surge in changes in long term contract insurance resulted in a 31.92 percent reduction in underwriting income.
“In a period of high inflation firms will not get premium from customers to invest,” said Monsuru.
BALA AUGIE
