Economy & Politics

Nigeria’s insurance market offers significant potential despite headwinds (AM Best)

Insurance penetration rate in 2019.

The Nigerian market has 57 insurance companies and, as observed in the CIMA zone, is subject to a dynamic of raising minimum capital. The 426 billion NGN (1.2 billion USD) of premiums generated in 2018 represented a growth of 14.5% compared to the previous year. During the five years between 2014 and 2018, the compound annual growth rate of total GWP increased by an average of 8.6% per year. Although growth has apparently been strong, seen in real terms, the market has contracted by around four percentage points, with inflation averaging 12% over the same period. Market-wide GWP (total premiums) (excluding health insurance premiums) increased overall in line with inflation to reach around NGN 490 billion (USD 1.3 billion) at the end of 2019 , according to figures from the Nigerian Association of Insurers (NIA).

Compiling this picture in a comprehensive report on the sector, rating agency Am Best sees the Nigerian market as promising. “Nigeria’s large oil and gas reserves, young and growing population and position as Africa’s largest economy mean significant development potential for its insurance sector. Furthermore, insurance penetration – the market’s gross written premium (GWP) as a percentage of gross domestic product (GDP) – is extremely low, highlighting the long-term growth opportunities in the market as shown in this article. board”.

A delayed recapitalization

In 2007, the market regulator, National Insurance Commission (NAICOM), increased its minimum capital requirements for insurance companies by more than 1,000%. While this led to a widespread recapitalization, AM Best has since observed a steady increase in underwriting leverage from insurers. Regulatory data shows that across the market, GWP (total premiums) growth has exceeded capital generation since 2014. This trend continued in 2019, according to AM Best’s analysis, with a Projected ratio of GWP to capital and surplus for the market of approximately 115%, compared to 75% in 2014.

Reinsurance outcry

With the aim of strengthening market capitalization and limiting the volume of premiums coming out of the country, the 2018 NAICOM circular outlined its plans to further increase the minimum capital requirements for (re) insurers. The proposed changes met with strong opposition, resulting in a court ruling that the proposed regulation did not comply with the Insurance Law of 2003. Therefore, no changes were made.

In 2019, NAICOM released a revised version of its draft regulations. The revisions to capital setting remain rule-based rather than risk-based and will change minimum capital requirements in accordance with the type of license of (re) insurers. Although initially slated to come into force by mid-2020, the deadline for implementation has been pushed back to December 2020, to allow market participants time to implement their recapitalization plans. However, given the economic downturn linked to COVID-19, NAICOM has agreed to an extension, opting for a phased approach, which will require a partial recapitalization by December 2020, with market players being required to meet the full requirements of ‘by September 2021.

According to the AM Best report, only a fifth of Nigerian (re) insurers at the end of 2018 had sufficient capital to cover the revised capital requirements. More than 10 companies are expected to double their end-of-2018 capital and surpluses to meet new capital requirements. AM Best believes that a significant proportion of (re) insurers will find it difficult to raise enough additional capital to meet the new standards.

The new requirements do not take into account the underwriting, asset and operating risks specific to each insurer

AM Best

In AM Best’s opinion, the successful implementation of the new capital standards would be beneficial for the industry, as they should lead to a strengthening of market-wide capital adequacy. Market consolidation and the resulting reduction in competition are expected to help alleviate strong pricing pressure and improve underwriting discipline. However, unlike the risk-based approach to capital building, the new requirements do not take into account the specific underwriting, asset and operating risks of each insurer. There is no restriction on the volume of business that each insurer can underwrite, as long as the minimum capital requirements are met. As a result, underwriting leverage in the market is likely to continue to increase over time. Risk-adjusted capital requirements – as measured by AM Best’s capital model, Best Adequacy Ratio (BCAR) – for insurers in sub-Saharan Africa tend to be driven by asset risk rather than by underwriting risk.

Investments geared towards liquid assets

The investment portfolios of the 15 largest Nigerian insurers are generally weighted towards low risk assets such as cash and fixed income securities. Although investment portfolios tend to be relatively conservative in terms of asset allocation, the quality of assets held by insurers is considered low and, as a result, they receive higher asset risk fees. within the BCAR. While the NAICOM does not prevent insurers from investing abroad, only locally owned assets are considered eligible in the calculation of regulatory solvency. As such, the overwhelming majority of insurer investment is concentrated in the country, exposing companies to increased investment risk.

The other weakness of the Nigerian market is the weak development of individual insurance and the slowdown in economic growth observed in recent years.


Related Articles

Back to top button