Unlike the matured markets that have composite insurance revenue, Nigeria is almost about 80% short term insurance contract market -- property insurance 12 months, compulsory life insurance 12 months. Individual life and other personal insurances that constitute the basis of the developed world?s market revenue and investment are almost practically non-existent in Nigeria. Long term insurance contracts, the critical mass individual insurance (micro insurance) are practically non-existent in this environment.
So, unfortunately, the industries that feed the short term underwriting businesses are affected by the adverse market condition. Naturally, the cash flow and premium payment will drop. The individual insurance that should have made a massive input into financial solvency is missing both from public and private sectors. It is very difficult to believe that Nigerian insurance companies will continue along the lines of short-term businesses. A lot of the marginally insured do not pay premium. That also affects the short-term revenue that should have come into the premium pot.
Absence of premium financing is hurting the market. In pure commercial sense, premium financing is the same thing as cash flow management of a company whereby liabilities are financed by a third party, usually a bank, in order to meet obligations in a long-term and sustainable basis. Therefore, it is easy to know that the insurance industry is not doing well.
So what are the burning issues which the industry will have to address to move forward from this point?
The burning issues include the fact that insurance penetration within the critical mass market is very low. This is because the supply chain to capture that critical mass is under-developed. There are not enough insurance brokers who could deal at micro and personal insurance levels. What is more, absence of professionally educated insurance agents and middlemen who are supposed to help the market build the bridge to the micro level is not there.
Apart from the issue of penetration, the average person lacks confidence in insurance. The suspicion that claims would not be paid limits growth of the insurance market in Nigeria. This suggests underwriters will have to improve their business practices in this regard. Nevertheless, there is a need for education of insurance consumers on the importance of buying insurance products.
Global insurance does not rely on short-term business; the type that characterise the Nigerian landscape. It relies on long-term businesses like group-life insurance, annuity insurance, investment-linked insurance, etc. As we have in Nigeria, the rate of return on short-term insurance, based on commercial rate inflation-indexed is not profitable.
In the matured markets, the insurance sector is as critical and important as banking. You need insurance to protect against accidental loss or damage. Before an entrepreneur continues to take more risks, he needs insurance. His insurance company will insure him against fortuitous circumstances. Be it a manufacturer, farmer, health facility owner, sportsman or musician, he/she needs insurance to enable business continuity in the event of financial loss. The same need exists for enterprise risk management, financial and commercial investment.
More recently, your industry regulator has been co-opted into the financial market regulatory framework. Nevertheless, it appears yet again that the insurance industry lags behind banking in terms of introduction of needed reforms. Any hope that needed reforms will gain traction in insurance in Nigeria?
All kinds of insurance are based on protection against the unexpected. It is not the same as taking deposits or savings for businesses as is done in banking. The underwriter receives premium income, but it is fundamentally to ensure claims are paid in the event risks materialise. Therefore, insurance is about good faith. How then do you regulate it?
To regulate insurance is the same as ensuring that the underwriter, broker, consumer and everybody in that line exercises absolute good faith in the transactional process. The insurance buyer should have thorough understanding of the risks and place them in the proper manner. Premiums must be put in the right investments to ensure claims are paid when the need arise, both from the primary and re-insurance ends. Insurance is a very conservative industry because underwriters insure risk-takers. By tradition and statue, insurance companies do not deal on high risk investment.
But the most important person in the transactional process is the buyer/consumer. Therefore, the consumer must be protected not only by the professional indemnity of his advisor, in this case the broker, or the government regulatory agency like NAICON. The consumers themselves must be part of the process that decides what is best for them. They must have input in benchmarking value for service. They are the ones to suffer more serious consequence of collapse of an insurer. In the insurance industry, the consumers of insurances are at the mercy of the liquidator of those companies that became insolvent due to non-compliance to insurance practice. What happens when you delist an insurance company or a brokerage or agents? There is no part of the existing laws that guarantees an insurance company.
In some parts of the world, the policy holders, the intermediaries, the insurance companies and the appointed regulatory agencies come together to discuss issues and institute policies, so that things that are inimical to the interest of the buyer of insurance will be clearly understood and resolved. We hope to see that practice take foothold in Nigeria.
What specific policy direction do you wish to see in leading the Nigerian insurance industry to growth in the near term?
The biggest challenge in the insurance industry is ethics. Asserting the importance of ethics ensures market participants follow the fundamentals of insurance - utmost good faith in corporate governance, and in underwriting.
Education is very important. A motor vehicle owner or bicycle rider needs to know that if he hits a second party, he would have to pay compensation to him/her. With this awareness, the person will understand why it is important to buy an insurance cover. But currently, people just see third-party insurance as compulsory by law, and you might have the policeman on the street ask you to produce your cover. As this is the case, you find that the unscrupulous fellow will just go and purchase a fake insurance cover to satisfy the demand of the law. Another example; a micro employer might be educated to know that if his employee dies, may be on the job, he may not need to go to the village meeting to solicit funds for the funeral. All it will cost him is may be N200 a month to buy a cover of may be N50,000.00. He will see reason why he must buy group life insurance. Also, when you say that every employer must have employee compensation or group life for personal accident without telling the micro-level operators the reason, you have lost the market. In this country you have only one NNPC, a few major oil companies, about six breweries, about 10 to 15 big manufacturing companies. The unregulated sector is the stronghold of this economy. That is what I mean by saying that the unregulated sector should be the trust of the insurance industry. Promoting awareness of the benefits of insurance is so crucial.
On the regulatory side, the assumption is that we operate a free market economy where government and regulators are like referees in a football match. You as an operator may tackle violently. But you will be shown a red card after two warnings. You will not necessarily be disqualified or banned. So to me we must respect free enterprise. But there is no where you have freedom without policing. The regulators must do their jobs.
What is your outlook for insurance stocks at the Nigerian Stock Exchange, and the industry generally in the second half of 2010?
We are not likely to see any dramatic upswing to movement in the price of insurance stocks. It just doesn?t happen with insurance stocks in a normal situation. More certainly, insurance mirrors the economy. If the economy does not produce new manufacturers and grow the existing ones; if the SME sector remains stifled; if the supply chain to tap micro insurance is not developed, there will be no significant growth in the insurance industry.
Mr. Prosper Okpue is Executive Vice Chairman, Insurance Brokers of Nigeria. IBN is a member of the Marsh Group, the world's leading insurance broking firm. IBN is Nigeria's oldest insurance broking firm, established in 1955 as C.T. Bowing & Co.
Interviewed by: Jide Akintunde, Managing Editor, Financial Nigeria - a monthly development & finance journal. Contact: firstname.lastname@example.org
This article was first published in the August 2010 edition of Financial Nigeria magazine - a monthly Development & Finance journal. To subscribe to it, click here