Ifeanyi Ugwuadu
7 January 2009
The Nigerian insurance market is characterised primarily by a pricing movement which benefits the buyer.
This situation is conditioned by the presence of a large number of providers and a contracting market. The number of buyers is largely stable and in some cases decreasing annually. They are corporate entities. And thus, what exists are corporate clients where the dominant player is the broker.
Personal lines insurance or the insurance of the person is apparently not existing but where it does exist, you only find employed persons in small numbers augmenting their savings by buying investment-linked insurance and the group insurance against accident and similar covers. As such, the Nigerian market is essentially a non-life market.
The income base and reserves of insurance companies are, therefore, very weak giving rise to premium buying or the aggressive acquisition of businesses through unwholesome practices. Funds at the disposal of underwriters are short-term funds from terminal (mostly annual) insurances.
There is also pressure on managers of insurance companies from key investors and shareholders. The demand is for increased and better returns. However managers react to this pressure by acquiring business to increase the topline instead of paying attention to the bottomline.
Future Outlook:
The Vision 2020 document envisages a dominant Nigerian insurance market that will rank 15 in the world by size of premium income. It is estimated that insurance will generate about N12trillion in that period. This means that in less than 11 years, our market will achieve a 15th record in the world! Now the framework for achieving this target is what should be the issue.
Can the government provide the enabling environment for insurance to thrive. Can government fast track infrastructure development and help the economy to grow. The Vision sees half of the target being achieved with existing infrastructure, that is, about N6trillion premium by the end of the Vision period. Unless something radical happens, it is obvious that this will become a tall dream.
Two reasons inform this opinion. From the submissions of several players in the market, underwriters must first learn to price risks appropriately. Currently, the fear of losing business does not allow them to dictate the price.
The uncoordinated and incoherent structure which allows bad players to be in the market and remain strong will certainly not allow a good reporting system which monitors and alerts on bad pricing. Can the regulator enforce international best practice and strong corporate governance. What is the quality of the boards to deploy best oversight capabilities.
What the current meltdown have once more shown is the volatile nature of stock markets. And for insurers as major players in the financial system, there would be increasing reliance on price as a strongest determinant of rates. But when this market will be forced to respond to evolving trend is yet uncertain.
Mergers & Acquisitions:
During the recapitalisation of the insurance market, a major factor for the successful exercise was the regulator's zero liquidation option.
The policy forced so many companies to come together to meet the new capital requirement. Although it had its negative impact, its positive far outweighs the demerits. Many companies would have ceased to exist but for that policy. But the point is that the number of players compared to available businesses is still larger and this gives room to premium buying. Whereas some players had hoped that the market will have cause to regulate itself, the price war assumed an uncertain dimension.
To some extent, some disillusioned managers no longer believe the recapitalisation was worth the effort. Towards achieving a stable market, there are increasing talks about mergers and acquisitions; this time a market induced measure to save the businesses and position the industry for a shot at the top of industry performers in the Nigerian economy. But who blazes the trail? Who fires the first shot? Insurance in Nigeria is not known for big moves but it can happen.
All it takes is for an aggressive manager to see opportunities, tap into it and exploit it. Definitely, some underwriters are going to price themselves out of the market because even the buyer will become so knowledgeable as to distinguish between genuine insurers and charlatan or traders who jump at any price. Very soon, insurance consumers are going to buy covers that help them recover after losses but not giveaway policies that do not guarantee them compensation when a loss occurs.
Fortunately, bad underwriters can always find business in government. They understand the terrain very well. 'Share the premium and don't expect a claim' is the principle in government business.The calculation is that when the good players seal the mega deals, the bad players can easily be spotted by consumers, isolated.
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