The Nigerian Insurance market is, in many respects the next frontier in the Nigerian Financial space but unlike the banking story, the growth opportunity of the Nigerian insurance industry has been in stagnation for too long.

In a commissioned research into "The relationship between the strengthening of the insurance industry and Economic Growth in Developing Countries" carried out by USAID in February 2006, the following conclusions were drawn:-

* Countries are much more likely to experience sustained growth if their insurance market develops well.

* Insurance market development is closely related to improved financial sector performance and* Insurance markets do not develop adequately without both public and private sector investment in their infrastructure.

It is therefore obvious that the Nigerian Insurance market can not be treated in isolation of the national economy. The Nigerian insurance market has been highly under-penetrated, particularly when compared with other African insurance markets.

Of the estimated 20m people in formal or informal employment across Nigeria, less than 1m currently holds personal insurance policies. This is despite a steady growth in incomes across the working population in recent years, and the emergence of a new middle-class group in Nigeria.

In sharp contrast stock market investing continues to be increasingly popular among this same group of people, many of whom do not hold life insurance policies. Cross selling opportunities clearly exist for investment related insurance products, as well as life products to stock investors. We expect this to be a strong growth segment of the insurance market,

The 2005 reforms brought about several players deciding to merge or acquiring other operators which saw to the emergence of bigger, stronger, more viable and better capitalized insurance market.

The post consolidation market capitalization of Nigerian Insurance market as at June 2008 stood at over N206billion as against N25.9billion prior to consolidation.

Better capitalized insurance companies have generated more confidence in the insurance sector. Prior to the recapitalization of the sector, public confidence in the industry was at a low, with most people doubting the ability and commitment of the insurers to pay claim.

Growth Driving Premium

In the last few years, we have witnessed sustained macroeconomic growth across the continent driven largely by high oil and commodity prices and more stable governments.

2006 was the third consecutive year in which Africa recorded an average GDP growth in excess of 5.0%. With stable governance has come periods of relative discipline and consistency in fiscal and monetary policy, leading to a renewed global interest in Africa as an investment destination, and spurring a new class of domestic retail and institutional investors across the continent.

Strong macro_economic performance is creating a greater pool of underlying insurable assets on the continent. In South Africa, which accounted for more than 75 per cent of premium income on the continent, growth in premiums exceeded 15 per cent in 2006.

Faster growing economies on the continent are demonstrating faster growth in premium income, Angola, Kenya and Nigeria for example (Africa's fastest growing insurance markets) have each demonstrated GDP growth in excess of 6 per cent per centper annum over the last two years, with Angola's economy expanding by about 15 per cent in 2006, Kenya by about 6 per cent and Nigeria by over 6 per cent.

There is thus, a strong positive correlation between expansion in national output (particularly real sector output) and insurance premiums. It is anticipated that some of the fastest growth in insurable assets, and premium income on the continent will come from these and other emerging high growth markets.

The bigger opportunity for the Nigerian insurance market is the forecast that the Nigerian economy will grow over the next 10 yrs, the potential growth in the insurance sector is even higher. On the assumption that the Nigerian economy grows at a rate of 13 per cent pa over the next lOyrs, the insurance sector should grow a nominal rate of 35 per centpa. The Nigerian insurance market could become bigger if the key initiatives that both the government and NAICOM have put in place are followed to the letter.

WHY THE OPTIMISM?

Because there are clear opportunities:

* We have a large population of over 140million

* There are seven areas of compulsory insurance

Motor Insurance -3rd Party Insurance, Employers Safety and Welfare Insurance (WC) Compulsory Insurances of all Marine Cargo Imports, Building - in-course of Erection Public building used for Commercial purpose, Compulsory Life Insurance for employees

Professional negligence of Insurance Brokers, Health care Providers.

* The Housing sector development

* The SMEEIS projects

* The fast growing Credit market and

* The Local Content policy on oil and gas.

All provide tremendous potentials to the growth of the Nigerian Insurance Market,

Though the above analysis gives premium potential of about N5trillion by 2012, there will also be available capacity in Insurance to employ at least 250,000 unemployed graduates in the same period.

These conclusions have prompted the believe that the potential of the Nigerian insurance market is enormous given the internationally recognized parameters for efficient development of an Insurance Market. Findings are that efficient development of Insurance markets in other parts of the world is predicated on some of these indices.

The threats to the Nigerian insurance market

The Intermediaries/Insurance Brokers Despite all the opportunities open to the Nigerian Insurance market there are avalanche of threats militating against the growth of the industry. While majority of these threats are self inflicted due to the quick_win approach of some of the players, other threat to the growth of insurance market in Nigeria includes the structure of same game, same rule and same players approach to the practice of her players in the industry.

The Nigerian insurance industry is characterized by numerous players, most of whom are of similar size and competitive positioning. The average Nigerian insurance underwriter reported a Gross Premiums in the region of Nl.Sbn (US$12.8m) in 2006, with only a handful (about six companies) reporting numbers significantly larger than N1.7bn. Of equal relevance, much of these premiums are largely sourced from covering risks in the same class of insurance, with motor insurance remaining the dominant source of premium income in 2006.

The industry is thus highly competitive, particularly considering the slow pace of growth in overall market size; and the ease of entry of new policy.

The competitive structure of the Nigerian insurance industry is further complicated by the presence of a large number of insurance brokers (510 as at 2006), who are major intermediaries in the flow of business between corporate customers and insurance underwriters.

Over 70% of industry premiums are controlled by this large group of brokers. Corporate accounts in particular, can often only be secured with the involvement of a broker, as companies are comfortable with the competitive pricing and claims management support that brokers typically provide.

Brokers have thus leveraged on this position of strength to dominate the industry. Broker dominance ensures that premium payments by corporate customers (to the underwriter, through the broker) are hardly ever received on time, resulting in a crippling industry premiums receivable ratio. As at year end 2006, over 62.9% of Gross Premiums were still with the brokers. This has been the pattern since we failed to take advantage of a section of the 2003 Insurance Act on No Premium No Cover.

Thus, it is quite common practice in the industry for insurance companies to carry risks on their books for which premiums have yet to be received, and may never be received from the brokers .

The resultant effect of this imbalance of power is that net operating cash flows for insurance companies in Nigeria are quite low (2006 average: 0.5% _ 19.7% of NPI), and the typical company carries a significant accounts receivable book on its balance sheet.

It is not uncommon for underwritten risks to materialize, for which premiums have yet to be received. Broker dominance is in my view, a key hindrance to industry profitability, particularly as regulatory pressure does not appear to be an effective deterrent.

More recently however, NAICOM has put in place new quarterly reporting guidelines that are aimed at promptly identifying defaulting brokers and hopefully, applying appropriate sanctions.

Unfortunately, the underwriting companies don't have the courage to support the efforts of NAICOM. They shield the unscrupulous brokers from NAICOM's search light; as a result, the brokers are clicking their glasses celebrating the weakness of the underwriting companies, and undermining the growth of the industry.

Though Insurance companies have also begin to think about alternative distribution channels _ retail and bancassurance, aimed at moving away from broker dominated accounts, the quick _ win attitude of most of the insurance companies has blinded them to this under_penetrated market.

While the oil and gas market is much too large to be considered an immediate opportunity, given the level of capital and technical know_ how of the insurance industry, the industry has not developed the manpower to handle the huge premium inflows associated with it, this may therefore continue to lead to huge premium placed in the international market to the disadvantage of our local economy. This is mainly due to absence of higher level training and technical expertise in oil and gas insurance to meet the market sophistication and advanced capacity.

Reasonable Pricing of Insurance Products

So much price war in the industry. When an industry is not creative, price war will become her only survival strategy.

One of the conditions for insurability is that the premium must be commensurate with the risk. The Nigerian insurance is the only market in the whole wide world that insurance premium reduces with every claims paid to an insured.

The question one is tempted to ask is, was the premium right in the first instance?

It is not certain that the industry have a scientific and realistic rating guide for her risks.

Underwriters have jettisoned the idea of pre_risk survey, some quote on risk they have not seen nor have idea about. The entire insurance market can be blamed for being involved in blind underwriting all because they want to grow their premium income without giving consideration to the risk and the exposure of investors' funds.

There is no geographical classification in our rating of risk, same rates are charged smokers and non_smokers, experienced and non experienced drivers etc in Nigeria, which goes to show we are more concern with premium income and not risk based income. How far can we go with this?

High Expense Ratio

The high expense ratio in the Insurance industry can not be justified and therefore should not be acceptable. It only shows how uncreative the industry is. The average expense ratio of the industry is about 52% of her premium income (these is excluding claims and reinsurance) it is not proper and can noj be justified in any environment that follows the tenet of proper Corporate governance; hence the profitability of the industry is very small wher compared to other sectors in the financial industries.

Collecting and Sharing Insurance Data

The level of fraudulent claims and avoidable losses in the insurance market i high because the Nigerian Insurance Market lacks reliable data to analyse and price risk adequately because of insufficient data to calculate losses anc expenses adequately. The Nigerian Insurers Association which would have been the data bank of the industry is not well equipped for the task, because the underwriting companies are always very reluctant to supply reliabh information to create a data sharing mechanism to assist in the analyzing risks.

Building Actuarial Resources

The industry can not boast of any accurate mortality table with which to evaluate the rating of its life business.

I may be wrong but the mortality table still in use today was developed over 40yrs ago! Can we say this is realistic in today's world when mortality risks are increasing in Africa?

We have not been able to produce a secured, efficient, effective and flexible life product today because of the lack of the technical skills to evaluate and adapt these products to local conditions for the reason of lack of efficient actuarial services. I understand that until very recently there were less than 7 qualified actuaries in Nigeria, I am not even sure if the numbers have increased as at today. There is therefore need to improve the actuarial capacity at local level through training.

Supporting Professional Insurance Education

If the Governor of the Central Bank of Nigeria (CBN) could come out to admit that there are not enough professionals/skilled staff in the banking sector to move the banking industry to the next level, your guess of the state of the required professionals/skilled staff for the Nigerian Insurance Industry, is as good as mine. The scope and horizon of the managers in the industry should expand and not be limited to insurance as modern day managers should be able to play in any field of the economy. ;

There is therefore urgent need for the Nigerian Insurance Industry to begin the building of reliable cadre of Insurance professionals for the market moving forward. The need for adequate training, in the development of our human resources can not be overlabored if we really want to get value for all the investment that is been put in the Nigerian Insurance market.There is need for the development of knowledge and skills in staff in every underwriting company and also the establishing/strengthening of the Insurance educational bodies.

Wiggle is the MD of Linkage Assurance Plc, being a paper delivered at BGL Insurance roundtable