Exploring options for growth: Plans for more stringent regulation are expected to improve sector penetration

With a total premium value of $1.6bn in 2011, Nigeria’s insurance market is the biggest in West Africa, but in a wider context the market remains relatively undeveloped and coverage in the retail market is mostly limited to motor insurance. Reforms are ongoing at the federal level, with both successes and failures seen in recent years. A giant leap in market size is expected in the current decade thanks to continued policy efforts and steady growth in disposable incomes for middle-class Nigerians. Fola Daniel, commissioner at the National Insurance Commission (NAICOM), said in early 2013 that he expects policy income to triple to N1trn ($6.3bn) by 2017. That milestone, however, was cited in 2009 as to be reached by 2012. Issues including prohibitive costs, inconsistent law enforcement, fake insurers and policies damaging the sector’s reputation, and a fragmented market of small and undercapitalised providers have presented impediments to the sector’s growth.

STRATEGIES: Recent years have made clear the challenge for NAICOM in helping the sector overcome obstacles. Six types of insurance are mandatory in Nigeria, but implementation has been uneven. Aggregated industry assets amount to less than 2% of GDP, according to an IMF sector review. With a penetration rate below 1%, according to NAICOM figures, and just 800,000 adult policyholders as of May 2013, the sector remains in a development phase and needs to build credibility with potential customers. “The Nigerian insurance industry is still engaged in tackling the lingering challenge of unlocking the huge market potential and the expansion of the retail market for the economy,” wrote Daniel in NAICOM’s 2011 annual report, the most recent available. For its part, the commission is “re-strategising on how to cope with the challenges inhibiting the enforcement of compulsory products and the lingering problem of fake insurance products in the market”.

Despite the magnitude of the challenge, the regulator has had some successes it can take credit for, and indications show that Nigeria will continue to tweak its policy mix and enforcement strategies until they become effective. The recent implementation of a regulation forbidding insurers to pay out on claims on policies for which payment has not been received, dubbed the “no premium, no cover” policy, has been widely praised as an effective strategy for reducing fake insurance. NAICOM is also working within limitations, which in some cases underscores the difficulty of enforcement.

IMPROVED RESULTS: Income from premiums underwritten rose to N300bn ($1.89bn) in 2012, up 25% from N240bn ($1.51bn) in 2011. This matches the average growth rate over the past five years, according to a report by local ratings agency Augusto & Co, which puts the rise in gross premium income at 25% per annum on average since 2008. Meanwhile, growth in the life insurance market slightly outpaced that of general insurance: the average annual rate of expansion in the 2000s was 24.3% for life and 22.1% for general coverage, according to figures from the Nigerian Insurers’ Association (NIA), an industry trade group.

The rate of growth within that period has varied, however. The insurance industry saw a 63% surge in gross premium income in 2008, whereas in 2010 it advanced by 6%. Growth was in the single digits in 2009, as well. The 2009/10 period saw Nigeria emerge from a banking crisis that sank the value of securities and dragged down the performance of insurers, particularly the returns from investment accounts. This was in part due to contagion effects from the 2008 global financial crisis spawned in the US as well as to factors in the domestic banking sector. As lenders emerged from that period with fresh capital and streamlined balance sheets, the hope was that insurers would benefit as well.

BANKING ON BANKS: Using banks as distribution channels through bancassurance has not yet served as a catalyst for growth, as it has in many other developing markets, but the expectation is for a trend towards expansion of overall financial inclusion now that the banking sector has largely moved on from its crisis. “Growth in retail insurance will be driven on the back of retail banking,” said Wole Oshin, managing director at Custodian & Allied Insurance, a wholly owned Nigerian insurer. “As long as lending does not reach the average person on the street, there will be a slim chance of insurance penetration. Until banks themselves start focusing on retail banking, they will not look to retail insurance in a big way,” he said. Furthermore, a more robust insurance sector can directly benefit the banks as well. “Life insurance can mitigate the lending risk in retail banking. Banks will be more willing to lend to individuals when they know that individual’s life is covered with an insurance policy,” Keith Alford, managing director and CEO of Old Mutual Nigeria, told OBG.

The commercial segment of the insurance market accounts for about 90% of current premiums, according to the IMF. Here, Nigerian insurers have been focusing on capturing more value from insuring the oil and gas industry, and the country has passed laws in support of that goal, mandating the exhaustion of local capacity before seeking coverage from a foreign provider. While the growth trajectory has been uneven, local insurers began recording premium income from the oil and gas sector in 2006, according to the NIA. That year, local firms wrote N14.9bn ($93.9m) in policies. The total reached N26.1bn ($164.4m) in 2010, sliding from N31.58bn ($199m) the previous year.

REGULATION: The Insurance Act of 2003 – a comprehensive law addressing all sector activities – and the National Insurance Commission Decree of 1997, which made NAICOM the regulator, both govern the legal framework for insurance in Nigeria. Insurers must be formed as limited liability companies, according to the Companies and Allied Matters Act of 1990. Another important law is the 2004 Pension Reform Act, which mandates that all enterprises with more than five employees must provide individual retirement savings accounts with a licensed pension fund administrator.

As the regulator, NAICOM is funded by levies on the industry and government grants, 50% of which are earmarked for operations. Another 30% is to be spent on boosting capacity, and the balance used for development and compensation. Finding local talent is an issue for both the private sector and government. NAICOM has been hiring consultants to conduct routine on-site inspections, according to the IMF. In the private sector, by end 2012 there were six licensed actuaries, but only five were practising. Of the remaining five, four were working with three firms, and the final one was a consultant available to the industry as a whole.

In its role as a regulator, NAICOM oversees 58 insurance firms, two reinsurers, 567 brokers, 1737 insurance agents and 54 loss adjusters. Of the total 58 insurers, 10 underwriters have captured roughly 90% of the market for life insurance. Another group of 10 controls around 60% of the market for general insurance.

CONSOLIDATION: The sector has seen significant consolidation in recent years. The chief catalyst has been NAICOM’s boost to minimum capital requirements for insurers, which began in 2005. Minimum requirements are now N2bn ($12.6m) for life insurers, N3bn ($18.9m) for non-life firms and N10bn ($63m) for reinsurers. Previous levels, established in 2003, were N150m ($945,000), N300m ($1.89m) and N350m ($2.2m), respectively. The move set off a period of capital raising as well as consolidation that is still ongoing. In 2011 NAICOM approved 10 mergers and five acquisitions. Additional causes of consolidation have included a directive from the Central Bank of Nigeria aimed at banks to divest of insurers they own as well as the plunge in stock prices on the Nigerian Stock Exchange since 2007, which has hurt insurers’ invested funds.

Foreign investment has played a big role in mergers and acquisitions. A consortium called Assur Africa, consisting of three European state-owned development finance institutions and two private equity firms, took a 67.7% stake in GT Assurance, which was formerly owned by Guaranty Trust Bank, renaming it Mansard Insurance. The consortium includes the Netherlands Development Finance Company, the German Investment Corporation and the French Development Finance Company, alongside the UK-based Development Partners International and Tunisia’s Africinvest.

From South Africa, Sanlam Emerging Markets of the Sanlam financial services conglomerate, purchased 35% of FBN Life Assurance, an arm of First Bank of Nigeria, the country’s largest lender. As of May 2013, Sanlam was reportedly in talks to buy Fin Insurance. Old Mutual now owns 70% of Oceanic Life Insurance, which operates as Old Mutual Nigeria Life Assurance. Cressida Nigeria has a 29% stake, with the other 1% diffused and individually owned. NSIA Banking and Insurance Group of Côte d’Ivoire purchased a 96.15% share of ADIC Insurance from Diamond Bank. However, mergers or acquisitions in the past several years have featured local players as well, with a recent example being the pairing of Custodian & Allied Insurance and Crusader Insurance to become Custodian & Allied, a move approved by the firms’ shareholders in January 2013.

BOOSTING CREDIBILITY: A major benefit to further consolidation would be to remove cash-poor companies from offering insurance services and then failing to pay claims. In the past, struggling insurers have managed to stay afloat despite being technically insolvent and unable to pay claims in some cases. “It is know that when there is a lack of transparency in financial reporting anyone can hide his financial health,” Corneille Karekezi, group managing director for Africa Re, a Lagos-based reinsurance company, told OBG. “Common practice is to underestimate reserves and present a misleading picture of the company. Further, a poor legal framework may allow insurance firms to be technically bankrupt and unable to pay claims while still paying expenses.” In a relatively small insurance sector needing to gain credibility and popularity, this problem has been identified as a threat to growth by the regulator. Consolidation has driven some smaller firms out of the market, although several still remain. While another boost to capital requirements is a possibility, other options exist, said Karekezi. These include directing companies to open more branches, imposing more stringent requirements for staff qualifications and mandating that bankrupt companies exit the market or find a buyer. Still, it is difficult to arrive at an accurate sense of the financial health of some of the smaller players as there are many, Karekezi explained.

COMMON POLICIES: Of the total of N232.7bn ($1.47bn) in premium income in 2011, N175.63bn ($1.1bn), or 75.5%, was accounted for by general insurance policies. Life coverage reached N57.07bn ($359.5m). General insurance’s share of premium income is down from approximately 81% of the total a decade ago; in 2001 total premium income was N28.8bn ($181.4m), of which general insurance premium income accounted for N23.19bn ($146.1m) and life premiums for N5.6bn ($35.3m), according to NAICOM figures.

Unlike in many developing countries, motor policies account for less than 50% of the general market. NAICOM data indicates a 36% share as of its 2011 annual report. Motor is the segment of the market that is perhaps most affected by the problem of fake insurance. A common scam gives drivers the opportunity to buy auto coverage at a fraction of the price – as little as 10% – but such a policy is being offered either from an unlicensed or fictitious company, or purportedly offered by a licensed company but with a fabricated policy number. Buyers typically discover they have been victimised when they need to make a claim. The problem is difficult to measure because of its illicit nature, but recent estimates indicate that as much as 90% of the 12.5m vehicles on the roads in Nigeria are piloted by drivers who have purchased fake insurance.

SOLUTIONS: The NIA has collaborated with the government on a solution to the problem based on data sharing. The Nigerian Insurance Industry Database aims to combat the fake insurance programme by providing a confirmation mechanism. The database of existing policies allows for remote verification of individual policies by checking the database to ensure it is listed among active and legitimate ones. Once all motor policies are listed – the database was a work in progress as of mid-2013 – it may be expanded to other forms of insurance, according to the NIA’s website.

Motor insurance is one of six types of insurance mandated by law in Nigeria. The other four are liability insurance for construction companies, occupier’s liability insurance, liability insurance for health care professionals and statutory group life insurance for firm workforces. Enforcement, however, has been lacking. In recent years, there has been little in the way of effective follow-up to ensure compliance. Doing so would in part require cooperation from other government agencies. NAICOM is pursuing a region-based strategy; in February 2011 it began enforcement campaigns in the South-East Zone, centred on Enugu, and a month later in Port Harcourt and the South-South Zone in which that city is located. Other efforts to increase compliance were carried out in Ibadan and Ilorin, including collaborating with law enforcement, fire departments and other agencies, as well as site visits for physical verifications. “Enforcement of compulsory insurance requires more punitive measures and sanctions,” said Gbolahan Olutayo, managing director of Goldlink Insurance. “Enforcement of motor insurance is better than the other classes.” The 2013 IMF sector evaluation listed enforcement of the compulsory classes among the most important reform for the sector. Beyond motor insurance, key general lines of business include marine, fire, and oil and gas coverage, with market shares of 13%, 12% and 11%, respectively.

Despite Nigeria’s exposure to political violence and kidnapping, growth in strike, riot and civil commotion (SRCC) warranty coverage and kidnap-and-ransom coverage has been underwhelming. Expansion may come if domestic terrorism continues to affect the country; however, these incidents of violence are currently concentrated in the northern region, while most insurable assets and people work elsewhere. “SRCC insurance has not yet taken off in Nigeria as it has in other regions like North Africa or some countries of East Africa,” said Africa Re’s Karekezi. “This shows the difference in the political risk profile and/or perception prevalent in southern Nigeria where most businesses are located. It also shows the attitude to risk management of most Africans, who do not actively manage risks, as shown by the relatively low insurance penetration rate on the continent. People still, to a large extent, leave risk management to God and fortune.”

POLICY CHANGES: NAICOM’s recent efforts to develop the sector include the raised minimum capital requirements, upgrades to regulation, such as voluntary codes on corporate governance, operational guidelines, risk management, anti-money laundering measures and adopting the accounting standards of the International Accounting Standards Board. Reporting in line with the body’s International Financial Reporting Standards began with the 2012 annual reports, which firms began releasing in the first half of 2013. Regulators issued a circular to insurance companies in June 2013, pointing out some common mistakes made in the reports already received. Another change in the implementation stage is a move to risk-based supervision, which took effect in July 2012 but as of June 2013 was widely perceived as too new of a development to be evaluated.

Despite the changes, issues such as those highlighted by Africa Re’s Karekezi underscore the fact that financial transparency remains a challenge for the regulator to improve consumer protection and its own functions. “Poor accounting and auditing practices result in supervisors spending too much time verifying the accuracy of financial data,” according to the IMF’s 2012 assessment. “Supervisors spend more time verifying data than analysing them. This not only hinders effective supervision but also timely disclosure of information to policyholders and the market in general.” To better protect consumers, the IMF recommended increased disclosure on behalf of licensed companies regarding their capacity to act in their proposed role as well as potential conflicts of interest.

FURTHER STEPS: Another important recommended reform is a clarification of the distinction between NAICOM’s regulations and its guidelines. Formally, NAICOM’s regulations are subject to ministerial approval, while its guidelines are not. NAICOM asserts that guidelines have the force of law behind them; however, that position is legally unclear and no precedents have been set via the courts. Previous requirements issued as guidelines include the minimum capital requirement, investment limits and other technical provisions.

Much of NAICOM’s reform agenda falls under the umbrella of its overall strategy, the Market Development and Restructuring Initiative (MDRI). The plan was introduced in 2009, with a stated goal at the time of boosting gross premium income to N1trn ($6.3bn) by 2012, now pushed to 2017. The MDRI also includes encouraging alternatives to conventional insurance, including takaful (Islamic insurance) and microinsurance.

ISLAMIC INSURANCE: A framework for takaful is expected to be in place by end-2013. Initial guidelines issued included sharia-compliant operations to be ring-fenced to avoid the commingling of assets with conventional insurance operations. Further, the regulator set a N100m ($630,000) minimum capital requirement and authorised three operating models: mudaraba, wakala and a hybrid of the two. Mudaraba is a commonly used financial contract based on sharia law, in which the takaful operator acts as a manager of a policyholder’s money, which is pooled with that of other holders and managed in a profit-sharing contract in which losses are also borne by the participants. The wakala structure is similar to an agency agreement in which pooled assets are overseen by a bank in exchange for management fees and performance fees. The hybrid model would use mudaraba for investing and wakala for underwriting. The initial takaful guidelines require each provider to establish a panel of experts to ensure sharia-compliance, two of which must be sharia scholars appointed to four-year terms. NAICOM will also establish its own sharia board to oversee the industry.

The rise of microinsurance is expected to be a catalyst for new licensees in the insurance industry, as these smaller products are considered to have great potential. According to a 2011 study published by the Munich Re Foundation and Making Finance Work For Africa, a research effort by the German Society for International Cooperation, Nigeria was among nine countries with more than 1m lives and properties insured; the other eight were Ethiopia, Ghana, Kenya, Namibia, South Africa, Tanzania, Uganda and Zimbabwe. What makes Nigeria unique on the list is the amount of microinsurance sold. At 0.68% – taking into account the proportion of the population covered – the microinsurance penetration rate remains in the lowest tier, at below 1%. All of the other eight on the “1m-or-more” list have penetration rates above 1%. A further sign of the potential for growth in this segment is the fact that mobile phones are not yet in use as a distribution channel for microinsurance products. This method has provided faster growth in recent years than traditional methods in other countries, suggesting that its introduction in the Nigerian market would facilitate growth.

REINSURANCE & DISTRIBUTION: Africa Re is the preferred reinsurer in Nigeria and maintains the largest market share. It was set up in 1976 by the Organisation of African Unity, precursor to the African Union, in a bid to retain more risk on the continent. The Lagos-based firm now has 41 member states in Africa holding 38.75% of its capital. Also among the largest shareholders is the African Development Bank, with an 8% stake. In its member states there is a mandatory reinsurance concession of 5% of the value of a contract. The reinsurer also enjoys tax breaks and minimal supervision, but a movement to end that regime or strip the firm of some of its preferential treatment is being supported by the IMF and some private sector participants. At Africa Re, however, officials insist that most of its customers use the company for more than 5% of their cession, which implies that they are choosing the company rather than using it only to the extent that the law demands. The other domestic reinsurer is Continental Re.

In 2012 the Nigerian reinsurance market was worth about $2bn, with Africa Re accounting for $105m in revenue and Continental Re an estimated $80m. Continental Re is also a pan-African reinsurer, with operations in 45 countries on the continent. It has regional offices in Nigeria, Côte d’Ivoire, Cameroon and Kenya, and plans to open in Botswana as well.

As bancassurance does not play a big part in the market, most major clients rely on brokerages to purchase policies. Most insurers complain of regular problems with their receivables, and cash-flow issues are commonly cited as reasons for delays in claims payment. NAICOM recently introduced a policy called “no premium, no cover”. It stipulates that insurers cannot pay claims for policies they have not received premium payments for. Custodian & Allied’s Oshin told OBG this has been a success, but that it may come at a cost in the short term. “Cash flow at insurance companies has improved tremendously,” he said. “However, the industry expects to see a dip in the market as buyers who previously relied on credit either cut or delay cover.”

OUTLOOK: Although top-line growth has not fulfilled sector leaders’ expectations for the overall value of the market, insurers in Nigeria and the regulator are both continuing to explore avenues for growth while removing obstacles. History shows that the projection of a tripling in market value within four years is a tall task for the industry. However, the overall forecast is for growth nonetheless, thanks to the maturing operating environment and Nigeria’s overall economic progress.