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Friday, September 30, 2022

Insurers’ Capacity to Underwrite New Policies Decreasing

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Insurers’ premium incomes are increasing without such corresponding increases in shareholders’ fund or policyholder surplus, which means the capacity to underwrite new policies are receding.

The average premium to surplus ratio of the most capitalized and insurers on the NGX exchange stood at 34.08 percent in June 2021, and that compares to 27.38 percent the previous year, according to MoneyCentral calculations.

Interestingly, further analysis of their books shows they collectively grew net premium income by 26.85 percent in June 2021, and that compares with an abysmal cumulative growth in policyholders fund by 2.14 percent.

Premium to surplus ratio is net premiums written divided by policyholder surplus. Policyholder surplus (shareholders’ fund) is the difference between an insurance company’s assets and its liabilities.

The premium to surplus ratio is used to measure the capacity of an insurance company to underwrite new policies. A low ratio indicates a company is not charging enough premium for its policies.

The greater the policyholder surplus, the greater assets are compared to liabilities. In insurance parlance, liabilities are the benefits that the insurer owes its policyholders.

The insurer can increase the gap between assets and liabilities by effectively managing the risks associated with underwriting new policies, by reducing losses from claims, and by investing its premiums to achieve a return while maintaining liquidity.

Notably, insurers in Africa’s largest economy are paying out more in claims than they are receiving in premium income, and they were exposed to losses following the ENDSAR protest that led to the destruction of properties.

It is practically difficult for insurers to generate higher returns from investment securities as yields are not as high as they were two years ago. The central bank’s decisions to bar non-corporate individuals have been blamed for the low yield environment.

It is saddening that the coronavirus pandemic compounded the woes of operators in the industry who suffers claims that relates to event cancellation, but the hit to Life insurers were minimal because mortality rates were low in Nigeria.

Custodian Investment Plc’s net premium income increased by 34.15 percent, however, shareholders’ funds increased by a mere 3.15 percent.Premium to surplus ratio rose to 34.59 percent in June 2021 from 26.71 percent the previous year.

AIICO Insurance Plc net premium income was up 13.10 percent in the period under review, which compares with 4.02 percent increases for shareholders’ funds. Premium to surplus ratio moved to 80.91 percent in June 2021 from 74.40 percent the previous year.

Coronation Insurance Plc’s net premium income spiked by 26.36 percent while policyholders’ ratio fell 4.66 percent as the insurer’s premium to policyholder ratio increased to 19.37 percent in the period under review from 14.62 percent the previous year.

Mutual Benefit Assurance saw net premium income surged by 52.09 percent, but policyholder surplus declined by 6.07 percent; the insurers’ premium to policyholder ratio moved to 54.37 percent from 33.70 percent the previous year.

Cornerstone Insurance’s net premium income surged by 101.67 percent while shareholders’ fund fell by 28.05 percent and premium to policyholders’ ratio increased to 28.05 percent in the period under review from 13.83 percent the previous year.

The regulator is taking drastic steps to ensure that companies are well capitalized so that they have the financial strength to undertake more policies and compete with peer rivals across sub-Saharan Africa.

It had hiked the minimum capital requirement for the different classes of businesses, and analysts see the policy spur mergers and acquisition as was seen during the banking sector recapitalization of 2005.

Consolidated Hallmark Insurance Plc net premium income was up 13.45 percent while policyholder surplus was up a mere 5.25 percent as premium to policyholder ratio increased to 37.93 percent in June 2021 from 35.19 percent in June 2020.

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