The average expense ratio for insurers in Africa’s largest economy hit 83.33 percent as at December 2019, albeit lower than 2018’s 92.21 percent, according to Money Central calculations.
This means that on average insurers have expended N83.33 to generate every N100 in premium income.
The expense ratio measures administrative, underwriting and management expenses as a percentage of Net Premium Income.
Analysts at Coronation Capital Merchant Bank in a recent report said players in the industry need to keep this ratio below 40 percent if they are to run sustainable businesses.
With investment returns expected to wane due to precipitous drop in yields on treasury bills, a bleak future awaits an industry that contributes less than 1 percent to the economy as insurers expenses continue to mount.
Many chief executives of top firms have complained that the cost of running office operations across the country are spiking, and that huge energy bills coupled with capital outlay in acquiring new technology makes it difficult for them to record strong profit margin.
According to the World Bank (WB) Nigeria ranks 131 on the World Bank (WB) ease of doing business report.
Most companies are maligned by cost pressures, and consequently, their underwriting capacities deteriorated, as they recorded losses.
Linkage Assurance’s expense ratio increased to 107 percent as at December 2019 from 95.40 percent the previous year.
Niger Insurance’s expense ratio increased to 198.56 percent in the period under review as against 67.76 percent as at December 2018.
Niger Insurance recorded a loss after tax of N1.65 billion as at December 2019, while negative retained earnings stood at N2.78 billion, intensifying concerns about its ability to pay dividend to shareholders.
Guinea Insurance expense ratio increased to 156.03 percent in the period under review as against 150 percent the previous year.
The insurer posted a loss after tax of N795.04 million as at December 2019.
However, Leadway Assurance Limited, the largest insurer by premium incomes, profit, shareholders’ fund, and total asset, bucked the trend as expense ratio stood at 24 percent as at December 2019.
“For us at Leadway, we too also feel the pressure. But we have benefitted from a diversified business base that permits us to absorb better the twin effects of pricing & cost pressures,” said Tunde Alao-Olaifa, Strategy and Special Projects Director, Leadway Assurance.
Olaifa argued that rising cost among insurers is mostly driven by the macroeconomic inflationary pressures at about 12 percent compared with growth of premium at 8 percent within the same period.
“Rate cutting prevalent in the industry directly results in high claims ratio as the risks covered were not adequately priced,” said Olaifa.
Analysts say only a scheme of merger and acquisition as witnessed during the banking sector consolidation of 2005 can reposition the insurance industry for better performance so that they can compete with peers across the world.
There are too many weak firms that do not have the liquidity and balance sheet to take on more risk and magnify revenue.
Disappointingly, some insurance firms have not published annual reports in the past five years, and their shares trade below N0.50.
Nigerian insurers expenses are surging due to a lack of the level of business to absorb fixed and other costs sufficiently at their offices as they are reeling from inefficiencies of energy supply and transportation.
The implication of this is that profitability will be eroded, and the unprecedented macroeconomic uncertainties brought on by COVID-19 will undermine earnings.
Of course, analysts do not expect them to fare better than their peers across the country, as Nigerians spend an average of $14 billion on generator and fuel yearly in order to power their business, according data from the Central Bank of Nigeria (CBN).