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Monday, March 27, 2023

Insurers Paid out More Money in Claims than Premium Received

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Insurers in Africa’s largest economy have paid out more money in claims than premiums that they received as growth continues to be hamstrung by a weak macroeconomic environment.

The average industry combined ratio for the most liquid and capitalised companies on the bourse deteriorated to N124.14 percent in September 2021 from 116.96 percent as at September 2020, according to MoneyCentral calculations.

The combined ratio-which is the summation of claims expenses, underwriting expenses and management expenses- is typically expressed as a percentage. A ratio below 100 percent indicates that the company is making an underwriting profit, while a ratio above 100 percent means that it is paying out more money in claims that it is receiving from premiums.

Even if the combined ratio is above 100 percent, a company can potentially still be profitable because the ratio does not include investment income.

It should be noted that total expenses ratio (a subset of the combined ratio) for the majority of insurers have risen on the back of money spent on the acquisition of new technologies-with a view to strengthening digital strategy- and recruitment of talented staff amid an intense competitive environment.

They also expend a lot on diesel oil to power generator plants at the head office and branch networks that sprawl across the country.

Analysts say firms incur expenses are high due to efforts to position themselves for the future and expansion purposes amid an inflationary environment.

To ensure that firms are able to meet obligations to policyholders, the National Insurance Commission (NAICOM), had put a cap on management expenses.

Little wonder insurers have recorded a combined negative real underwriting results of N6.70 billion as at September 2021, according to MoneyCentral calculations.

The real underwriting result is 1 minus combined ratio multiplied by net premium income, which is much more preferable to the underwriting profit that excludes management expenses.

Inflationary pressures, devaluation of the currency, and losses relating to the ENDSARS protests have ballooned claims expenses, as the reopening of the economy has accelerated obligations to policyholders.

While inflation reduced to 15.99 percent in October from 16.63 percent in September 2021, it is below the central bank target range of 6-9 percent.

In May, the Central Bank of Nigeria devalued the naira to N410.25 per dollar. The CBN had kept the official exchange rate at N379/$1 since August 2020, when the naira was devalued for the second time last year from 360 per dollar. It was first devalued to 360/$1 in March 2020 from 306/$1.

The largest insurers saw collective claims grow by 30.30 percent to N94.14 billion in September 2021 from N72.26 billion the previous year, according to data gathered by MoneyCentral.

The industry average claims ratio moved to 43.24 percent to September 2021 from 38.70 percent as at September 2020.

Combined total operating expenses (management plus underwriting expenses) increased by 14.71 percent to N93.18 billion as at September 2021. The average total expense ratio rose to 80.12 percent in the period under review from 78.29 percent the previous year.

Rising expenses leave insurers with very slim profit margins as investors’ apathy towards listed insurers as quite evident in their stock price.

Because costs erode margins, shareholders get abysmal dividends, and market participants crave for firms that reward them generously from distributable profit.

It is expected that new minimum requirement by the regulator will spur mergers and acquisition needed to shrink the number of sector players and make the industry more competitive and attractive to foreign investors

Of course, there are structural issues and bottlenecks that the government has to remove through transformation policies.

Analysts have urged policy makers to relax capital controls measures put in place to stabilise the economy and adopt a unified foreign exchange policy that will help reduce inflation, underpin the currency, and allure foreign investors to Naira assets.

Coronation Insurance’s combined ratio increased to 160.17 percent in the period under review from 155.56 percent the previous year. Linkage Assurance’ combined ratio rose to 179.66 percent in September 2021 from 151.89 percent the previous year.

AIICO Insurance’s combined ratio increased to 106.18 percent in September 2021 from 92.10 percent the previous year.

AXA Mansard’s combined ratio increased to 100.61 percent in September 2021 from 95.56 percent as at September 2020.

Royal Exchange Insurance’s combined ratio moved to 143.33 percent in the period under review from 106.55 percent the previous year.

While Cornerstone Insurance’s combined ratio reduced to 114.28 percent from 173.44 percent, it is still above the 100 percent threshold.

Lasaco Insurance’s combined ratio stood at 117.52 percent, albeit lower than 2020’s 123.9 percent.

It is worthy to note that the small players with weak capital bases have a higher combined ratio because their operating expenses grow much faster than the uptick in premium, which calls for another round of consolidation.

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