In general sense, Nigerian insurers are not making money for their shareholders as spiraling operating and claims expenses combined with weak revenue growth continues to erode profitability.
The largest insurers in Africa’s largest economy recorded a combined negative or deficit real underwriting performance of (N12.44 billion) as at December 2019, data compiled by MoneyCentral shows, somewhat lower than the (N46.31 billion) loss posted the previous year.
The real underwriting performance, which is different from underwriting profit, is derived by deduction one (100%) from the combined ratio (1-CR), and actuarial scientists prefer to use the metric to evaluate the efficiency and portability of an entity.
The average combined ratio for the industry stood at 128.83 percent as at December 2019, but lower than the 141.14 percent the previous year.
The combined ratio is typically expressed as a percentage and it is computed as claims expenses/total expenses divided by net premium income.
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 than it is receiving from premiums.
However, some companies bucked the trend as they are operationally efficient as their combined ratios are less than one.
For instance, Leadway Assurance posted positive or favorable real underwriting performance of N15.15 billion; AIICO Insurance, N322.14 million; AXA Mansard, N3.91 billion; NEM Insurance, N1.56 billion, and Regency Assurance, N322.05 million.
Nigerian Insurers operate in a tough and unpredictable macroeconomic environment that makes it difficult to magnify earnings; and with over 50 percent of populations of 200 million living on less than $1.98 a day, taking a policy is not on the scale of preference of most people in the country.
Analysts are of the view that insurers lack the level of business to absorb fixed costs, thanks to inefficient energy supply and transportation cost in a country where power sector reforms have failed to improve power generation.
Several experts have warned insurers to cut down cost, especially the top management expenses if they want to stay afloat.
Interestingly, insurers spent 83.33 percent on expenses (underwriting and management expenses) for every N1 generated in premium income.
There are mounting obligations from policy holders as combined claim expenses for the companies under MoneyCentral coverage increased by 14.15 percent to N144.51 billion as at December 2019.
Similarly, loss ratio could spike by the end of 2020, when the impact of the unprecedented economic uncertainties from the coronavirus begin to show up in their books.
The National Insurance Commission (NAICOM) is waking up from its slumber and has come to the realization that the companies have to shore up their capital in order to take on more risk and magnify earnings.
The banking sector reforms of 2005 that saw banks reduce from 85 to 25 may need to be replicated in the insurance industry because there are too many weak ones occupying space and causing nuisance on the index.
Last year, regulator had announced a new Minimum Paid-up Share Capital Policy for insurance and reinsurance companies in Nigeria.
The revised paid-up capital requires life Insurance business operators to raise its capital from N2 billion to N8 billion; General business from N3 billion to N10 billion, while that of Composite business has been jerked up from N5 billion to N18 billion.
For Reinsurance business, the revised minimum paid-up share capital has also been reviewed upward from N10 billion to N20 billion.