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Wednesday, February 21, 2024

Insurers Should Reprice Policies to Fend off Low Interest Rate Environment

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Insurers in Africa’s largest economy who are reeling from poor valuation must reprice policies in the light of the current interest rate environment, according to Afrinvest Securities Limited.

It is paramount that operators in the industry plug the funding gap between assets and liability as the coronavirus pandemic exposes the Life segment to losses given the high mortality rate from the virus that has claimed millions of lives across the globe.

Indeed, the Life insurers bore the brunt of the headwinds as AIICO Insurance, though a composite operator, received more beating from the Life segment.

The 2020 audited financial statement of AIICO showed it incurred N50.66 billion change in the annuity fund that led to an underwriting loss of N35.43 billion.

However, the insurer’s net income rose 17.33 percent to N6.70 billion, many thanks to investment income.

Cornerstone Insurance Plc saw a 61.12 percent drop in net income as at December 2020, no thanks to change in annuity fund and rising claims and total operating expenses.

The coronavirus pandemic and deteriorating investment income will pressure insurers’ future profitability as the industry underperformed the economy.

The sector contracted by 18.67 percent year on year (y/y) in the third quarter (Q3) GDP report released by the National Bureau of Statistics (NBS) as the industry is set for a deep recession in 2020.

The Nigerian Insurance sector remains largely underdeveloped with Insurance penetration still at c.0.5 percent to GDP.

Analysts say companies are likely to underpin their position in the continent and accelerate penetration across the country only if they think outside the box and introduce friendlier market driven products.

“For the nonlife segment, we expect insurers to come up with innovative products and especially, take advantage of this pandemic to promote health related products,” said analysts at Afrinvest Securities.

“We believe micro-insurance offers the opportunity to improve premiums significantly and also grow profits provided the insurers can make use of cheaper and existing distribution channels,” adds analysts at Afrinvest Securities.

While Nigerian insurers suffer low valuation compared to peers in Sub Saharan Africa, the current valuation signals the attractiveness of shares, and an entry point for investors.

Nigerian insurers in the market trade at a price-to-book ratio of 0.43x compared with South Africa (1.99x), Egypt (1.65x) and Kenya (0.64x).

Shares of insurers having been rallying since the start of the year and the Insurance sub index was a star performer as it outperformed the All Share Index, as investors are optimistic that the recapitalization by the National Insurance Commission will spur mergers and acquisition needed to bolster companies’ earnings.

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