While the majority of listed insurers are spending less to generate revenue even amid an unfavorable underwriting environment, they have to focus on cost optimization and reduce expenses in order to remain agile.
The average expense ratios of the largest entities stood at 72.76 percent as at December 2020 as against 77.66 percent the previous year, according to MoneyCentral calculations. A lower figure or ratio is favorable.
However, the expense ratio of 72.76 percent, a key component of the combined ratio that insurers are trying to keep under 100 percent, is high, and the implication is that the industry will incur losses in a challenging market where returns on underwriting and investment are both low.
Total combined operating expenses (underwriting plus management expenses) increased by 6.04 percent to N92.48 billion in the period under review as against N87.21 billion the previous year, data compiled by MoneyCentral shows.
A breakdown of the figures shows total combined management expenses were up 1.01 percent to N50.10 billion in the period under review as against N49.60 billion the previous year.
While the expense growth is less than the 16.47 percent inflation figures, analysts have warned that chief executive officers (CEOs) and their team have to cut cost in the face of a low yield environment, spiraling inflation, and decrepit infrastructure such as unreliable power supply.
They added the current macroeconomic reality as evidenced by the coronavirus pandemic that undermined business activities and tipped the country into a recession in the third quarter has compounded the woes of companies who are reeling from deteriorating profit margins.
In order to bolster the efficiency level of operators in the industry and avert financial crises, the National Insurance Association (NIA) had put a cap or ceiling on the expenditure of some firms.
The regulator said such a decision was taken to ensure companies do not spend unnecessarily to the extent that they would not be able to attend to claims settlement and some other relevant matters in the industry.
Of course, the regulator is on point as some insurers are already spending their way into the future as expenses are exceeding revenue.
For instance, Cornerstone Insurance Plc recorded an expense ratio of 105.38 percent, which increased from 81.67 percent the previous year. What this means is the insurer’s total operating costs are l.05 times net premium income.
Linkage Assurance Plc total expense ratio moved to 110.32 percent in the period under review as against 106.90 percent the previous year while total operating expenses spiked by 22.73 percent to N4.87 billion in December 2020 from N3.96 billion as at December 2019.
While coronation insurance Plc’s total operating expenses were down 6.89 percent to N8.25 billion in the period under review, the N8.25 billion is 108.96 times net premium income of N7.57 billion.
Industry experts say that firms have to spend money on the acquisition of latest technology in order to underpin their growth objectives and meet the ever-evolving consumer demand.
They added that capital outlays also help bolster efficiency.
The industry must invest handsomely in technology which is one of our key drivers for developing the market. Institutions should be prepared to digitise their processes, procedures and systems in order to make their operation seamless and real time, according to Sunday Thomas, Commissioner for Insurance and Chief Executive of NAICOM.
Thomas stated that the Commission is investing heavily in automating its processes and expects nothing less from insurance institutions.
Meanwhile, Thomas advised the insured public not to discard insurance as part of measures to cut cost in the face of the harsh economic situation.
“It is good to reduce cost but in terms of insurance, people should ensure that all assets are adequately insured,” Thomas said.
Insurance companies operate in a difficult business environment as they spend huge money on diesel fuel to power generator plants at branch offices and branches across the country.
Also, they are obliged to increase workers’ salaries to compensate for the inflationary environment, and that’s on top of the cost associated with hiring talented workers to help achieve the organization aims and objective.