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Wapic Insurance’s Sticky Expense ratio Should Alarm Investors

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Wapic Insurance Nigeria Plc is spending more in acquiring, underwriting, and servicing premium income, raising concerns about the underwriters’ cost control mechanism.
For instance, expense ratio as at March 2020 increased to 94.83 percent from 74.21 percent the previous year. What this means that the company spent N0.96 to generate one Naira in premium income.
Expense ratio for the purpose of this article is the summation of underwriting expenses and total operating expenses (including management costs) divided by total premium income.
The expense ratio signifies an insurance company’s efficiency before factoring in claims on its policies and investment gains or losses. The expense ratio is combined with the loss ratio to give an insurance company’s combined ratio.
Expectedly, the insurer’s combined ratio stood at 128.27 percent as at March 2020, from 2019’s 108.25 percent. A combined ratio that exceeds 100 percent means the company is paying out more in claims and other costs than it is generating revenue.
However, total net operating expenses reduced by 20.61 percent to N757.52 million in the period under review as against N954.26 million as at March 2019; thanks to claims recoverable.
Experts expect the lockdown measures put in the place by government in order to contain the spread of the coronavirus to balloon insurers’ claims expenses as the industry is part of the larger economy.
Tope Smart, Chairman, Nigeria Insurance Association (NIA), said in a recent interview with The Punch Newspaper that claims will raise as some companies are laying off staff, and these staff will have to go and make claims.
Smart added that immediately the lockdown measures are eased, some companies whose properties or valuables were stolen by hoodlums will come and make claims.
“We would definitely record increase in claims. That is another effect of the pandemic on the insurance industry,” said Smart.
Wapic Insurance’s premium income fell by 14.76 percent to N4.10 billion in the period under review from N4.81 billion the previous year while gross premium income dipped by 1.70 percent to N3.95 billion.
In a show of magnanimity, the leading underwriting company refunded premium back to customers as they were unable to use their vehicles due to the lockdown occasioned by the outbreak of the COVID-19 pandemic.
“Wapic is a corporate citizen and we continue to pursue several Sustainability initiatives. We pride ourselves in giving back to the communities in which we serve and continue to look for ways to contribute,” said Adeyinka Adekoya.
“Up to this point our contributions have taken the form of cash donation to NAICOM which was applied as a pool to fund the free life insurance cover for health workers,” Adekoya added.
Huge total operating, underwriting, and claims expenses left Wapic Insurance with deteriorating profit margins.
Net profit margin, a measure of efficiency, reduced to 15.93 percent as at March 2020 from 17.41 percent last year; and profit after tax reduced by 26.34 percent to N361.25 million as at March 2020 as against N490.48 million the previous year.

Wapic closed trading at N0.33 per share on Tuesday and the stock is down -17.5 percent in the past year, missing out in the recent rally in Financials.

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