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Insurers Face Mounting Obligations, Deteriorating Underwriting Results in 2022

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A red-hot inflation exacerbated by the war between Russia and Ukraine is worsening the outlook of insurers who will see mounting obligations to policyholders  and weak underwriting margins, according to research firm Afrinvest Securities.

Already, the majority of insurers are paying out in claims than premiums they are generating as evidenced in skyrocketing combined ratios that is significantly responsible for shrinking margins.

“We expect claims ratio to increase albeit at a slower pace while underwriting margin would be pressured downward,” said analysts at Afrinvest Securities.

“This expectation is predicated on the deteriorating effect of the rising inflation rate which could result in higher claims particularly in the non-life business. Subsequently, we foresee mounting pressure on underwriting margins as the inflationary effect trickles into insurance policy acquisition and maintenance cost thus raising underwriting expenses,” said the analysts.

Renewed surge in food prices, exacerbated by the war in Ukraine, and raising food security concerns pushed inflation to 17.7 per cent in May, compounding the woes of a country where over 40 per cent of a population of 200 million people live below the poverty line.

There will be rising claims in the non-life business division that will lead to an increase in HMO pricing while inflationary pressures balloon insurance acquisition and maintenance costs will result in a spike in underwriting expenses.

Analysts say that sector players are hobbled by currency volatility that affects the replacement cost of assets because the exchange rate instability is undermining the economy.

Insurers’ operating expenses will further be bloated as they pay more for diesel oil run generator plants at head office and branch offices across the country since electricity from the grid cannot be relied upon.

The largest insurers in Nigeria incurred N204.34 billion in claims in 2021, which is 20.54 percent higher than 2020’s N169.54 billion, according to data gathered by MoneyCentral.

The average industry claims ratio increased to 67.05 percent in the period under review from 52.44 percent the previous year.

They collectively spent N166.45 billion as at December 2021, which is percent higher than 2020’s N150.93 billion the previous year.

The average industry combined ratio increased to 158.67 percent in December 2021 from 141 percent the previous year, according to MoneyCentral calculations.

The reopening of the economy and successful rollout of vaccines that reinvigorated business activities underpinned premium income, but rising claims and expense ratio prevented top line (revenue0 impressive performance from trickling into bottom (profit) line growth.

Of course, the negative prognosis by analysts negates the predictions that the decision of the central bank to hike monetary policy rate will add strength to investment income.

An expert who spoke to MoneyCentral on the condition of anonymity said the weak dividend payment and slim profit margins will continue to make insurers’ stocks unattractive to investors.

The pricing of insurance companies have a price-to-book ratio of 0.64x in 2022. Which is underwhelming compared to Brazil (2.58x), South Africa (2.48x), Egypt (1.66x), and Kenya (0.65x).

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