Insurers in Africa’s largest economy will become profitable with significant improvement in underwriting margins when they show more commitment to the retail business.
It is important for sector players to think out of the box and introduce innovative products for the low-income earners, especially those working in the informal sector who do not have a cover; such investments will help insurers get back to sustainable profit.
Of course, firms have been generating premiums from the commercial or corporate end of the market, but unfavourable underwriting conditions such as rising claims and operating expenses have prevented the top line (revenue) impressive performance from translating to bottom (profit) line growth
The average industry net profit margin of the largest insurers fell to 10.34 percent in September 2021 from 16 percent as at September 2020, according to MoneyCentral calculations.
A breakdown of the figures into per firms shows AIICO Insurance’s profit margin reduced to 5.65 percent in September 2021 from 13.94 percent as at September 2020.
Custodian Investment’s net margin reduced to 15.54 percent in the period under review from 21.85 percent the previous year.
AXA Mansard Insurance’s net margin fell to 14.03 percent in September 2021 from 23.88 percent the previous year.
Lasaco Insurance’s net margin reduced to 6.77 percent in the period under review from 17.86 percent the previous year.
Sovereign Trust Insurance’s net profit margin reduced to 14.08 percent in September 2021 from 16.36 percent the previous year.
Prestige Assurance’s net profit margin reduced to 26.37 percent in September 2021 from 28 percent the previous year.
Mutual Benefit, Coronation Insurance, and Royal Exchange recorded negative net margins as they posted operating losses.
Analysts say insurers will have to increase the number of people in the pool to improve profit margin, but they admit that insurance cover is the least problem of Nigerians whose pockets have been squeezed by inflationary pressures and unemployment.
“If companies do more retail business, the majority of those products will be used to improve margins. We are more focused on commercial end of the market,” said Morunfola Monsuru, actuarial scientist at Coronation Insurance
“People are not taking up cover because the economy is not doing well. Inflation has led to increase in price of commodities which will affect claims payout as the estimate of repairs has spiked,” said Monsuru.
The jobless rate in Nigeria rose to 33.3 percent in the three months through December, according to a report published by National Bureau of Statistics (NBS) That’s up from 27.1 percent in the second quarter of 2020, the last period for which the agency released labour-force statistics.
While the inflation rate reduced to 15.40 in November from 15.99 percent in October, it is still below the central bank target range of 6-9 percent.
The Nigerian economy grew by 5.01 percent year on year (yoy) in the second quarter (Q2) 2021, according to a recent report by the National Bureau of Statistics (NBS).
Analysts say retail remains the driver of insurance penetration since the industry is its embryonic stage.
The sector continues to lag its peers in terms of penetration which stood at 0.5% compared with South Africa (12.9%), Kenya (2.8%), Angola (0.8%) and Egypt (0.6%) while density at $6.2 also remains weak compared to South Africa ($762.5), Kenya ($40.5), Angola ($30.5) and Egypt ($22.8).
“The future is in retail business and micro-insurance if we are to reach the mass of the Nigerian people with quality, reliable and affordable insurance solutions. The low-income segment has remained largely untapped and we are ready to give it our best shot,” said Commissioner for Insurance/Chief Executive Officer, National Insurance Commission (NAICOM).
It is noteworthy that insurers have not been beaming their search light on the informal sector and small businesses that make up the chunk of the labour force.
A recent World Bank report stated that 80.4 per cent of Nigeria’s employment was in the informal sector, 10 per cent in the formal sector and 9.6 per cent in households. A total of 78.8 percent of men were in the informal sector; 12.9 percent of men were in the formal sector and 8.3 per cent in households.
For insurance companies to deliver sustainable returns and return on equity higher than the cost of capital, their premium income has to magnify pretty much faster than growth in expense ratio. That will make them more efficient.
“Overall, profitability would rely heavily on effective risk management and operational efficiency as a result of slower growth in premiums and rising claims (majorly in the life segment due to increasing death toll from the pandemic),” said analysts at Afrinvest Securities.
“However, the pandemic may provide an avenue for players to roll out variants of health insurance and pandemic-related policies,” said the analysts.
Next year will be tough for sector players as a low interest rate environment due to the dovish stance of the central bank will continue to undermine investment returns.
Of course, juicy yields on fixed income securities adds impetus to underwriting performance amid unfavourable underwriting conditions.
However, there is light at the end of the tunnel as the gradual economic recovery and successful rollout of vaccines are expected to accelerate 2022 renewal.