Nigerian insurers are reeling from unprofitable underwriting returns as they paid more in claims than premium received, raising concerns about their ability to make money for shareholders.
The average combined ratio of the largest insurers in Nigeria was 167.10 percent in 2021, a sharp deterioration from the COVID-19-impacted 145. 90 percent for the year prior, according to MoneyCentral calculations.
The combined ratio is typically expressed as a percentage. A ratio below 100 percent indicates that the company is making an underwriting profit, while a ratio above 100 percent means that it is paying out more money in claims that it is receiving from premiums. Even if the combined ratio is above 100 percent, a company can potentially still be profitable because the ratio does not include investment income.
Further analysis of the books of firms shows they collectively posted negative real underwriting returns of N58.38 billion in 2021, from a negative figure of N12.75 billion the previous year.
It is noteworthy that the real underwriting returns, which is a better measure of profitability and efficiency, includes the management expenses in its calculations but excludes investment income.
Analysts say to date rates increases have not outstripped claims trends while operating and underwriting expenses are mounting.
Inflationary pressure and currency volatility are also responsible for spiral in expense ratio as insurers are not using their resources enough to drive top line (sales)-growth.
High inflation erodes the current value of fixed future payments creating a disincentive for life insurance purchases and an increase in lapse rates. It also balloons claim expenses as the replacement cost of assets go up. Of course, companies spend a lot of money on the acquisition of latest technology, hiring talented workforce, and diesel oil to power generator plants in head offices and branches across the country.
The headline inflation for the month of February climbed 10bps to settle at 15.7% y/y, from January’s 15.6%, according to the latest data from the NBS.
Analysis by MoneyCentral finds that, total, total operating expenses (underwriting plus management) increased to N139.55 billion as at the end of 2021, up 8.93 percent from 31st December, 2020.
The average industry expense ratio is 96.86 percent in 2021, from 91.17 percent the previous year. What this means is that they spend N96 on average on expenses to generate N100 premium income, leaving with paltry profit to distribute to shareholders as dividend.
While insurers honor obligations to policyholders as they paid N165.14 billion in claims in 2021 that represents a 17.91 percent increase from 2020’s 140.33 billion, some do not have the capacity to continue to honor such obligations.
Most of the insurance companies’ return on equity is below the cost of capital while expenses have been increasing faster than premium growth.
Since some are technically insolvent or just making up the numbers, analysts see a recapitalization scheme unlocking the potentials in an industry whose contribution to the economy is abysmally poor.
“There has to be an aggressive merger and acquisition because there are too many weak ones,” said an industry player who prefers not to be mentioned for the reasons best known to him.
Niger Insurance Plc combined ratio deteriorated to 839.10 percent in December 2021 from 412.70 percent as at December 2020. Its expense ratio moved to 486.41 percent in the period under review from 319.49 percent the previous year.
Linkage Assurance’s combined ratio rose to 182.70 percent in December 2021 from 142.50 percent the previous year.
African Alliance’s combined ratio increased to 255.90 percent in the period under review from 194.30 percent as at December 2021.
Seventeen out of twenty insurers under coverage have a combined ratio above 100 percent, while NEM Insurance, Regency, Universal Insurance bucked the trend with the ratio of 90.30 percent, 81.90 percent, and 94.80 percent, respectively.
To exacerbate the already anemic position of sector players, investment income no longer adds impetus to net income due to a low yield environment.