Over the past 10 years, Nigeria’s insurance sector has exhibited poor performance – in fact, it has not expanded at all. Gross premiums, for example, did not achieve any growth in inflation-adjusted terms during the period from 2008 to 2018. They also only grew very slightly in US dollar terms over the same period, according to a report by Coronation Research, one of the leading research houses in Nigeria and a subsidiary of Coronation Merchant Bank.

The implications of this become all the more obvious when you compare the sector to the country’s pension fund industry, where the total assets under management (AUM) grew at an average annual compound rate of 9.8 percent in inflation-adjusted terms. This can largely be attributed to the fact that insurance companies have not yet become part of Nigeria’s broader drive for financial inclusion – however, things could soon be set to change, thanks to new reforms that are due to be implemented in 2020. In light of this upcoming transformation, World Finance spoke with Guy Czartoryski, Head of Research at Coronation Merchant Bank, about the industry as it stands today and what’s on the horizon for the near future of the business.

Why is insurance penetration so slow in Nigeria?
The Nigerian insurance industry is very fragmented: of its 59 companies, many lack adequate capital. When there are so many companies, it’s difficult for customers to compare service standards, for the regulator to monitor activities and fix problems as they arise, or for the industry to effectively engage with the regulator. Essentially, the industry lacks an adequate capital base while having far too many companies. Without these two problems being addressed, the industry is unlikely to grow.

What opportunities does this slow growth present?
If you look at countries with a similar GDP per capita to Nigeria, you will find very big differences in insurance penetration, which measures the total gross premiums of the industry against nominal GDP. For example, India has an insurance penetration rate of 3.69 percent, while Kenya has a rate of 2.37 percent. Nigeria, on the other hand, has an insurance penetration rate of just 0.31 percent.

The systems already exist to turn Nigerian insurance companies – which are accustomed to managing thousands of customer accounts – into companies that are able to manage millions

Although concerning, this is a great opportunity for the country: if Nigeria can get close to India’s level (say, reaching 3.1 percent in the next 10 years), the industry’s total gross premiums would expand at a real-term compound annual growth rate of 25.9 percent. The encouraging thing is that this has happened before in the banking sector, during the five years following the banking reform of 2004. In that period, Nigerian banks’ total gross loans grew by a compound annual growth rate of 27.9 percent.

How can insurance penetration be increased?
The essential thing to understand is that the building blocks for transformation already exist. For example, there are 38 million bank verification numbers in Nigeria, so banks’ abilities to distribute insurance or bancassurance is not in doubt. What’s more, there are 170 million mobile phone lines in the country, which suggests another effective distribution method. Number-plate recognition technology, using real-time referencing with insurance records, is already being used in some parts of the country, showing that the datasets, hardware and technology for rapid development are already there.

The technological platforms for managing high volumes of customers are tried and tested in other markets, and are available for deployment here too. In other words, the systems already exist to turn Nigerian insurance companies – which are accustomed to managing thousands of customer accounts – into companies that are able to manage millions.

In addition, there is microinsurance – low-cost insurance that is distributed in cooperation with state institutions, development finance institutions, foundations and other agencies. Microinsurance can help to familiarise a market with insurance products and pave the way for the expansion of insurance overall. It’s therefore a matter of which combination of these assets and initiatives will be deployed in Nigeria.

Can you tell us about the reforms due for completion in 2020 and what impact they will have on Nigeria’s insurance sector?
Nigeria’s National Insurance Commission (NAICOM) has found a deceptively simple device to reform the industry as a whole. This involves helping insurance companies to raise extra capital.

In the coming months, the minimum level of capital for a composite insurer is set to rise from NGN 5bn ($13.8m) to NGN 18bn ($49.8m). Meanwhile, the minimum level of capital for a non-life or general insurer is set to increase from NGN 3bn ($8.3m) to NGN 10bn ($27.6m) and the minimum level of capital for a life insurer is predicted to rise from NGN 2bn ($5.5m) to NGN 8bn ($22m). In May 2019, instructions regarding these changes were given to insurance companies, and a further document was issued in July giving clarification to NAICOM’s precise definition of ‘capital’. The deadline for complying with NAICOM’s minimum capital requirements is June 2020.

In the process of recapitalisation, we expect two things to happen: first, we expect companies to raise fresh capital on their own. As of September 2019, we can already identify eight companies that are doing this, but there will be more companies raising capital over the coming months. Second, we expect more mergers and acquisitions to take place, consolidating some of the medium-sized and smaller players together and perhaps bringing them under the umbrella of one or two of the larger players. It is also possible that some of the weakest players will be eliminated entirely. The result – and we can see this evolving at the moment – is the creation of a suitably capitalised industry with fewer companies.

89

Number of banks in Nigeria in 2004

25

Number of banks in Nigeria in 2005

59

Number of insurance companies in Nigeria in 2019

25

Predicted number of insurance companies by 2020

The insurance reforms of 2020 looks very much like the banking reforms that took place in 2004. The banking reform of 2004 was introduced under Charles Chukwuma Soludo, who was governor of the Central Bank of Nigeria at the time. His reforms involved a steep increase in the capital requirements of banks; as a result, there was a round of capital raising and mergers and acquisitions. The number of banks in the country fell from 89 in 2004 to 25 in 2005. In a similar way, we expect the number of Nigerian insurance companies to fall from 59 today to around 25 by the middle of 2020.

The banking reforms of 2004 also re-established the credibility of the industry in the eyes of international partners, domestic commercial customers and, crucially, retail customers. The number of clients who entrust their current accounts and savings to banks has grown enormously, which in turn has expanded the measurable money base. There is a strong precedent for something similar to happen in the insurance industry too, starting in 2020.

In addition to these reforms, what else is needed to promote the growth of Nigeria’s insurance sector?
The role of the government and regulators is very important. In countries where the government takes an interest in the development of insurance, there have been many instances of successful insurance rollouts. These governments understand the social benefits of widespread insurance deployment in providing a safety net for individuals, SMEs and businesses in sectors as diverse as agriculture, logistics, transportation and power generation. When it is understood that insurance is a social good and essential to the smooth running and development of the economy, then governments are likely to get involved.

Regulation is not restricted to insurance regulators. If the insurance industry is going to expand through bancassurance, then it requires both insurance and banking regulators to work together; if the industry is going to expand through mobile telecoms, then it requires the insurance and telecoms regulators to work together too. In fact, all three need to collaborate in order to create the optimal mix. Ultimately, what is required is a collaborative approach from NAICOM, the National Communications Commission and the Central Bank of Nigeria. It may be a tall order, but there are gains to be made for all the parties involved.

What role does Coronation Merchant Bank play in helping to make this change happen?
Coronation Merchant Bank plays many roles in supporting the insurance industry in Nigeria. We have a strategic advisory role with our investment banking division, which has a clear insight as to how the industry is going to develop. We also have advisory and capital-raising capabilities in investment banking and Coronation Securities, as well as key contacts in the industry.

Part of the success of an insurance company comes from the effectiveness of its liquidity management – in other words, how effectively it manages the premiums it receives. This is an important factor in Nigeria, where risk-free interest rates are in double digits. It is therefore very important to judge fixed income markets well. Thankfully, our global markets and Coronation Asset Management divisions provide critical services and support for insurance company liquidity management.

What can we expect to see from Nigeria’s insurance sector in the coming years?
It seems likely that the NAICOM reform will reduce the number of insurance companies to around 25. Within that number, it is possible to identify a group of six to eight largely foreign-owned insurance companies, and a group of six to eight wholly indigenous insurance companies, followed by a number of small companies. So, there is likely to be an even split between foreign and indigenous ownership among the biggest firms. This bodes well for the competitive aspects of the industry going forward, and for the relationship between the industry and its regulators.

Raising capital costs money, therefore there has to be a return on that money. Clearly, the recapitalised industry of 2020 needs to achieve scale if it to make the kind of profit that strategic investors and stock market investors demand. That scale can only be reached with rapid expansion. Fortunately, the industry is likely to work together with distribution partners and regulators to achieve growth.

It can also be expected that development finance institutions, foundations and other agencies will take greater interest in the industry, quite possibly through sponsoring microinsurance schemes. There could also be innovations in bancassurance and mobile telephony if regulators are prepared to amend existing regulations. As such, the insurance industry is likely to be very dynamic, with rapidly evolving partnerships and alliances forming over the coming years.

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