Insurance firms’ huge management expenses are increasingly eroding profitability and undermining margins, raising concerns about their deteriorating underwriting performance.
Experts agree that some urgent and responsible steps have to be taken by management of firms regarding the copious expenses.
However, industry players say certain costs such energy costs, acquisition of latest technologies and remuneration of talented and quality staff are inevitable.
The cumulative management expenses of 43 insurers stood at N100.13 billion as at December 2016, which is three times the profit after tax of N31.54 billion recorded by these firms in the period under review, according to data obtained from the National Insurance Commission (NAICOM).
The aforementioned expenses translated into an average combined ratio (CR) of 128.74 percent as at December 2016, resulting in a negative real underwriting performance of N33.85 billion, based on BusinessDay’s calculations.
The CR is a measureof how profitable an insurance firm is in its underwriting operations and is calculated by taking the sum of incurred losses and expenses and then dividing them by earned premium.
The ratio is typically expressed as a percentage. A ratio below 100 percent indicates that the company is making underwriting profit while a ratio above 100 percent means that it is paying out more money in claims that it is receiving from premiums.
Twenty five (25) of the 43 firms that have released their financial statement on the website of NAICOM are inefficient as their CR crossed the 100 percent threshold.
Lasaco Assurance Plc has a CR of 416 percent, Leadway Assurance Limited, the largest insurer by premium (369 %); Aiico Insurance Plc, (312 %), Equity Assurance Plc, (244 %); Ensure Assurance, Limited (218 %); Great Nigeria Insurance, (207 %); and Fin Insurance, (206 %).
However, a few firms bucked the trend.
Cornerstone Insurance Plc has CR of 58 percent, NEM Insurance Plc, (58 %); Continental Re insurance Plc, (65 %); Regency Insurance Plc, (66 %); Zenith General Insurance, (72 %); and Consolidated Hallmark (74percent); according to NAICOM.
“We are trying to cut down on management expenses, however, there are costs you cannot control. The cost of diesel oil to power head office and branches is on a high side. Personnel costs are rising because we are trying to recruit talented staff,” said Jide Orimolade, managing director and Chief Executive Officer of Law Union and Rock Insurance Plc.
“Companies should try to put cost control in their front burner and see how expenses can go down as profit margin continues to remain supressed,” Orimolade said.
Operating expenses ratio of the 43 firms stood at 83.41 percent, which means they have spent N83 for every N100 of premium income generated.
The deteriorating underwriting performance of insurers in Africa’s largest economy can also be attributed to mounting claims expenses.
This is because lots of policy holders who hitherto were not demanding for motor insurance claims are beginning to demand for such claims.
An industry expert who doesn’t want his name mentioned said that an increase in flood and fire incidences across the country on the back of a change in weather are also responsible for high claims expenses.
“Having paid so much as claims for Lekki flood, it will not make business sense to charge the same rate during renewals,” the Chairman of Nigerian Insurers Association, Eddie Efekoha said.
Aiico Insurance Plc’s claims expenses increased by 38.58 percent to N14.96 billion in September 2017 from N10.82 billion the previous year.
AXA Mansard Insurance Plc’s claims expenses rose by 27.47 percent to N6.76 billion in September 2017 as against N5.30 billion as at September 2016.
Wapic Insurance, Mutual Benefit Assurance, Cornerstone insurance, and Consolidated Hallmark Insurance, recorded a 13.43 percent, 110.95 percent, 46.72 percent and 59.43 percent, increase in claims expenses as at September 2017.
BALA AUGIE
