Guy Czartoryski is the Head of Research at Coronation Merchant Bank Ltd. In this interview with Businessday’s Endurance Okafor he shares insights on the challenges stalling Nigeria’s insurance industry and the catalysts needed to spur growth. Excerpts:
How do you define the current state of the Nigerian insurance industry? As at today, it’s undercapitalised, it’s very fragmented, and it’s not growing.
According to data by the National Bureau of Statistics (NBS), the insurance industry reported 4.48 percent growth in Q2 2019; the highest in a year. What do you think drove the expansion?
So what is happening in the insurance sector as a whole is that in the last 10 years, in real terms, you have had no growth; that is from 2008 to 2018. That is real data that is similar to NBS data because their data is inflation-adjusted.
So what you saw in the insurance sector is a very sharp decline at the time the economy was in recession in 2016. But what you could do is that you can take the data from 2016 and compare it to that of 2019 and you will say oh, the sector is growing. But actually, it is actually going back to what it was in 2015 before the recession. The National Insurance Commission (NAICOM) plans to include the informal-sector operators that are not yet included in the insurance scheme through the use of micro products. What’s your take on that?
If you go into the formal sector, you are selling policies to companies, which traditionally has been way easier than selling it to individuals and the problem with selling to companies is that it is too easy; you get the numbers too easily.
So, if you look at the group life policies between 2008 and 2015, they grew fantastically but that is mainly group life but at the same time, the premiums on group life have been declining. In other words, that big surge in group life premium was actually at lower premium rates. So you take much more risk for less money. So, that is why the profitability of life began to get worse; because they were not charging enough with respect to risks.
The regulator had to come in in early 2018 and said we are going to have to raise the minimum amount that you charge for group life insurance, otherwise you guys are going to have a burst.
So when it comes to selling group life products to individuals your prices are a lot better than selling group life or group insurance to companies because what is going to happen is that when you go to offices you will hear something like oh, another insurance company was here earlier, they charged much lower; you have to cut your price because you are coming to a group.
Groups have more bargaining power than individuals, so if you can distribute to individuals you have a lot better chance of pricing in your favour than distributing at the group level. So with microinsurance it is kind of interesting because you can go direct to the consumer. What are the opportunities for the industry post recapitalisation? So if capital in the industry now is N300 billion and you raise that to N400 billion, you have just diluted your shareholders’ return. so you have to use that money to really expand and from the work we have done we have seen that the profit comes with scale. So you have to scale up.
Also, if you raise capital, you would want a return on capital; you don’t do it just to comply. So there has to be a push back; you have to figure out how to make more money out of the capital. So obviously there is going to be some market share gain and some will go out of the business but that will be quite small.
For the opportunities, I think some will create a viable bank insurance models that actually work, which is a huge opportunity, and if you are distributing through a large bank, then you can do phenomenally well.
So if you can get your bank to partner and sell, whether they can sell or not is a big question. Then you can do exceptionally well, and I see that technology will play an A-part in that.
The other thing would be: can you create a happier regulatory environment than the one you have now? So can you then have more cooperation, broader bank cooperation and can you involve telcos?
So from our findings at Coronation Research, if there is a happier regulatory environment which will involve Telco regulator- NCC, NAICOM and the CBN, then I think things will take off. And I think you do need that regulatory environment.
If you think about it, let’s say you don’t have a successful or happy resolution of the regulatory issues between the three main regulators, then you will be left with bank insurance as a way of doing it. The truth is about six or seven big banks and you would have to partner with the biggest bank. Now FBN is already taken because First Bank is already taken with FBN Life and so you will go to the next bank. But hold on, Zenith is already taken by Prudential, then you will go to the next bank.
If you only have bank insurance as the only medium to enhance your distribution, you will only have certain number of banks left. Nigeria has one of the lowest insurance penetration ratios compared to its peers. What do you think has been the challenge in including more Nigerians into the scheme?
I think the real problem is too many insurance companies, and the fact that someone will say I insure with a certain insurance company, you probably have never heard of. And then they can later say, ‘this particular insurer isn’t good and so I don’t like insurance’. But that could have been a really small insurer.
So, the big problem has been too many insurance companies and it is difficult to create trust when you have so many insurance companies and it is really difficult to have a common standard among the many companies.
In the future when they say we are going to have around 25 players and you are going to have six or seven big foreigners and six or seven Nigerians, then you are looking at around 14 to 15 major insurance companies.
That will be much easier to say ok, these are our standards; these are underwriting standards, these are payment standards because you can then compare it. It is impossible to compare service standards among 59 companies. Agusto & Co projected that Nigeria’s insurance industry will expand at a slow pace of 10% in 2019 compared to 12% in 2018. What is your short-term projection for the industry?
What is happening this year is the focus on 2020. There will be continued growth this year but it will be partly form the rebound.
If you are running an insurance company now, the real focus is how do I get everything in order for 2020? How am I going to be one of the survivours? And that is what they are thinking about, because the next 10 years could be very exciting, and so if you are saying later that we actually gave up in 2019, then it’s going to be a pity.
So going into the future, post recapitalisation, I think what will happen is that you will be able to create common standards for the industry. It will become easier for customers to compare between the companies and I think there will be better dialogue with the regulator, because I think the regulator now is probably as concerned with the very weak insurance companies as it is with the overall shape of the industry. This is why I think it is a fantastic thing they are doing in the industry.
The big problem has been too many insurance companies and it is difficult to create trust when you have so many insurance companies and it is really difficult to have a common standard among the many companies
