Average returns on equity (ROAE) across group of life and non-life insurance firms operating in Nigeria have tumbled as replacement cost continues to rise.
The added pressure from poor investment returns, premium growth that is failing to keep pace with loss cost trends, intense competition, high inflationary environment, rising claims and underwriting expenses has driven the decline.
“The pricing of insurance hasn’t changed in the last 10 years and the costs of replacing assets are outpacing the cost of the risk we are covering,” said Oluseyi Taiwo, financial controller, Wapic Insurance plc.
For instance, if a car owner bought a car at N5 million and insured it when the exchange rate was $150/$, if the insurance company was to replace some parts of the car today when exchange rate and inflationary pressure have impacted prices, the company would be spending much more than it should have spent when the car was insured.
Taiwo added that the cost of doing business is high as overheads cost has spiked, further undermining underwriting performance.
Data gathered by BusinessDay showed that the average returns on average equity of 14 largest insurers declined to 14.82 percent in March 2019 from 16.96 percent the previous year.
In the finance parlance, a higher ROAE means a company has utilised the resources of its owners in generating higher profit.
Obligations to policyholders are rising, particularly on motor insurance policies, which were largely ignored by customers before now.
The industry is currently experiencing claims in large numbers without commensurate increases in premium income due to economic hardship as weak liquidity position hinders companies from taking on more risk.
Experts say low rates continue to hurt insurance business, and insurers are cautious about the risk they admit because they must meet claims obligations when they crystalise.
The difficult operating environment has, of course, hindered firms from magnifying revenue in such a way that will propel underwriting profit. Also, they do not have enough liquidity to invest in government securities to underpin investment income.
The average cumulative combined ratio, excluding change in life fund, annuity insurance, and other contract, stood at 99.02 percent as at March 2019, close to the 100 percent international benchmark.
The combined ratio is the summation of claims, underwriting, and operating expenses, divided by net premium income. A ratio below 100 percent means the insurer earns more in premiums than it pays out in claims.
Underwriting profit was down 27.46 percent to N6.71 billion in the period under review as against N9.21 billion as at March 2018.
Total costs (operating and underwriting expenses) have been spiralling due to mounting staff, professional fees, and diesel expenses, hence squeezing profit margins.
Combined operating and underwriting expenses were up 20.76 percent to N25.37 billion in the period under review, a figure that is 55.23 percent of net premium income.
The insurance industry, like other sectors, has been hard hit by a sluggish economy.
Gross domestic product in Africa’s largest oil producer expanded by 2.01 percent in the three months through March from a year earlier. That compares with 2.4 percent expansion in the fourth quarter of 2018.
Inflation for the month of June stood at 11.22 percent, a figure that is less than the CBN’s 6 percent and 9 percent target range.
Nigerians are getting poor as over 50 percent of the population of 200 million lives on less than $1.98 a day. The country has overtaken India to become the poverty capital of the world. This means taking a cover is the least of the worries of an average Nigerian.
Nigeria’s insurance industry continues to lag peers in sub-Saharan Africa with penetration as contribution to GDP at less than 1 percent.
Investors are looking to see the strategies put in place by insurers to bolster returns and maximise the value of shareholders.
Experts say operators in the industry should pay more attention to the retail end of the market, because the opportunity is enormous compared to corporate business that offers little premium.
“To change the face of the industry, we should focus on the people and stop depending on corporate and government for premium. The industry as whole has to wake up,” said Owolabi Salami, executive at Allianz Nigeria Insurance plc.
BALA AUGIE
