Investors want to know whether management and board of directors are curtailing costs and maximizing profit.
This is because ballooning expenses erode profitability, and consequently resulting in a propitious drop in stock price.
In an environment fraught with rising claims, acquisition, maintenance and management expenses, maintaining an efficient underwriting capacity could be a herculean task for some managers.
A cursory look at the financial statement of 20 quoted insurers on the floor of the Nigerian Stock Exchange (NSE) shows that firms are spending less on expenses to generate each unit of premium income, but underwriting and operating expenses for some are heading south.
Of course firms spend a lot of money in the acquisition of latest technology and recruitment of a talented work force.
In a nutshell, the half year result of insurers reveals their expenses are not eroding revenue because the expense ratios, but combined ratios for some of them were high.
For the first six months through June 2018, the cumulative underwriting expenses of 20 insurers increased by 16.60 percent to N27.0 billion from N23.28 billion the previous year.
Underwriting expenses, according to insurance companies, comprise acquisition costs and other underwriting expenses. Acquisition costs comprise all direct and indirect costs arising from the writing of insurance contracts.
Experts say increasing underwriting expenses may indicate a poor performance, though; the expenses might have been committed to improving anticipated premium income.
The above means firms spend more as revenue increase.
The cumulative management or operating expenses of these insurers increased by 5.47 percent to N25.56 billion in June 2018 from N24.23 billion as at June 2017.
Interestingly, combined average total expense ratio, (operating and underwriting expenses) as a percent of combined net premium income, fell to 63.90 percent in June 2018 from 67.88 percent as June 2017.
But a breakdown of costs reveals some of them are grappling with deteriorating underwriting performance.
Experts are of the view that the country’s insurance industry is becoming more competitive with the Tier Based Minimum Solvency Capital, TBMSC, which indirectly compels companies to beef up their capital base.
A breakdown of the figure shows Aiico Insurance’s underwriting expense increased by 22.89 percent in to N1.91 billion in June 2018 as against N1.55 billion as June 2017.
The insurer spend less to generate each unit of premium income as underwriting expense ratio fell to 13.27 percent in the period under review from 14.54 percent as at June 2017.
But Aiico’s combined ratio of 110 percent in the period under review exceeds the 100 percent threshold.
AXA Mansard Plc’s underwriting expenses were up 27.71 percent to N1.79 billion in June 2018 from N1.41 billion as at June 2017. Underwriting expenses ratio fell to 18.72 percent in the period under review from 21.42 percent as at June 2017.
The Insurer’s combined ratio improved to 93 percent in the period under review from 104 percent the previous year.
Wapic Insurance Plc increased by 41.60 percent to N1.16 billion in June 2018 as against N707.82 million the previous year. Underwriting expenses were flat at 30 percent while combined ratio fell to 110 percent in the period under review from 134 percent as at June 2017.
Linkage Assurance Plc underwriting expenses were up 20.44 percent to N1.17 billion in June 2018 from N972.57 million as at December 2017. Underwriting expense ratio rose to 66.36 percent in June 2018 from 64.21 percent as June 2017.
The insurer’s combined ratio moved increased to 102 percent in the period under review from N94 percent the previous year.
Experts are of the view that insurers should underpin their risk allocation strategy, as they bemoan the abysmally poor investment income.
In the insurance parlance, firms use income from fixed income securities, short term government securities to add impetus to earnings since rising claims eat most of the premium income, leaving them with a slim underwriting profit. #
While lenders in Africa’s largest and most populous ec0nomy took advantage of the interest on shortage government securities to shore up profitability, their insurance counterparts were unable to take advantage of high yields environment to bolster the bottom line.
Thirteen Nigerian banks made N879.23 billion income from treasury bills (T-bills) in 2017, this c0mpares with the N49.16 billion investment income realized by 18 largest insurance companies, data gathered by BusinessDay shows.
In the insurance parlance, investment income comprise of income from bonds, T-bills and real estate. For instance, firms in the Europe, Asia, and the United States own skyscrapers and earn rental income.
The assets under management for firms are small. The entire premium they have received in relation to GDP is not up to 1 percent. That is the fund they will use to invest,” said an actuarial scientist who didn’t want his name mentioned.
“Their investable funds are poor compared to bank as lenders make money from fixed deposit. The larger your resources, the higher the returns you get. This means if your pool of resources are not enough, you may not have enough to invest in securities,” said
Experts are of the view that poor investment portfolio management is responsible for the insurance industry’s low performance compared to other sectors.
They however added that an efficient investment management strategy will bolster insurer’s margins in the short term since an unpredictable and tough macroeconomic environment has undermined underwriting business.
Agusto & Co estimated that the insurance industry’s investment portfolio grew by eight per cent to N762 billion in 2017 (approximately 75% of total assets).
