The recent sharp depreciation of the Naira in the foreign exchange market as well as the rising inflation rate has started eroding the value of assets under insurance cover.
Financial Vanguard findings from the recent developments in the industry have indicated that most risks are now under-insured as value of claims are getting lower than the assets they were supposed to cover.
Consequently, as claims continue to crystalise in the sector, insurance consumers are being paid claims far lower than the value of the asset insured.
Also, insurance firms are now off-loading their underwriting businesses to ceding arrangements with both local and foreign re-insurers, while also incurring higher reinsurance expenses especially on overseas ceding due to weaker Naira.
The development is expected to erode profitability in the sector despite improved gross premium income, while undermining their capacity to retain huge risks.
The industry operators told Financial Vanguard that the rise in reinsurance expenses is fueling capital flight menace that has plagued Nigeria’s insurance sector over the years due to their inability to retain huge businesses in-country.
Consequently, findings from the full-year report of 17 leading insurance companies released on the Nigerian Exchange Limited show that while Gross Premium Written, GPW, for full year 2023 increased by 25.9 per cent to N557.5 billion from N442.6 billion recorded in 2022, their reinsurance expenses went up by 28.4 per cent to N133.01 billion from N103.6 billion.
The companies are Aiico Insurance, Axa Mansard, Consolidated Hallmark, Cornerstone Insurance, Coronation, Custodian Investment, Guinea Insurance, Lasaco Assurance, Linkage Assurance, Mutual Benefits, Nem Insurance, Prestige Assurance, Regency Alliance, Sovereign Trust, Sunu Assurance, Universal Insurance, as well as Veritas Kapital Assurance. Meanwhile, insurance experts have cautioned that insurance consumers should insure their assets as well as renew based on the prevailing value to get full coverage and adequate compensation when the risk crystalises.
This indicates that in 2024, insurance premium is expected to rise significantly against the rate in 2023 for the same class of assets. However, the prospect of the insurance industry growing with a higher premium appears remote as operators fear consumer resistance amid erosion of disposable income across the segments of the society by harsh economic condition in Nigeria today. Operators’ insight Speaking on the development, Managing Director of Universal Insurance Plc, Mr. Ben Ujoatuonu, said that inflation is wiping away peoples disposable income and it is having a toll on insurance. He stated: “Businesses thrive when the economy thrives and insurance is not an exception. So with what is happening in the economy today, the inflation has taken away people’s disposable income and insurance is product you buy when you have enough disposable income.
“Everybody, both the insurers and the insured are suffering the same situation. For the insurer, what it means is that at any point in time, the premium you collected today may not even be adequate in the next two months because the value of the insured asset has gone higher. The constant devaluation of the naira is impacting our business in the sense that we are operating in a naira economy where your capacity has to be measured against the dollar in terms of what you have.
“For instance, if when the rate was N300 to a dollar you have shareholders fund of N30 billion, you can take a risk of 10 million dollars in terms of capacity. But now with the same N30 billion, when you take it in exchange for what you have in dollars, you see that you may not take a risk of three million dollars. “So what it has done is that it has reduced your capacity in terms of attracting risks.
This is driving capital flight in the industry because once you get the business, you will want to offload into reinsurance because the valuation in naira has reduced the capacity to retain risks within the economy, which is the major thing it has done.” Ujoatuonu also said that the sustained inflation uptrend is having a negative impact on claims payment. He stated: “In terms of claims settlement, inflation is also eating up a lot of things.
“When it comes to partial losses will come to a point where there will be more constructive total loss, because by the time you bring the cost of repairing your damaged vehicle, it will be almost the same as the cost of new purchase. What will happen is that the insurer will take it as constructive total loss and if he does that and pays you that sum insured, he cannot buy another vehicle for you. “It has a very strong negative impact on everybody both the insured and the insurer.”
Ujoatuonu, however stated that this is the best time to buy insurance. He said: “So in drawing your priority list, insurance should be part of it because those assets you cherish, once they are damaged, you cannot replace them if you don’t have insurance. So this is the best time to buy insurance despite the economic situation in the country.”
Also speaking, Managing Director of Value Edge Insurance Brokers, Mr. Tunde Thomas, noted that the declining value of the naira is raising operational expenses of the insured. He stated: “In some instances, it now requires the insured to raise the necessary income required when naira is required to pay for the dollar value of aviation insurance or oil and gas insurance. If a particular company requires aviation cover, they need to get more naira that will be converted into dollar at higher rate; in essence, their operational expenses will go up. If their operational expenses go up because insurance is part of their operational expenses, that will definitely have impact on their bottom line.
“Also, for the insurance companies that equally have to buy these insurance products from foreign companies, they equally have to look for dollars. I have to get the dollars from the market and it is not that easy to get from the banks. So you have to exercise a lot of patience, you have to keep running with them for some time. Because of that, a lot of people want to go to the black market and get the dollars. In essence, you are biting more than you can chew and that also will affect operational expenses of the insurance institution. “Also, the folding up of some companies is affecting the insurance sector.
The companies that have folded up, definitely, won’t buy insurance and that will lead to the loss of premium income on the part of the company. However, the increase we are witnessing in total premium is being driven by the businesses written in naira which is helping to stabilise the shock of the depreciating naira.”
Thomas stated that the depreciation of the naira is also affecting insurance customers. He stated: “When you now look at claims, the motor vehicle that is insured for N3 million today, will be valued at N5 million tomorrow and you have insured it for N3million. “In the event of a claim, the insurance company will not give you N5 million, they will give you the value of the claims you insured for. It may not necessarily affect the insurance company, but will affect the customer because the insured may not be able to get the right value for the vehicle. “The same applies to property. The cost of putting up a structure now is very astronomical. So it only takes a wise person who wants to protect his assets to insure for the new value. It is always advisable that they insure for the new value. If they insure for the new value, in the event of claim, you will not lose much.”
