Business & Economy

Untapped potential in Nigeria’s insurance sector

A POTENTIAL increase in minimum capital requirements for Nigeria’s insurers, currently under discussion, could have significant consequences for the domestic sector’s ability to underwrite the country’s large oil and gas projects.

‘Increased capital will provide funding for publicity and product development. It will raise the clout of insurance companies in policy formulation and will enhance [the sector’s] capacity to hire the best people and deploy the technology and marketing, product awareness and investment needed to the support the industry,’ Kemi Adeosun, minister of finance, told local press in July.

Following the National Insurance Conference in Abuja in July, Sunday Thomas, director-general of the Nigerian Insurers Association (NIA), announced that the NIA was in talks with the National Insurance Commission (NAICOM) to recapitalise all of the country’s insurers.

The most recent sector-wide increase in capital requirements was carried out by NAICOM in 2007, which raised minimum capital for insurance companies in the life segment from N150m ($476,000) to N2bn ($6.3m), non-life, from N200m ($634,000) to N3bn ($9.5m), and composite, from N350m ($1.1m) to N5bn ($15.9m).

While other financial services industries in Nigeria have matured in recent decades, the insurance sector has lagged behind, according to Adeosun.

‘The insurance sector needs to raise minimum capital requirements in a manner that is comparative to what happened to the banking sector in the last two to three decades,’ she said.

Indeed, Nigerian banks have increased their capital requirement eight times faster than insurance firms since 1981. Today, the three largest banks each have more than N300bn ($951.7m) in capital, while the top-three insurance entities have between N14m ($44,000) and N25m ($73,000).

While Nigeria’s insurance sector is posting positive growth – total gross written premiums were up 19 percent year-on-year in 2015 at N350bn ($1.1bn), according to data released by the NIA – an increase in capital requirements could bring a number of additional benefits beyond improving the health of individual operators.

One major advantage to the recapitalisation exercise would be the potential for further consolidation in the industry. The sector is modestly sized, at one-sixth that of South Africa’s insurance market, and it remains relatively fragmented. As of mid-2016, the company registry of NAICOM showed that 60 underwriters were licensed to do business in Nigeria, including 14 composite firms, which offer both general and life products, 31 general policy providers, and 15 life insurers.

A potential increase in regulatory minimums could force firms to explore potential mergers and acquisitions among smaller players, which in turn could have significant ramifications for the sector’s growth, particularly in capital-intensive sectors.

The billions of dollars worth of upstream projects currently ongoing in Nigeria – Africa’s largest oil producer – are a lucrative opportunity for local insurance companies, for example, but the relatively small size of most Nigerian insurers means they often lack the required capital to manage those types of large risks – a huge loss, given that the energy sector accounts for 90 percent of exports and at least 50 percent of government revenues.

There have been efforts to address this – such as the Nigerian Oil and Gas Industry Content Development Act, which was passed in 2010 to increase the level of participation of Nigerian companies in the energy industry, including those in the insurance sector – but with limited success.

While the law mandates that Nigerian insurers cover 70 percent of the oil and gas industry, only between 25 percent and 40 percent of premiums are currently being written for the sector locally, according to a report released earlier this year by ratings agency AM Best – although this marks a significant improvement from the 5 percent retained prior to 2010.

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