By Pius Apere, (PhD/FCII)
The insurance penetration rate (IPR) is defined as a country’s total gross premium income as a percentage of its gross domestic product (GDP). It is a measure of the level of development of the insurance sector in the country and thus, it indicates how much the insurance sector contributes to the national economy. It does not indicate how many people actually have insurance coverage nor does it signify the quality of coverage and whether it provides value to the clients. The higher the penetration rate, the more developed the insurance market.
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Nigeria being the largest economy in Africa (with about 200 million people) has a low IPR below 1%, much lower than the African average of 3.3%, while South Africa has the largest IPR of 16% in Africa. The abysmally low insurance penetration rate in Nigeria is mainly due to lack of consumer trust and confidence in insurance companies, limited knowledge of insurance amongst the insuring public leading to negative perceptions; complaints over the poor claims settlement; cultural constraints; low per capita income; ineffective enforcement on the compulsory insurances by law enforcement agencies; limited collaboration between insurance operators and regulators; inadequate capital base and corporate image of the insurance providers; lack of Government support (e.g. implementation of insurance compliance certificate on building constructions) etc. Conceptually, the insurance penetration can be achieved if the Nigerian insurance industry is well equipped with appropriate and/or adequate capital resources, human capital development and regulatory policy guidelines.
Over the years, self-regulatory bodies (e.g. NIA) and/or regulators (e.g. NAICOM) have played a considerable role in shaping the insurance industry through their various regulatory, monitoring and awareness/sensitization initiatives to address the negative perception issues raised above. The previous efforts such as the industry wide rebranding media campaign, the setting up of a Public Complaints Bureau (Ombudsman) and heavy sanctions on players who default in prompt payment of claims, just to mention a few, could not produce the desired IPR probably because the insurers were poorly capitalized to meet the payment of claims and digitalize their insurance operations in order to diversify their marketing strategies.
The recapitalization exercise of the insurance industry is an appropriate regulatory decision which is particularly apt in deepening the insurance penetration in Nigeria. Thus, this paper briefly examines how the recapitalization would improve the operations of the insurance companies thereby increasing the insurance penetration rate in Nigeria.
Capital requirements for insurance companies
The recapitalization would place all insurers at least on the same level playing field in terms capital base being the most important critical success factor for an insurer in driving its insurance penetration plan. The new minimum capital requirements for the conventional insurance companies (e.g. N8 billion, N10billion and N18 billion for Life, General and Composite insurers respectively) being specified by the insurance regulator, NAICOM, are appropriate and adequate to enhance the desired insurance penetration rate in Nigeria if properly managed.
However, the minimum capital base for the micro-insurance underwriters, e.g. N40 million, N100 million and N600 million for Unit Micro-insurer, State Micro-insurer and National Micro-insurer respectively, writing both life and general micro-insurance business, as provided in NAICOM’s micro-insurance guidelines has been considered inadequate and/or unrealistic by the Commissioner for Insurance (CFI) during his recent interview with Mr. Zaka Khaliq of Leadership newspaper. However, the foregoing is a welcomed development as the challenge of low capital base leading to risks of inadequate capital to write micro-insurance business had been brought to the fore by key stakeholders in the insurance industry including the author of this paper during the NAIPCO Confab in August 2019 and in Business Day newspaper on 2nd October 2019.
Micro-insurance is not an insurance product type in itself but the term used for the growing mass market in insurance products that are characterized by low premiums and low coverage limits (sum insured) for reasons of affordability. Thus, Micro-insurance can provide an insurance company (if adequately capitalized) with the opportunity to break into new markets and hence generate more profits which in turn will increase the insurance sector penetration and contribution to the country’s GDP.
In view of the above, the current micro-insurance guidelines need to be revisited holistically in order to make the micro-insurance business viable and also reduce or avoid the risk of limited number of micro-insurance service providers arising from the prescribed limited scope of micro-insurance business which has implications in terms of interpretation, pricing and enforcement. The above risk can be mitigated by downscaling the un-recapitalized conventional insurers under the new insurance capital regime to register as National Micro-insurers to serve the low-income segments, as these insurers would leverage more on their existing IT infrastructure, quality staff, clientele and higher capital base.
Human capital Development
The availability of appropriate human capital (i.e. the crop of professionals with good change management and leadership skills) within a company is also an important factor in driving insurance penetration plan. The staff recruitment, training and retaining policy of a company leading to highly dedicated workforce (with innovative ideas, analytical and computer skills etc.), that is required for rapid business expansion, is determined by the available capital resources.
Thus, insurers need to invest heavily in human capital development in order to remain competitive. NAICOM’s sponsorship of actuarial programme and the proposed academy essentially to train regulators are welcomed initiatives that would go a long way to address the human capacity gap in actuarial skills in the industry.
• Product Development
An innovative and competitive product design and pricing of insurance contracts to meet the needs of the customers (which are under the control of an actuary) can effectively be carried out, having undertaken a thorough market research and development (R&D) which requires adequate capital resources. As insurance companies will be adequately recapitalized after the recapitalization deadline, insurers are expected to invest more funds to acquire the required actuarial skills if they have to remain competitive with innovative products (for the micro-insurance and Takaful insurance target markets) in order to increase their level of insurance penetration. Thus, the availability of capital resources, technology and actuarial skills within a company would create the opportunity for the use of big data analytics in innovative product development to meet the needs of a given target market which is currently limited in the Nigerian insurance market.
NAICOM’s obligation to approve or reject new products within 30 days of receiving applications, pursuant to section 16 of the Insurance Act (IA) 2003, needs to be complied with, rather than being the exception due to regulatory queries and bureaucracies. Insurers can also help in this regard by making sure they have thought through their products and, as such, comply with requisite basic requirements for NAICOM’s approval. NAICOM should have a fast track approval mechanism to further encourage innovative insurance products conceptualization in the industry. The above is an indication that both the insurance regulator, NAICOM, and the insurance providers need to have the necessary actuarial skills (that requires huge capital investment) in order to have a seamless product approval process as part of implementing the risk-based supervision framework.
• Consumers Education and Awareness Campaign
The collective efforts of stakeholders (particularly the regulator and insurance providers) in the insurance industry are needed to invest heavily in marketing communications if the industry is to build awareness and overcome the lack of product understanding or low consumer trust and confidence, leading to negative public perception. There was an attempt to provide a better brand positioning for the insurance industry by the regulator, NAICOM, in collaboration with NIA. In order to improve the penetration levels, NAICOM launched the Market Development and Restructuring Initiative (MDRI) in 2009. Furthermore, they had embarked on industry wide rebranding media campaign which commenced in 2018, without much success, to address the negative perception of the insurance by the general public.
The recapitalization would help insurers to be adequately capitalized to fund the rebranding campaign in the future in collaboration with NAICOM to regain consumers’ trust and confidence which would boost consumer awareness and demand for insurance, particularly in the retail end of the market to drive insurance penetration and premium income from the largely untapped mass market segment. The above can be achieved easily if only NAICOM continues to upgrade its policy implementation strategies such as enforcing the compulsory insurance scheme by collaborating and/or synergizing with the Government Agencies, educating and sensitizing potential customers to voluntarily purchase an insurance cover.
• Marketing Strategy
Over the years, the Nigeria insurance industry has maintained brokers focused marketing strategy with complex product designs aiming at high-worth policyholders, corporate businesses, especially the oil and gas industry, leading to limited gross premium income (GPI) growth and hence low insurance penetration rate. This strategy is also associated with premium rate cutting and unethical practice that increased the business acquisition costs and high claims ratios. Even when technology and mobile phone have evolved, the industry has not embraced these channels enough to grow the insurance penetration.
The main reason for adopting the brokers focused marketing strategy could be attributed to lack of adequate capital resources to fund clients’ focused marketing strategy which requires simple, creative and value-added insurance product range. The later strategy also requires the use of technology (telemarketing, online marketing, social media etc.) to eliminate the sales of fraudulent insurance products (e.g. fake third party motor policies) and/or use a large direct salesforce for the mass market, with overall effect of improving the insurance penetration rate. It is noteworthy that acquiring the necessary technology will not automatically translate to efficient service delivery, as financial inclusion requires attending to the needs of the lower end of the pyramid through innovative products and the right staff recruitment, training and retaining policy.
The recapitalization in the insurance industry is likely to reduce the insurers’ over-reliance on broker focused marketing strategy in the future as insurers would have the required capital to diversify their business strategy through digitalization to reach the desired target market that is not under the exclusive control of the brokers. For example, Nigerian youths prefer to do insurance businesses through the social media platforms than in person. Retail marketing (agency workforce and branch network that will work with the banks e.g. bancassurance and mobile phone companies) is what would drive the insurance penetration in a country where the online marketing is not fully developed. Kenya insurance industry has 25,000 agents serving 40million population and its insurance penetration is about 3 percent whereas Nigeria currently has about 10,000 agents serving 200million population instead of having about 100,000 agents and its insurance penetration is about 0.7 percent.
• Profitability and Solvency
There is high tendency to believe that the profitability and solvency position of Companies in the post-recapitalization era would exceed expectations due to the high minimum capital base requirement. Infact, the insurance industry may likely to experience over-capitalization leading to low return on capital employed (defined as the profits divided by capital employed) and asset turnover ratio (defined as the premium income divided by capital employed) if the insurance companies adopt the same less aggressive business strategy (with limited growth in gross premium income) in the post recapitalization era. The above scenario might arise if the significant increase in capital employed resulting from the recapitalization could not generate a corresponding increase in premium income and profits from the core insurance business. In other words, the recapitalization itself would not necessarily translate to increase in insurance penetration and profitability if it is not utilized optimally.
Furthermore, companies that have been over reliance on high investment returns to remain profitable and solvent over the years relative to premium income generation may experience low investment returns and profitability if the assets that had been producing the high investment returns have been sold and/or capitalized to meet the recapitalization exercise (i.e. the minimum solvency capital requirement). This is likely to be true because the high minimum solvency capital may not produce the usual high investment returns.
The regulator, NAICOM, has significant role to play in deepening insurance penetration in terms of policy formulation, monitoring and sensitization of initiatives. Thus, NAICOM requires a pragmatic approach in the implementation of its policies/initiatives, having digitalized of its own operations, seeking Governments’ support and/or buy-in, collaboration with insurance industry stakeholders and relevant law enforcement agencies to ensure that the compulsory insurances are complied with by the insuring public etc. NAICOM’s recent sensitization and enlightenment programme with State Governments to domesticate compulsory insurances in their domains and leverage it to create additional source of Internally Generated Revenue (IGR) and to ensure provision of grants and Fire-Fighting Equipment for the States’ Fire Services by NAICOM from the Fire Fund as stipulated in the Insurance Act 2003 is a move in the right direction.
There is also a need to train the Non-Executive Directors (NEDs) on basic insurance principle and practice on a continuous basis in order to improve on the oversight functions of the Boards that might impact on the Company’s plans in deepening its insurance penetration. In the same vein, the regulator might rethink and/or reconsider the composition of Board members to include at least one Non-Executive Director (particularly the independent NED) with an insurance experience relevant to the insurance business being undertaken, on the Board of every company. This would bridge the knowledge gap in the insurance operations currently existing between the Executive Management and Board of many insurance companies.
The insurance industry is at the crossroads of transforming insurance penetration rate to the levels being expected by the stakeholders in the post recapitalization era that would contribute significantly to the economic development (i.e. the GDP) of the country. Thus, the regulator needs the maximum support of all industry stakeholders and hence it may consider a think-tank of few result-oriented insurance and/or actuarial professionals to assist the regulator on advisory capacity similar to the Presidential Economic Advisory Council. This would assist the regulator to catch up with the implementation of its strategic initiatives including the risk based supervision which have been far behind schedule, as revealed by the CFI during his interview with Leadership Newspaper, if the industry is to meet the expectations from the stakeholders on a timely basis in the post recapitalization period.
The current low insurance penetration rate (IPR) in Nigeria and its huge population and imminent economic growth are expected drive demand for insurance products which would create huge business opportunity for the insurers. The recapitalization exercise would no doubt help the insurance industry to achieve the feat of transformational levels of insurance penetration rate (IPR) if NAICOM continues to upgrade its policy implementation strategies.
(Actuarial Scientist and Chartered Insurer) Chairman/CEO Achor Actuarial Services Limited