Recapitalisation may end foreign domination of Nigeria’s insurance

Mr. Guy Czartoryski is the Head of Coronation Research, a part of the Coronation Merchant Bank. In this interview with The Guardian, after unveiling a report on 2019 outlook for insurance sector, he said the country would witness mega insurers, like the banking consolidation era, after a successful recapitalization of the sector.

Why has the Nigerian insurance sector not performed as well as the country’s financial sector?
The insurance sector has not expanded over the past 10 years. If you take all the Gross Premiums from all Nigeria’s insurance companies they did not grow in inflation-adjusted terms during the period 2008-18, and only grew very slightly in US dollar terms over the same period. Compare this with Nigeria’s Pension Fund industry where the total Assets Under Management (AUM) grew at an average annual compound rate of 9.8 per cent, in inflation-adjusted terms, during the period 2008-18. Insurance companies have not yet become part of Nigeria’s broad drive for financial inclusion.

What opportunities does this slow growth present today?
If you look at countries with similar GDP per capita as Nigeria you will find very big differences in insurance penetration, which measures total Gross Premiums of the industry against nominal GDP. For example, India has insurance penetration of 3.69 per cent; Kenya has insurance penetration of 2.37 per cent. But Nigeria has insurance penetration of just 0.31 per cent.

This is the opportunity. If Nigeria could get close to India’s level, say 3.10 per cent in the next 10 years, that would mean that the industry’s total Gross Premiums would grow by a real-term compound annual growth rate of 25.9 per cent over that period. The encouraging thing is that this has happened before, in the banking sector during the five years after the banking reform of 2004. In that period the total gross loans of the banks grew by a compound annual growth rate of 27.9 per cent. So, rapid growth after implementation of reforms is a real possibility.

Why is insurance penetration so slow in Nigeria?
The insurance industry worldwide is about trust and about capital. The Nigerian insurance industry is very fragmented, with 59 companies, and many of these companies lack adequate capital. When there are so many companies it is difficult for customers to compare service standards; it is difficult for the regulator to monitor activities and to fix problems as they arise; and it is difficult for the industry to engage effectively with the regulator. The industry lacks an adequate capital base and there are too many companies. Without these two problems being addressed the industry is unlikely to grow.

How can penetration be increased?
The essential thing to understand about the industry in Nigeria is that the building blocks for transformation are in place. For example, there are 38 million bank verification numbers (BVN), so the ability of banks to distribute insurance – bancassurance – is not in doubt. There are over 170 million ringing mobile phone lines, which suggests another potent distribution method. Number-plate recognition technology, using real-time referencing with insurance records, is already being used in some parts of the country. So, the data sets, hardware and technology for rapid development are already there.

The technological platforms for managing high numbers of customers are tried and tested in other markets and are available for deployment here. In other words, the systems exist to turn Nigerian insurance companies which today are accustomed to managing thousands of customer account into companies managing millions of accounts. In addition, there is micro-insurance, whereby low-cost insurance is distributed in cooperation state institutions, development finance institutions (DFI), foundations and other agencies. Micro-insurance can play a key role in familiarising a market with insurance products and pave the way for the expansion of insurance overall.So, it is a matter of which combination of these assets and initiatives will be deployed in Nigeria. Different countries roll out insurance in different ways.

Can you tell us about the insurance reforms due for completion in 2020? What do they entail?
The National Insurance Commission (NAICOM) has found a deceptively simple device to reform the industry. The technique is to instruct insurance companies to raise extra capital. The minimum level of capital for a Composite Insurer is to rise from N5billion to N18 billion. The minimum level of capital for a Non-Life Insurer (also known as a General Insurer) is to rise from N3billion to N10 billion. And the minimum level of capital for a Life Insurer is to rise from N2billion to N8billion. The instructions were given to insurance companies in May of this year and a further circular was issued in July giving clarification as to NAICOM’s precise definition of capital. The deadline for complying with NAICOM’s minimum capital requirements is June 2020. The advice is simple, but the consequences will be far-reaching.

What can we expect to see from Nigeria’s insurance sector in the coming years?
It seems likely that NAICOM reform will reduce the number of insurance companies in Nigeria to a number around 25. Within that number, it is possible to identify a group of six-to-eight largely foreign-owned insurance companies and a group of six-to-eight wholly indigenous insurance companies, followed by a number of small companies. So, there is likely to be an even split between foreign and indigenous ownership among the biggest companies. This bodes well for the competitive aspects of the industry going forward and for the relationship between the industry and the regulators.

Raising capital costs money, and therefore there has to be a return on that money. Clearly, the re-capitalised industry of 2020 needs to achieve scale if it to make the kind of profits which strategic investors and stock market investors demand. That scale can only be reached with rapid expansion, and the industry is likely to worth together, and with distribution partners and regulators, to go for growth.

At the same time, it can be expected that development finance institutions (DFI), foundations and other agencies will take interests in the industry, quite possibly through sponsoring micro-insurance schemes. There could be innovations in bancassurance and mobile telephony, if regulators are prepared to amend existing regulations. The insurance industry is likely to be very dynamic, with rapidly-evolving partnerships and alliances, over the coming years.

What impact will these reforms have on Nigeria’s insurance sector?
In the process of recapitalisation we expect two things to happen. First, we expect companies to raise fresh capital on their own, and we can already identify eight companies that are doing this. Of course, there will be more companies raising capital over the coming weeks and months. Second, we expect mergers and acquisitions to take place, consolidating some of the medium-size and smaller players together, perhaps bringing them under the umbrella of one or two of the large players. It is also possible that some of the weakest players will be eliminated entirely. The result – and we can see this evolving at the moment – is the creation of a suitably-capitalised industry with fewer players than we have today.

Insurance reform in 2020 looks very much like banking reform in 2004. The banking reform of 2004 was introduced under Professor Charles Soludo who was then Governor of the Central Bank of Nigeria (CBN). His reforms involved a steep increase in the capital requirements of banks. As a result, there was a round of capital-raising, mergers and acquisitions. The number of banks fell from 89 in 2004 to 25 in 2005. In a similar way we expect the number of Nigerian insurance companies to fall from 59 today to around 25 by the middle of 2020.

Bank reform in 2004 re-established the credibility of the industry in the eyes of international partners, domestic commercial customers and, crucially, retail customers. The number of customers who entrust their current accounts and savings to banks grew enormously after 2004, which expanded the measurable money base. So, there is a strong precedent for something similar to develop in the insurance industry, starting in 2020.

In addition to these reforms, what else is needed to promote the growth of Nigeria’s insurance sector?
The role of government and of regulators will be very important. In countries where government takes an interest in the development of insurance there have been many instances of successful insurance roll-out. The point is that governments understand the social benefits of widespread insurance deployemnt in providing a security net for individuals, for small and medium-size entreprises (SME), and for businesses as diverse as agriculture, logistics, transportation and power generation. When it is appreciated that insurance is a social good, and essential to the smooth-running and development of the economy, then government is likely to get involved.

Regulation is not restricted to insurance regulators. If the insurance industry is going to expand through bancassurance then it requires the insurance and the banking regulators to work together. If the industry is going to expand through mobile telecoms then it requires the insurance and telecoms regulators to work together. In fact, all three need to work together to create the optimal mix. So, what is required is a collaborative approach from the National Insurance Commission (NAICOM), the National Communications Commission (NCC), and the Central Bank of Nigeria (CBN). It may be a tall order but there are gains for all these agencies and the companies and banks which they regulate.

What role does Coronation Merchant Bank play in helping to make this happen?
Coronation Merchant Bank plays many roles in supporting the insurance industry in Nigeria. We have a strategic advisory role with our Investment Banking division which has a clear insight as to how the industry is going to develop and key contacts in the industry. We have advisory and capital-raising capabilities in Investment Banking and Coronation Securities.

At the same time, part of the success of an insurance company comes from the effectiveness of its liquidity management, in other words how effectively it manages the premiums it receives. This is an important factor in Nigeria where risk-free interest rates are in double digits, so it is very important to judge fixed income markets well and to execute efficiently. Our Global Markets division and Coronation Asset Management provide critical services and support for insurance company liquidity management.