Nigeria’s insurance industry: Poised to survive the weak macroeconomy and an election year

BY AGUSTO&CO LIMITED

Agusto & Co. Limited, the pan-African credit rating agency and the foremost business information provider, has released its 2023 insurance industry report. The 2023 edition of the annual report provides a comprehensive review of the insurance landscape in Nigeria and the near-term expectation for the industry.

The report contains a review of how the Nigerian insurance industry has fared amidst the lingering macroeconomic headwinds and outlook for the industry in an election year. According to Agusto & Co, the Nigerian insurance industry’s estimated gross premium income (GPI) maintained its double-digit growth trend and crossed the ₦700 billion mark in FY 2022. The uptick in the industry’s premium was driven by several factors including improved economic activities and stronger regulatory support.

Furthermore, while the industry’s performance in FY 2021 was moderated by the payout of claims emanating from the violence that trailed the #EndSARS protest, such outflows were minimal in 2022 given the non-recurring nature of the crisis. Consequently, the Nigerian insurance industry’s estimated net claims for FY 2022 rose by a slower 13% relative to the previous year. Notwithstanding, inflationary pressures continue to adversely impact claim settlements, underwriting costs, operating expenses and also moderate profitability indices. Agusto & Co. also recognises that the country’s insecurity gaps, infrastructural shocks and aftermath of the #EndSARS protest have emphasised the benefits of insurance products, particularly fire and general accident policies.

One of the most notable highlights of the industry in 2022 was the increase in third-party motor insurance policy rates by the National Insurance Commission (NAICOM), the apex regulator. On December 22, 2022, NAICOM raised the new premium for private motors to ₦15,000, staff buses to ₦20,000, commercial trucks/general cartage to ₦100,000, commercial tricycles to ₦5,000 and commercial motorcycles to ₦3,000. These policies previously had a basic rate of ₦5,000. In addition to the new premium rates, NAICOM announced that the comprehensive motor insurance policy premium rate should not be less than 5% of the sum insured after all rebates or discounts. Although the policy has received some criticisms, Agusto & Co. believes that it would cushion the rising loss rates from the associated business line and support a boost in GPI in FY 2023.

Nevertheless, Nigeria’s political environment will define the financial year 2023 for insurance operators. The first half of 2023 would be characterised by electioneering activities while the second half would bring a new administration and fresh ideas for fiscal and economic transformation. Possible election violence poses a downside risk that could adversely impact insurance operators, especially if it is a widespread occurrence across several states. However, there will also be opportunities to secure new insurance contracts from the public sector, especially in the second half of 2023.

In the near term, Agusto & Co. expects the introduction of a risk-based capital regime to gain momentum while NAICOM continues to implement policies and directives that would boost the industry’s sustainability. A strong regulatory stance to claims payments which resulted in the withdrawal of the license of some insurers in 2022, though being contested in the court of law, would remain in 2023 and possibly going forward as part of NAICOM’s efforts to sanitise the industry.

The non-conventional takaful insurance segment which is an under-tapped area is already witnessing significant growth as evidenced by the marked 172% growth in GPI in FY 2021. We anticipate that the segment would continue on its upward trajectory in the near term. Takaful insurers offer alternatives to conventional insurance and their model is based on the concept of social solidarity, cooperation and mutual indemnification of losses of members. We believe that these alternative insurers would continue to leverage the large Muslim population in Nigeria estimated at over 100 million to grow the segment. Albeit, the relatively low awareness of these alternative products remains a challenge to be surmounted. Microinsurance is also poised for growth given the dwindling consumer purchasing power, large informal sector and relatively high poverty rate in the country.

Overall, Agusto & Co. expects a modest performance by the industry in FY 2023, supported by the rising yield environment. Initiatives such as the bancassurance model which would enable insurance operators to partner with the banking industry to deepen their reach in the retail market will also bolster the industry in our view. The rate hikes for third-party motor insurance and the bullish growth track for microinsurance, takaful insurance and some new entrants in the conventional insurance landscape are also growth drivers for the industry.

Furthermore, the intensified marketing campaigns, awareness programmes and adoption of digital channels would continue to support penetration, albeit strong broker relationships would remain vital in bolstering performance. The political terrain would also shift in the year 2023 and the operators’ ability to respond promptly to these changes would be a key factor for the industry’s performance in the near term.