Tuesday,September 10, 2019    / 12:14PM / by Coronation Research/ Header Image Credit: Coronation Research

Nigeria's insurance industry has not shared in the growth experienced byother Nigerian financial services, notably banks, pension funds and mutualfunds. In fact, it has hardly grown in real terms over 10 years. This is according to a report from one of the leading research houses inNigeria - Coronation Research (a part of Coronation Merchant Bank). 

Without scale the industry suffers from poor returns on equity. Yet itssmallness is also its opportunity. If it were to grow to the level reached bycountries with similar GDP per capita, it might grow by a factor of 10 times inreal terms in eight-to-10 years. The technological infrastructure and datanecessary for expansion are largely available. 

Recently, the National Insurance Commission (NAICOM) announced theintroduction of new capital requirements, due in June 2020 for the sector. Webelieve these will reduce the current 59 companies to around 25. There areclose parallels with the banking reform of 2004. The banking industry grewrapidly after that, so the question is how the insurance industry can growafter 2020. In the meantime, there will be capital raising and M&A. 

The Asian Lessons

Accordingto Guy, Czartoryski; Head, Coronation Research, "to position the sector forradical growth, one must consider the lessons learned in Asian markets, andalso in West Africa which shows how insurance can be rolled out to tens ofmillions of customers. Cooperation between regulators is critical, as aredistribution partnerships with banks and telecom companies. Fresh capital isnecessary for development, but a fresh strategic approach is required to reachthe industry's potential. 

Nigeria's insurance sector presents perhaps the most remarkableinvestment case of any industry in Nigeria.  At one level the businesscase is very simple. Insurance penetration, at 0.31%, is extremely low, evencompared with countries with similar GDP per capita, for example India withinsurance penetration at 3.69%. Experience in other countries shows that, inthe right conditions, insurance can be rolled out to India's level in eight to10 years. So Nigeria could go from 0.31% penetration to 3.69% penetration in 10years". 

He further stated that, "Nigeria has achieved great things in financialservices.  Pension Fund penetration is an example, with the total assetsunder management (AUM) of its pension funds growing, in real terms, at 9.8%between 2008-2018 and taking the proportion of the population covered up to4.3% and rising.  However, the insurance industry has lagged its otherfinancial services. Conditions have not been helpful for growth. Experiencefrom other markets, particularly in Asia, suggest three remedies. First,government and regulators - not only insurance regulators but bank and telecomregulators, too - need to cooperate: there are gains for all. Second, theroll-out of micro-insurance with the development aim of financial inclusion, iskey to familiarizing and educating the market. Third, technology plays a keyrole in partnerships and distribution 

NAICOM's current reform of the insurance industry shares essentialfeatures with the 2004 reform of the banking industry under Professor CharlesSoludo, then Governor of the Central Bank of Nigeria (CBN). Just as NAICOMappears to seek consolidation and an overall reduction in the number of playersthrough stringent capital requirements, so too did the CBN in 2004.

Keeping The Numbers Right

Theresult of 2004's banking reform was to reduce the number of banks from 89 to25. As already stated in the report from Coronation Research, 2020 could seethe number of insurance companies fall from 59 to around 25. If some insurancecompanies are actually eliminated rather than consolidated by this process,then the survivors will enjoy market share gains. The banking sector enjoyed aboom after 2004, so the question is how the insurance industry will grow after2020. It is however important to note that economic conditions between 2005-08were different from today, with rising oil prices bringing in a very high levelof foreign direct investment from which banks benefited, sometimes directly.

Inconclusion, as with banks after 2004, there exists the opportunity for are-capitalised insurance industry to make enormous gains from 2020 onwards, notonly in terms of expanded underwriting capacity but also (as was the case withbanks after 2004) by attracting millions of new accounts. As contained in thereport, Nigeria's insurance penetration, at 0.31%, is less than one tenth ofthat of India (with similar GDP per capita) which suggests significantun-tapped potential. The business opportunity exists because of Nigeria's verylow bases in insurance penetration and insurance density.

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Other Reports FromCoronation Research

1. Market Interest Rates Back Up - Coronation Research
2. Fixed Income Market Sees Growing Liquidity - Coronation Research
3. Coronation Research Issues Weekly Update as Equity Market Revives
4. Coronation Research Issues 2019 Economic Outlook for Nigeria; A Tale of Two Halves

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