Claims, Exposure, Dividends and Shareholders in the Insurance Industry: An Advice

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Friday, November 09, 2018   11:19AM / OpEd By Ola Bridges


Warren Buffett, one of the world's leading investor and wealthiest person in the world said in his famed annual Berkshire Hathaway letters:


"Simply put, insurance is the sale of promises. The customer pays money now; the insurer promises to pay money in the future if certain events occur. Sometimes, the promise will not be tested for decades. (Think of life insurance bought by those in their 20s.)"


He also stated

"At bottom, a sound insurance operation needs to adhere to four disciplines. It must:

(1)   understand all exposures that might cause a policy to incur losses;

(2)  conservatively assess the likelihood of any exposure actually causing a loss and the probable cost if it does;

(3)  set a premium that, on average, will deliver a profit after both prospective loss costs and operating expenses are covered;

(4)  be willing to walk away if appropriate premium can't be obtained."


"Many insurers pass the first three tests (above) and flunk the fourth. They simply can't turn their back on business that is being eagerly written by their competitors. That old line, "The other guy is doing It, so we must as well," spells trouble in any business, but in none more so than insurance." Buffet said.


And hear him, "In most businesses, of course, insolvent companies run out of cash. Insurance is different: you can be broke but flush. Since cash comes in at the inception of an insurance policy and losses are paid much later, insolvent insurers don't run out of cash until long after they have run out of net worth. In fact, these "walking dead" often redouble their efforts to write business, accepting almost any price or risk, simply to keep the cash flowing in."


Berkshire Hathaway Letters to Shareholders since 1965 up to 2017 are available on and I encourage those that seek to remain as shareholders in the insurance industry in Nigeria to invest their time to acquire more knowledge about insurance from these letters.


With improved knowledge on how to engage the managers, you are more likely to get VALUE from your interest, and better understand the implications of the season of recapitalization, which is not restricted to the insurance sub-sector.



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Lessons For The Nigerian Insurance Sector

In most insurance companies, the time is nigh for 2019 Budgets to be put together and forwarded to their Boards for approval but with little input from you, the shareholders, not to talk about any letters. Truth is, if you seek to earn any dividends from your insurance companies by 2020, and put the experiences of the past behind, you must engage differently and now!


Rather than allow the Management and Board to consider the top line income and expenses and subsequently, the bottom line, you should review the trend of your companies' performances over the years and set clear expectation of your dividend earnings based on capital employed.


Notwithstanding the outcome of the recapitalization by the regulator, National Insurance Commission (NAICOM), the insurance market has been awakened to the extent that customers (policyholders) now know the insurance companies that are strong and those that are weak. And so, beyond capital, it would come down to how much insurance business these companies have to strengthen their financial position.


Put succinctly, your expectation of dividend should be the basis for determining the top line of the 2019 Budgets to ensure the likelihood of receiving dividends.


As we are aware, not a few insurance companies in Nigeria have healthy financial ratios because, despite the level of income, their management expenses hit +50% of the Net Written Premium (NWP).


To avoid another rowdy and fruitless Annual General Meeting (AGM) next year, it is better to engage now.


Interestingly, too many shareholders have the vision of belonging to an insurance company that pays dividend even if they have to borrow to do so, only a few especially in owner managed companies, seek to have a distinctive insurance brand that could be the pride of Nigeria.


Easily, you get carried away by the branded goodies that are shared before, during and after the AGMs with little care about the outstanding claims, unpaid salaries and obligations to employees and policyholders.


And sometimes, akin to the political environment in our country, incapable executives and directors with questions over their heads are re-elected to continue while the financials evidently bear huge sums paid as fines to the regulators.


If the insurance industry in Nigeria must be transformed, the role of shareholders should first change and the manner of engagement should undergo serious review.


Members of the Management and Boards of insurance companies cannot continue to tell you, the shareholders, that NAICOM is the problem when we can all appreciate that over the years, not up to 2.5 million Nigerians have any form of insurance policy!


Advise To Shareholders

As shareholders, you must join the campaign for more Nigerians to have insurance cover knowing that therein lies the opportunity for greater earnings and respect.


It should not take many decades for a shareholder in an insurance company to earn good returns on investment and it should also not get to the point where a shareholder is confronted by the fear of losing the toils of many years of waiting for dividends. 


That is why my advice is that, as shareholders seek to take the unusual step of requesting for the 2019 Budgets to be based on the dividend you expect rather than the normal trend where the Management and Board just agrees.


Learn more about the management of the business you are expecting dividends like Warren Buffett has done over the years so that you understand why you are winning or losing.


See you at the next AGM!



Proshare Nigeria Pvt. Ltd.



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