Insurance Sector Update: Recapitalisation... Another Dead End?

Insurance
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Thursday, June 10, 2021 / 02:34 PM / by Afrinvest Research / Header Image Credit: Afrinvest 


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Executive Summary

In our Insurance Sector report 2020 ("Recapitalisation - Launching into the Deep"), we highlighted the global insurance sector performance in 2019. The sector premiums reached $6.3tn in 2019 after scaling the $5.0tn mark in 2018 as the non-life segment surpassed forecast and reported a 3.5% growth in premiums to $3.4tn while the life segment premiums also increased 2.2% to $2.9bn mainly due to a recovery in China. Sigma research had expected both non-life and life premiums to contract by 1.0% and 1.5% respectively in 2020 similar to that of the Global Financial Crisis (GFC) in 2008 due to the effects of the pandemic on the insurance business.

 

While we cannot ascertain the specifics of global insurance sector performance in 2020 as Sigma Research - the research subsidiary of a global insurance firm is yet to release its annual report, we have gleaned from the International Association of Insurance Supervisors (IAIS) to obtain insights into performance. This is especially to examine the impact of the pandemic on the sector.

 

Lower premiums, on the back of reduced economic activities, coupled with lower investment income pressured the profitability of insurers in 2020 according to IAIS. Data as of Q2:2020 also showed that solvency ratios declined on an aggregate level across business lines and regions resulting from investment losses that accrued from financial market volatility during the period. Lower profitability increased claim payments, and declines in asset values as a result of financial market volatility have forced some insurers to discontinue some pandemic-related insurance policies and remove clauses that expose insurers to pandemic-related claims in existing policies in order to contain claims.

 

Coming from the stunted growth recorded since it contracted 2.9% in 2019, the Nigerian insurance sector recorded a negative 15.3% growth in 2020 according to the National Bureau of Statistics. In terms of global relevance, the Nigerian insurance sector lagged significantly with a total contribution to global premiums at 0.03% as it ranks 63rd of 88 countries profiled by Sigma Research in 2019. Compared with Sub-Saharan peers, the narrative is similar, the sector's insurance penetration (GPW/GDP) remains poor at 0.3% with South Africa (13.4%), Morocco (3.9%), and Kenya (2.3%) advancing in reach. Similarly, the sector grapples with low insurance density (GPW per capita) of $8.0 compared with South Africa ($803.0), Morocco ($127.0), and Kenya ($43.0).

 

In December 2020, Nigerian lawmakers in the House of Representatives directed the regulator to suspend the phased recapitalisation program, citing the economic hardship in the country as a result of the pandemic and the need for increased liquidity to boost growth. The lawmakers also alluded to the #ENDSARS protest by the Nigerian youths and the negative impact that the destruction of several properties has inflicted on the insurers. This action creates a Deja vu scenario relatable to 2018 when a class action by insurance companies' shareholders resulted in NAICOM canceling a proposed Tier-based recapitalisation. We advocate that the recapitalisation of the industry remains crucial to replicate growth similar to the banking sector experience.

 

Although the pandemic fueled lockdowns and resulted in lower premiums from some insurance policies as well as refunds from some auto insurers and escalation of other insured risks, on the bright side, it necessitated the need for fast-paced adoption of technology and digital channels in the industry.

 

The Nigeria Insurers' Association (NIA) reported a total of 1,661 protest-induced claims as a result of the #EndSars protests, of which 143 substantiated claims worth N105.0m have been settled. We believe the settlement of claims is key to emphasizing the purpose of insurance among the Nigerian populace and encouraging uptake of insurance policies although this would imply higher costs and depressed profitability for insurers.

 

We continue to advocate for increased mergers and acquisitions in the sector to consolidate the influence of companies, deepen insurance penetration and enhance the retention of heavy-ticket risks in Nigeria. We also advise increased collaboration with telecommunication companies and banks as well as micro-insurance to capture value at the retail end of the population. We have seen some banks (Guaranty, Sterling, and Access Bank) applying for the Holding Company (HoldCo) licence and upon the expected resumption of recapitalisation program, we anticipate that these banks would consider insurance subsidiaries. Already, Access Bank, EcoBank, First Bank, and Guaranty Trust Bank have Bancassurance relationships and equity stakes in insurance companies while Zenith Bank, Unity Bank, and Stanbic IBTC Bank have fully owned insurance subsidiaries. We expect full HoldCo structure frenzy to boost banks' investments in the insurance sector and while this may stifle competition for the industry, it would boost growth and insurance penetration.

 

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Related to Recapitalization

  1. Insurance Recapitalization: The Quest for Efficiency
  2. Is Missing the Recapitalisation Deadline a Death Sentence?
  3. Recapitalization: Types, Sizes and Shapes of What to Expect
  4. NAICOM Announces Minimum Paid Up Capital Policy for Insurance and Reinsurance Companies in Nigeria
  5. Insurance Sector Update: Recapitalisation... Launching into the Deep
  6. Ekerete Ola Gam Ikon To Speak On NAICOM Recapitalization Extension Till 2021 Tomorrow on WebTV
  7. NAICOM Segments Capital Requirements for Insurance Companies; Extends Deadline to Sept 30th 2021
  8. NAICOM Mulls Extension of Recapitalization Exercise
  9. Higher Capital Requirements Credit-Positive for the Nigerian Insurance Industry
  10. NAICOM Issues Update on Recapitalization Plan; Extends Deadline To December 31, 2020

 

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Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

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