Economic Slowdown affecting Insurers

Insurers are apprehensive that the industry will suffer significant drop in premium income this year owing to the slowdown in economic activities occasioned by the slide in crude oil prices and Naira depreciation. The growth of economic activities in the country, as measured by the growth rate of the Gross Domestic Product (GDP) slowed down to 2.35 per cent in the second quarter from 3.96 per cent in the first quarter.

Financial Vanguardinvestigations reveal that as slowdown in economic activities persists, insurers are paying more to settle claims, coupled with  decline in insurance businesses; hence there is anxiety about premium income declining this year.

“Like every other part of the economy, once the currency is not stable, it does not help in determining values in the insurance sector,” said Mr. Fatai Lawal, Managing Director of Sterling Assurance Limited.

Continuing, he said, “Insurance operates on values of assets and most of these assets are imported. So when losses happen, you begin to look at the replacement cost.  To repair a damaged vehicle cost more now than it was when the exchange rate was less.

“Unfortunately premiums are not automatically adjusted. Most times they are adjusted at the renewal of the policy when the insured are encouraged to revalue their asset. And when they revalue their asset it increases the value of their asset, so when the rates are applied you can then get more premium as an insurer. But sadly, since it is not renewal period yet, insurers are paying more to settle claims.”

“At the level of the common man, the devalued Naira will reduce the disposable income of Nigerians, further precluding them to care less about undertaking insurance”, noted Mr. Ayodapo Shoderu, President of the Nigerian Council of Registered Insurance Brokers, NCRIB.

Shoderu said, “It is most distressing that the price of the nation’s crude has dropped by about 40 per cent from the initial projected cost of $140 per barrel to about $62 per barrel. The implication of this is that there is a great pressure on the naira as many foreign investors will feel unsafe in our equity market making many of them to divest and take out their monies.

He added, “The entire situation is adversely affecting the insurance industry, given the fact that insurance thrives when the economy is robust, adding, “At the corporate level, there is the likelihood of a bulls run on the already fragile equities of quoted insurance companies, affecting their solvency.” On his part, the Group Managing Director of Custodian & Allied Insurance Plc, Mr. Wole Oshin, lamented that slowdown in economic activities is having adverse pressure on the insurance sector.

Oshin said, “A situation where the consumption index is dropping on regular basis is having adverse pressure on us. If the naira is devalued by 25 per cent that simply means that your balance sheet will shrink by 25 per cent. What you use to boast of ten years ago is not what you will have again. When ranking is done internationally, you just go to one corner and keep quiet.”

Marine insurance, worst hit

Vanguard investigations also revealed that the impact of the slowdown in economic activities is expected to be more severe on marine insurance business than other segment of the industry due to the foreign exchange restrictions imposed on importation of 41 items by the Central Bank of Nigeria (CBN). Marine insurance is import based, and the foreign exchange restrictions have weighed down on imports.  Operators expressed concern that the fall in gross premium income for marine insurance between 2012 and 2013 would likely persist this year.

Analysis of five year gross premium income for Marine & Aviation insurance obtained from the Nigerian Insurers Association, NIA, showed a total of N16.7 billion in 2009. The figure went up to N20.1 billion in 2010. In 2011, the figure climbed higher at N23.4 billion only to decline in 2012 to N20.9 billion. It came further down in 2013 at N18.7 billion being the last available data from NIA.

Although, figures for 2014 and 2015 are still being collated, experts are of the opinion that there is every possibility that this category of business could record more decline in gross premium income in comparison to others. “Due to the fluctuations in the exchange rate, business has been very challenging particularly for import based businesses like marine insurance because people are being more careful with what and the frequency at which they import, “ observed Mr. Bode Akinboye, Group Managing Director of Standard Alliance Insurance Plc.

“The effect of the fluctuation in the exchange rate on the insurance sector, particularly for marine insurance and for companies that are import dependent is that they had to cut down on their importation because of the exchange rate surge and that in itself has negatively affected the premium being generated from there”, he said.

The way forward

On ways of salvaging the situation, Akinboye said that the only way to turn the situation around for the insurance sector as well as for the economy is for government to create local alternatives to imported goods and fast-track resuscitation and creation of local industries.

Akinboye said, “If our local capacity is addressed and enhanced and there are alternative raw materials from our local industries and there is regular power supply that can trigger more local industries to run more efficiently, then even if we are losing from marine insurance now, we should be able to get businesses locally. So we expect to see a compensating effect when certain policies are in place. Government should be able to create other policies that will compliment or act as substitutes for current areas of challenges.

Shoderu on his part said that the present challenge should make national policy makers to be more ingenious in managing the precarious economic state, while the onus is also on practitioners to be more prudent and more resourceful in running their businesses. According to Shoderu, the time has come for Nigeria to break fast the façade of mono economy and develop other latent mineral resources that the nation presently has in abundance.

He said, “We must also continually put in place strategies to promote the nation’s industrial sector so as to transform our nation from consumption-based to production-based . An expert who spoke on the condition of anonymity said that there is need for the National Insurance Commission, NAICOM, being adviser to government on insurance in the country to have regular positive engagement with government.

He said, “We expect that government will walk the talk by being the number one insurance customer in Nigeria and enforce particularly the compulsory insurances and at the end of the day we expect to see a massive increase and growth of premium income and that will peculate into other sectors through renewed investment activities and helping to address unemployment and economic growth generally.”

Source: Vanguard