The Nigerian insurance industry is expected to grow at 10 percent annually over the next five years, following a favourable demographic structure,even as the economy contends with fiscal and structural weaknesses, analysts say.
Analysts at AM Best say the young and growing population of Nigeria continues to present a huge potential for the growth of the underpenetrated insurance industry, with annual nominal growth rates of up to 10 percent expected for the coming five years.
It however observed that the economy remains subject to fiscal and structural weaknesses, including the country’s dependence on oil revenues, high levels of corruption and subsequent distrust in the financial system.
These factors, it observed, restrict the development of the insurance sector, given the high poverty levels and persistent inequality between the various demographics that continue to be ignored.”
Growth of Nigeria’s insurance industry and increased competition from international participants will continue to be important to the health and development of the insurance sector, although companies need to stay focused on the economic and regulatory environment, A.M Best said.
Among the domestic operators, four firms including Continental Re, Custodian & Allied; AXA Mansard and Wapic made the agencies list in 2014, highlighting growing appetite of local firms to put themselves on global watch. Also, part of the rated companies is Africa Reinsurances Corporation a Lagos based African reinsurance Company.
According to the report, domestic insurers, particularly those that maintain insurance portfolios weighted to the oil and gas segment, are likely to feel pressure from the decline in oil prices. “This reflects delays, or in some cases, cancellations of infrastructure projects, as a result of negative investor sentiment relating to the stability of the economy, and therefore lower premium revenues. “Furthermore, for insurers that maintain foreign-currency denominated obligations and utilise a weak asset-liability matching framework, the decline in the naira relative to the U.S. dollar will increase liquidity constraints, owing to the need to increase domestic-denominated assets to meet their foreign-currency denominated liabilities.
“This would in turn have negative implications for the capitalisation levels of these insurers and hence their financial strength.”
A.M Best further stated that in spite of such challenges, there appears to be some signs of renewed confidence in the economy, following the coming of the new government led by Muhammadu Buhari.
He faces numerous economic, fiscal and political challenges, including the decline in oil prices and a continued insurgency from the militant group Boko Haram. It is anticipated that Buhari will bring much needed changes by reducing corruption, implementing economic reforms by reducing the country’s reliance on oil and by increasing foreign investor interest in Nigeria, through the promise of greater transparency, the report said.
“Should these expectations transpire, greater confidence in Nigeria will likely attract further interests into its largely untapped insurance industry, the report stated.
On regulation, the report said the Nigeria’s insurance regulator, the National Insurance Commission (NAICOM), continues to be proactive in its attempts to advance the Nigerian insurance market. Over the years, the regulator has implemented numerous reforms to improve the perception of the sector and expand the contribution of the industry to the country’s economic output, to varying degrees of success.
A.M. Best believes that consolidation is likely to continue, abetted by the entrance of foreign investors seeking global expansion to diversify their business. For domestic insurers, this enables them to utilise international practices and technical expertise, further aligning the Nigerian market with that of the global operating environment.
“However, international investors targeting Nigeria will need to remain mindful of the inherent challenges overshadowing the insurance market, including the uncertain economic environment. While the existing retail portfolios of domestic players may be considered attractive, as these
lines of business are relatively untapped, significant investment is required to establish strong distribution channels to enable insurers to build sufficient scale.
“This will require investors to have a long-term view of their positions in the market. Furthermore, the low, albeit improving, level of transparency in the market is likely to be a hurdle in undertaking sufficient due diligence on potential acquisition targets.”