The current regulatory regime requires reinsurers and insurers to meet a margin of solvency as well as a minimum amount of paid-up capital without taking into account that certain classes of insurance business are inherently riskier than others. Thus, the determination of the industry’s capital adequacy requirement is highly deterministic leading to very low regulatory capital and working capital in relation to risk exposures.
There is a material reduction of premium rates in the insurance industry which has a significant impact on the industry’s capital and earnings. Furthermore, the capital inadequacy in the insurance industry results in a low premium retentions and high demand for overseas reinsurance leading to excessive premium/capital flights. The Energy and Allied Risks Insurance Pool of Nigeria (EAIPN) which is set up to retain capacity in oil and gas underwriting has also helped to curb the excessive capital flights.
NAICOM has charged all insurance companies to design and implement their own Enterprise Risk Management (ERM) framework so as to be able to identify, assess, monitor, mitigate and control the risks inherent in their businesses to which they are exposed. It is also required that companies should also have risk governance structure which clearly sets out the risk appetite, tolerance and strategy.
The low level of implementation of ERM framework in insurance companies is mainly due to the following factors: (a) Lack of adequate working capital within the insurance companies. (b) Fewer risk management expertise in the insurance industry. Actuaries are trained as risk management experts for the insurance industry. (c) No robust IT infrastructure to provide automated and integrated system of operation.
NAICOM should develop the insurance industry’s capital adequacy regulatory framework based on economic/risk-based capital methodology. Thus, the higher the company’s risk profile (based on size, nature and complexity of operations), the higher the capital it should hold.
A company requires a significant amount of capital to effectively implement a robust ERM which will definitely improve its risk management and risk assessment standards. This will also enhance the company’s effectiveness in meeting the solvency regulatory requirements. Additional capital injection will make companies better positioned to effectively execute improved and impactful underwriting services.
Solvency regime that complies with international standards and best practice should be adopted by the regulator. Thus, the solvency framework should require that insurance companies implement sound corporate governance and risk management systems in line with international best practice.
Insurance market concentration: Market concentration is the extent or degree to which a relatively small number of firms control a relatively large percentage of the market. If concentration is low, then the industry is considered to be competitive. If the concentration is high, then the industry will be viewed as oligopolistic or monopolistic. Major sales channel is the brokers’ market whereby the brokers dominate and dictate the market. There is low regulation of brokers’ market relative to insurance companies.
Insurance market penetration: Market penetration can be considered as the proportion of the insuring public that patronizes the products or services of an insurance company, measured either in terms of market share of an existing product, or promoting a new product, through strategies such as bundling, advertising, lower prices, or volume discounts, etc.
NAICOM’s Market Development and Restructuring Initiative (MDRI) includes the different compulsory insurances, micro insurance, Takaful, etc., targeted at increasing market penetration and enhancing insurance industry’s contribution to the nation’s GDP. Thus, companies investing in the above insurances are already penetrating the market to the grassroots.
On the other hand, fake insurers providing fake compulsory insurances (particularly third party motor insurance policies issued at local government licensing offices) are also a threat to insurance penetration and/or the survival of the industry. The Nigerian Insurance Industry Database (NIID) which was developed by NIA to checkmate the incidence of leakages in the motor insurance portfolio has not actually achieved its purpose due to lack of full support from the Vehicle Inspection Officers (VIO) working under the Federal Road Safety Corps (FRSC).
However, there are still challenges affecting the market penetration as stated below. There is low penetration ratio in the industry due to inadequate market research to identify the target markets and the needs of potential clients in order to model or develop appropriate products.
The funds required for extensive market research are not readily made available because the industry and individual companies have not prioritized the need of such exercise as important. The market researches carried out in the past were not robust enough to have the deserved impact.
There is lack of value-added new products that can help to accelerate the penetration to the mass insurance market (retail), even with the micro insurance providers. Brokers’ unwillingness to deepen insurance penetration has resulted to unhealthy competition among insurers for the limited account being offered or managed by the brokers.
There are also issues of low level of enforcement of compulsory insurance policies by the regulator and/or other government agencies and low level of financial literacy of potential insurance consumers.
Specialization: Most of small insurance companies in the developed insurance markets tend to focus on specific niches but insurance companies in the emerging markets (including the Nigerian insurance market), regardless of size, compete in all segments/businesses. A company’s degree of specialization in offering a limited range of products (or a single product line) in the insurance market will enable the company to gain greater degrees of productive efficiency.
Currently the regulatory guidelines to encourage single product line of operations are weak or non-existent. Traditional products are mainly offered for sale to the public with little or no market segmentation.
NAICOM should issue more guidelines to regulate the market concentration/penetration. Some regulatory guidelines should insist on a periodic incremental proportion of market penetration from each insurance company/broker in terms of spread of policyholders and/or products, etc. Regulators can encourage companies by recognizing and rewarding those companies that excel in market penetration.