The country’s insurance industry has lately been plagued with a myriad of challenges ranging from low penetration, inadequate training of staff to lack of actuaries. Chairman/Consulting Actuary, TAF Consulting Group, Mr. Debo Ajayi, in this interview with ODIRI UCHENUNU, proffers solutions to some of the challenges confronting the insurance industry.
Why, in your view, don’t many Nigerians buy insurance policies?
If people are not buying insurance, it is because they are smart. This is because, particularly in Nigeria, Nigerians can make intuition assessment of the value preposition of insurance and when they realise they are not getting a good deal, they won’t buy. It is not that they don’t value insurance, they do, it is because the price they pay versus the benefit they get doesn’t measure up.
When you look at the average lost ratio, the ratio in Nigeria is 24.2 per cent and what that really means is that out of every N100 of premium that the insurance industry collects, only N24.2 is returned to the insured population. To put this in perspective, in Kenya, the loss ratio is 59 per cent. This means that out of every 100 shillings collected, the industry returns to the population 59 Kenya shillings. In Tanzania, the ratio varies between 50 to 60 per cent. In Uganda, it is 63 per cent, in South Africa, it is 61 per cent. In Egypt, it is 73 per cent while in Nigeria it is 24.2 percent. So if you are in a transaction that somebody collects N100 from you and gives you N24, how sustainable is that transaction on an on-going basis? Though Nigerians are not actuaries, they are very smart intuitively. They can make that judgement. From my circle of friends, based on their own insurance experiences, I can tell that when they pay N100, they get N24. We have worked for clients in Nigeria and we have seen their loss ratio and we alerted the management that this is too low and we advised that they either cut down premium or increase benefit for the same premium so that the loss ratio can go up.
What can be done to avert the low penetration in the insurance industry?
I told players in the industry that if Nigerians are not buying insurance, it is not because they don’t have the need or value for insurance, but because the price is too high and it is not sustainable. There is a high correlation between loss ratio and penetration of insurance. In Kenya for example, the penetration rate grew in 2008 from 2.6 per cent to 3.3 per cent in 2013. In Nigeria, penetration rate is 0.6 per cent. You see the correlation? Taking you back, in Kenya, the average loss ratio is 59 per cent. In the United States, the average loss ratio is 95 per cent, meaning, from every $100 collected from the population, 95 is returned to them. So the remaining 5 per cent covers the insurance company’s expenses and investment income to make up profit. Another example is Ghana, they went from 0.9 per cent in 2008 to around 1.8 per cent in 2013. Morocco from 2.9 per cent in 2008 to 3.2 per cent in 2013.
So, principally, I would say rather than spend all these millions on so called insurance awareness, improve your benefit offering, improve your pricing. When people enjoy insurance, they would buy. Rather than running away from claims, engage in paying claims because it is a form of customer service. So when I said that Nigerians are not buying insurance because they are smart, that is what I mean.
The issue about price is a very big one. All these issues affect penetration by the way. The product, how it is packaged, how it is presented, the price is also very important. Talking about price, whether it is high or low, of course the price is high because that was what the loss ratio indicates, but why is the price high? A lot of time, the insurance industry in Nigeria does not have the technical capacity to do right pricing. They need actuaries whether in life or non-life. The prices are not credible,they are not reflecting. Different actuaries use different assumptions and they have been using these assumptions for decades and they have not accumulated statistics to review these assumptions. Also, the managements of insurance companies are not asking questions. So, of course the price is high and there is no assessment of any price that I can see happening in this market. So, all of these together define the low penetration that we have In Nigeria. If you want to do proper product packaging for example, you would need to have product developing process, that is, you need to identify your target population, you need to identify their needs and then before you start talking about pricing, packaging and all of that. This is not happening in Nigeria. The woman on the corner grocery knows the profit margin of product items that she has in her store, how many of our insurance companies in Nigeria know the profit margin of the product they are selling? They don’t. Something that important. When they are asked to develop new products, what they care about is what are the risks? What are the benefits? How profitable are these rates? What are the risk elements in this product? What are the capital implications of this product? What is the vulnerability to me in terms of this product? So when they are selling education products, mortgage protection products, annuity products, they don’t have or know the profit margin for all these products. Even at the product initiation stage, that information is not in the product menu. So I conclude that the insurance companies are managing their businesses using a rear view mirror to drive in the dark. It is pathetic. I can talk to you like this because of the technical know-how. The average person on the street would probably have a difficult time even appreciating what I am saying. They just know that insurance is a bad deal. If something has to change in Nigeria, these things have to be addressed. There is a need to also develop actuaries.
What can the regulators do to revive the industry?
The government and stakeholders need to develop actuaries. I have written proposals on the need to train actuaries but to no avail. We have a fully equipped classroom in this place for video conferencing and all of that, getting actuaries outside Nigeria to teach Nigerians, entirely based on our own investment, no single support from government or any industry association. We are putting these things in place because we believe that the insurance industry cannot develop without that technical capacity. It is just not possible.
The insurance industry having 0.6 per cent penetration is a testimony that there are problems there, you don’t need to be a super actuaries to know that and here we are. I chase them instead of them chasing me. I really don’t understand why Nigerians don’t want to be developed. As a Nigerian, I am committed to developing Nigerians to the extent of becoming world class actuaries and I know I would be remembered one day.
I hold two classes of stakeholders responsible for the state of Nigeria’s insurance industry, the regulator and the shareholders. There is no way as a shareholder I would invest capital in an organisation and not care about sound management of that company. The level of oversight that I display with my company would drive the quality of management and I would get answers for the right questions. So, something must be wrong somewhere. I don’t know what is it but I have an opinion that something is wrong with the shareholding structure of insurance companies in Nigeria. If that is dealt with and the regulator improves on its capacity and its independence, then Nigeria’s insurance industry would start to see some progress.
As an actuary, what have you contributed to the industry?
Actuaries need to get involved in the industry. We have been chasing the regulators but to no avail, we have not stopped. The social insurance trust fund that covers workers’ compensation throughout Nigeria requires actuaries and a lot of data gathering. This is an insurance fund that covers people against injury, death and occupational hazard in this market and it is mandatory by legislation. How are they doing? They collect billions every month and they don’t have a single qualified actuary. We have offered them to help train actuaries further, still no response.
How can being an actuary help solve the unemployment rate in Nigeria?
As I speak to you now, being an actuary is the number one job in the United States and yet we have huge graduate unemployment in Nigeria. You can imagine a graduate going to teach in a kindergarten. If these graduates can subscribe to the training we have in Nigeria within 12 to 16 months, they can begin to apply for jobs in the US, but they are completely unaware. Youth unemployment, the insurance industry with low penetration, social insurance industry and the pension industry that is sitting on a time bomb when pensioners are going to out-live their retirement assets, all need actuaries to help reform.
Beyond that, there is what we called enterprise risk management that is a vast field covering all industries that actuaries are the only professionals that are best suited for enterprise risk management.