34 underwriters may quit post-recapitalisation-Research


34 underwriting firms have their fate hanging in the balance with about 25 others having a brighter chance of scaling through, going by the report of Coronation Research. DAVID AGBA reports.


The new guidelines by the National Insurance Commission (NAICOM) in the insurance sector, indicates the need for insurance companies to shore up their eroded share capital or assessed deficit estimated at over N150 billion, to retain their licenses, by June 2020.


Their dilemma
But the report by one of the leading research houses in Nigeria – Coronation Research, a part of Coronation Merchant Bank, said the majority of these companies would face the hurdle of mobilising the capital, which appears difficult for many or embrace merger and acquisition rounds, otherwise, quit.
The development that comes like a repeat of the 2004 banking consolidation, which trimmed 89 banks to 25 mega institutions, maybe a turning point for the country’s beleaguered insurance sector.
The Head of Coronation Research, Guy Czartoryski, while unveiling the report in Lagos, recently said the regulatory move, when successfully executed, would be a booster to the sector and economy at large.
Sector extremely underdeveloped
The report titled: “From the Lagoon to the Ocean”, showed that the country’s insurance sector is extremely underdeveloped, going by statistics of peers with similar economic challenges, like India, with penetration of 3.69 per cent; Kenya, 2.37 per cent, against Nigeria’s 0.31 per cent.


NAICOM’s May 2019 circular demands steep increases in authorized capital by June 2020, across all business categories in the industry, which currently has total capital approximately N300 billion, with an estimated deficit of N169.1 billion.
“In nominal terms, it looks as though the industry is growing, but adjusting for inflation, there is no growth over 10 years, as total Life and Non-Life premiums fell at an inflation-adjusted Compound Annual Growth Rate (CAGR) of 1.4 per cent between 2008 and 2018.


“When we translate premiums into U.S. dollars, we get a similar picture- Life and Non-Life industry gross premiums grew at a CAGR of 0.3 per cent between 2008 and 2018.
“Lack of inflation-adjusted growth in the insurance industry is exceptional, as other branches of the financial services have been growing. For instance, the Asset Under Management (AUM) of pension funds. This grew at an inflation-adjusted CAGR of 9.8 per cent between 2008 and 2018.
“The number of pension fund account holders has been growing consistently, as well as the penetration rate of pension funds to 4.3 per cent in the first quarter of 2019. In other words, pension funds are deepening financial inclusion, while insurance is lagging behind,” he said.
No growth recorded.


Czartoryski restated the industry has not grown in real terms in the last 10 years, as without the growth and scale, the average returns on equity remained low, leaving the question of how the industry would join the elusive growth track.
“This circular is being taken seriously and has unleashed a round of capital raising from AIICO, LASACO, NEM, Sovereign Trust, Royal Exchange General, Consolidated Hallmark, Prestige Insurance and Wapic Insurance.


“India’s total insurance premiums grew in U.S. dollars at a CAGR of 11.5 per cent between 2012 and 2018,” he said, adding that roll-out by public insurance companies has been matched by the private sector,” he said.
The Director, Investment Banking, Coronation Merchant Bank Limited, Abiodun Sanusi, who spoke on the place of the business environment, pointed out that India sponsored the roll-out of micro-insurance, which had a role in educating the market and building trust, with both penetration and density steadily rising now as a result.


Need for branding
Also, the government and operators would need to come up with a lot of branding strategies such as door to door awareness and distribution to increase insurance penetration, which is the essence and our view in this report.
“There are currently about fifty-nine players and the reasons people are not patronizing insurance are trust issues and getting paid when the insurance policy matures.
“By the time the numbers of layers in the industry reduce and we have strong firms in the insurance industry that have a huge capital base, the patronage in the sector would develop,” he said.
But pointing to the quick wins for a rejuvenated underwriting sector in the country, he noted that the insurance companies behind the Asian countries’ success are nowhere in Nigeria.
Technology can help
Besides, there are now about 38.5 million unique Bank Verification Numbers and 172.9 million SIM registrations in the country, saying that the technology that transformed the banking industry can be applied to the insurance industry.
He added that the regulated environment and the regulator remain a course of concern and that is where the state would need to focus more attention on the achievement of set goals.


Stunted development
Sanusi noted that Nigeria’s insurance industry has not shared in the growth experienced by other Nigerian financial services, notably banks, pension funds, and mutual funds and has hardly grown in real terms over 10 years.
Without scale, the industry suffers from poor returns on equity. Yet its smallness is also its opportunity. If it were to grow to the level reached by countries with similar GDP per capita, it might grow by a factor of 10 times in real terms in eight-to-10 years. The technological infrastructure and data necessary for the expansion are largely available.
“In terms of insurance consolidation, there are two things- either the insurance companies raise capital through rights issues or mergers and acquisitions route. We are of the view that mergers and acquisitions would dominate the capital raising exercise and insurance players would reduce from 59 to twenty-five. We are also going to see the flow on offerings like Initial Public Offerings in the capital market if the insurance industry and investment banks are able to communicate the equity story because there is enormous potential in the sector.
“With the flow of offerings, it can also be a catalyst to what we have seen in the capital market in the past four years. So, the insurance consolidation that we are going to see is going to have a positive impact on the capital market. When there is consolidation, we would have bigger players and investors would be more confident to invest. As we speak, there are lots of pension funds that have not been invested in the insurance sector,” he said.
Close parallels
There are close parallels with the banking reform of 2004. The banking industry grew rapidly after that, so the question is how the insurance industry can grow after 2020. In the meantime, there will be capital raising and mergers and acquisitions.
Czartoryski pointed out that to position the sector for radical growth, one must consider the lessons learned in Asian markets, and also in West Africa, which show how insurance can be rolled out to tens of millions of customers.
Need for fresh capityal
Cooperation between regulators is critical, as are distribution partnerships with banks and telecom companies. Fresh capital is necessary for development, but a fresh strategic approach is required to reach the industry’s potential. Nigeria’s insurance sector presents perhaps the most remarkable investment case of any industry in Nigeria. At one level, the business case is very simple.
Insurance penetration, at 0.31 per cent is extremely low, even compared with countries with similar GDP per capita, for example, India with insurance penetration at 3.69 cent.
Experience in other countries shows that, in the right conditions, insurance can be rolled out to India’s level in eight to 10 years. So Nigeria could go from 0.31 per cent penetration to 3.69 cent penetration in 10 years.
Nigeria has achieved great things in financial services.
Pension Fund penetration is an example, with the total assets under management (AUM) of its pension funds growing, in real terms, at 9.8 per cent between 2008-2018 and taking the proportion of the population covered up to 4.3 per cent and rising.
However, the insurance industry has lagged its other financial services. Conditions have not been helpful for growth. Experience from other markets, particularly in Asia, suggests three remedies.
Need for cooperation
First, government and regulators – not only insurance regulators but bank and telecom regulators, too – need to cooperate: there are gains for all.
Second, the roll-out of micro-insurance with the development aim of financial inclusion is key to familiarizing and educating the market. Third, technology plays a key role in partnerships and distribution

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