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Insurance Industry – More resilient than expected despite headwinds

Agusto & Co. Limited, the Pan-African credit rating agency and the foremost business information provider has released its 2022 insurance industry report.

The 2022 edition of the annual report provides a comprehensive review of the insurance landscape in Nigeria and the near term expectation for the Industry.

According to Agusto & Co., in the financial year ended 31 December 2020, the Nigerian insurance industry generated an estimated gross premium income (GPI) of ₦520.1 billion ($1.4 billion at ₦380/$), with growth muted by the outbreak of the COVID-19 pandemic. The lockdown following the COVID-19 pandemic negatively impacted insurance products distribution, especially with the inter-state travel bans restricting the movement of people and goods.

Simultaneously, in the financial year 2020, the Industry paid out net claims of circa ₦196 billion, up by 20% year-on-year (representing 37.6% of GPI) and worsened by the violence that trailed the #EndSARS protest in October 2020. Consequently, modest profitability indices are expected in FY 2021 and to a lesser extent in FY 2022 due to higher claims, an aftermath of the protests as well as inflationary pressures on the Industry.

Nevertheless, Agusto & Co. notes that the violence that trailed the #EndSARS protest has also emphasised the importance of insurance products, particularly with the absence of a robust social security system in Nigeria. The violence that trailed the protest could be a catalyst for insurance uptake in the near term, given that the insurance penetration rate has remained less than 1% in Nigeria.

Agusto & Co. also anticipates a resumption of the recapitalisation exercise in the short term. The rating agency notes that the persistent naira devaluation has reduced the financial strength of the Industry’s capital since the last recapitalisation exercise in 2007. Although some insurers have strengthened their capital base through earnings retention, the ability of most Industry operators to solely underwrite large ticket transactions has dwindled based on the lower value of capital in USD terms.

Therefore, Agusto & Co. believes that the recapitalisation exercise could be a watershed in the Industry. In addition to the benefits accruing from a larger capital base from a risk underwriting perspective, improved investment management practices will be upheld by a larger investment portfolio as insurers strive to generate adequate returns.

Overall, Agusto & Co. expects a modest performance by the Industry in the near term. Performance would be supported by enhanced bancassurance which would allow insurance operators to leverage the more structured data and client base of the banking industry to deepen their reach in the retail market. There are also new insurance products, particularly for the agriculture sector that have come on stream to boost GPI.

Furthermore, the sharp switch to virtual channels, one of the many rapid changes witnessed during the pandemic-induced lockdowns in 2020 should be sustained in the near term. With improved digitization, insurance companies can advertise and sell products via various digital platforms and partnership with Fintechs will also galvanise growth. However, digitization presupposes better management of cyber risks.

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