Business

Challenges and prospects of the insurance sector

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2 years ago

The Nigerian insurance market, like that of so many other countries around the world, has a long way to go in serving the needs of the people. Indeed, insurance is currently still very much for the elites and the formally employed. The insurance market here encountered challenges. The major issue is that of the image, and this is being tackled headlong by the National Insurance Commission (NAICOM) and other bodies in the industry like the Nigerian Insurance Association (NIA). The biggest challenge of the industry is how to deepen insurance.

The contribution of insurance to economic growth is huge and unlimited. Insurance is of great importance to a modern society and in fact, economic growth is characterised by the soundness of a nation’s insurance market. Insurance promotes financial stability and reduces anxiety; it can substitute for government security programmes, facilitates trade and commerce; mobilises savings; enables risk to be managed more efficiently; encourages loss mitigation and fosters a more efficient capital allocation.

The Nigerian insurance market presents vast opportunities for citizens, the industry, the financial services sector, and the economy. But the market is not efficient and lacks the capacity of consumers’ trust. Experts say the net effect is that it does not grow and no meaningful contribution to the macro-economic indicators.

The NAICOM said for the set target to be achieved, the insurance gap must be lowered to a minimum of 70 percent. Globally, the world-insured premium income from 2006-2008 as presented by Sigma publication shows that life insurance has contributed more premiums, an average of 58.86 percent than non-life business an average of 41.14percent. However, the reverse is the case in Nigeria.

Nevertheless, conscious efforts were made by successive governments and the regulation to improve the insurance market over the years “One such effect was the market consolidation exercise that started in 2005 culminating in the increase of the industry’s minimum capital requirements.

Risk spreading is the main concept of insurance. Insurance facilitates investment by reducing the amount of capital that businesses and individuals need to keep at hand to protect themselves from uncertainties. Some scholars say insurance is a barometer of economic activity in a country and thus, protects the success of emerging economies.

In Nigeria, insurance can be traced back to the 20th century when the country’s economy was solely dependent on agriculture. The need arose for merchants to transport their cash crops to Europe and also reduce the risk of such transportation. This majorly contributed to the dominance of marine insurance at that time in Nigeria.

According to Damilola Osinuga, an Associate in the Shipping and Oil Services practice, “Despite its importance for economic development, the gross premium collected by insurance companies in Nigeria is about 1.9 billion United States Dollars compared to the 3.8 Billion United States Dollars collected in South Africa. In the United Kingdom, the insurance industry contributes about 20% of the total GDP of the country. In South Africa, the insurance industry contributes 17 percent of the total GDP and in Kenya, the insurance industry contributes 3.4 percent of its nation’s GDP. However, in spite of the astronomical growth of the Insurance companies from just one agency in 1918 – Royal Exchange Assurance Agency to the present number of about 56 Insurance companies as stated on National Insurance Commission (NAICOM’s) website, the Nigerian Insurance industry contributes a meagre 0.7% of the total GDP of Nigeria. It may be right to infer that the performance of the Nigerian insurance industry has not reached its peak.

In defiance of NAICOM’s persistent efforts at curing and mitigating the challenges causing the sub-optimal performance of the insurance industry, a couple of challenges still exists that are militating against the growth of the insurance industry in the country.

Unfriendly and hostile economy

A stable economy promotes the savings necessary to finance investments, which is a prerequisite for achieving a viable insurance industry that can help sustain economic growth. Insurance companies are sensitive to economic fundamentals and sometimes have to factor in many economic variables in order to make the right investment decisions. These variables, Osinuga enumerated include foreign exchange reserves, government debt, government deficits, inflation, interest rates, and exchange rates, which have all suffered in recent years as a result of Nigeria’s financial indiscipline and misappropriation. What this means, according to him, is that for the insurance industry to thrive and attain its potential, the government must be sincere in promoting a favourable environment that will allow the financial service industries to thrive as this will help increase the operational efficiency of the insurance industry.

Osinuga noted that at present, insurance companies are unwilling to invest the premiums in long-term instruments because of the fear of inflation built up over several years due to fiscal indiscipline and high inflation. It is a very simple principle of economics and investment that short-term investment will yield lower returns. If these trends continue to occur, insurance companies will not be able to solve their liquidity problems, which might deter insurers to pay claims.

Misgiving in the market over insurance companies

The perception of Nigerians on the insurance sector has not changed much over the years. Anyone who has spoken to the average Nigerian about insurance can give a firsthand experience of how Nigerians generally have a negative attitude toward insurance. This accounts for the low patronage of insurance companies in Nigeria. The negative attitude of Nigerians might not be unconnected to the notion of the insurers regarding non-payment of claims as some insurance companies are said to be very notorious for defaulting in claims settlement, which has adversely affected the publicity for the industry and consequently, the confidence in the industry, by the prospective client. “Also, there are clauses in policy documents which escalate the distrust in Nigerians”, the associate attorney noted.

Inadequate access to technology

Some insurance companies still do not have a fully automated and/or integrated computer software system, despite being in a world where information technology seems to be ruling. The challenge here is that the document management system is relatively poor compared to other sectors of the economy. It is an unfortunate situation that manual services are still prevalent in the industry which leads to delays in settlement of claims, fraudulent practices, mistakes, and errors in the entire business operations. “There is also no regulatory guideline on best IT infrastructure for insurers and re-insurers to adopt for both operational and reporting purposes,” Osinuga further stated.

Weak regulatory framework

According to the associate attorney, “The regulatory framework for insurance is very weak. National Insurance Commission is empowered to ensure the effective administration, supervision, regulation and control of the insurance business in Nigeria. Historically in Nigeria, government policies and legislations were made concerning the insurance industry simply to whittle down foreign dominance in the industry. There is an urgent need to review the laws regulating the Insurance industry. The Marine Insurance Act, of 1961 is clearly outdated as it was a verbatim reproduction of the Marine Insurance Act 1906 of the United Kingdom, which has been reviewed in the UK. There is also a need for policies making some insurance products compulsory and mechanisms to ensure the full implementation of such policies. More stringent policies in relation to retaining more local content in some special risk such as aviation and oil & gas must be made by the legislators and National Insurance Commission”. Another major problem is the National Insurance Commission’s inability to ensure that there are standard premium rates on certain insurance products. Insurance companies must adhere to the policy such that there is a benchmark for rates when negotiating premiums.”

Lack of skilled personnel

The situation might have improved over the years, but as funny as it may seem, there is a huge shortfall of skilled professionals (underwriters, brokers, actuaries, etc.) in the entire insurance industry. Some insurance companies, unlike their counterparts in the financial services sector, inadequately train their staff. Many insurance companies attract low-skilled personnel due to inadequate remuneration packages thus; there is always the inability to retain competent employees. Many top executives in the insurance industry are marketers who rose through the ranks not because of their strong technical background in the industry but because of their distinctive salesmanship and the ability to bring in more clients than others. The author thinks bringing in clients should be a major requirement of promotion, however, the combination of a good technical background and business skills should be the pre-requisite. Many marketers out there would give any rate to the prospective assured, not looking at important factors such as claims history and other major factors.

Poor knowledge of insurance services by prospective assured

The insurance culture in Nigeria is very low, although marked improvements have been recorded over time. This may not be unconnected to the lack of knowledge about life insurance products. Many educated Nigerians still do not see a reason for insurance. Scholars have stated that there is an urgent need for insurance companies to renew their marketing communication strategy which should be based on creating awareness and informing consumers of the benefits inherent to insurance.

Nigeria as a nation seems to be plagued with a low level of development, vast income inequalities, and cultural diversity in terms of language, religion, ethnicity, and resource control crises. The low standard of living is a major reason for the poor attitude of Nigerians towards insurance services. The per-capital income in Nigeria is low and thus insurance penetration into the economy is bound to be low.

Possible Measures to ensure optimal operation of the Insurance Industry

Osinuga said the “Federal Government must also examine the extant legislations on insurance in Nigeria, particularly the Insurance Act 2003 and the National Insurance Commission Act 1997. The Insurance Act must also be well implemented by NAICOM or any other government institution saddled with such implementation responsibility. For instance, Section 64 of the Insurance Act makes compulsory insurance for building under construction which is more than two floors. The general implementation of the Insurance Act has left more to be desired.

The limitation of liability on third-party insurance is too small in line with the present-day economy. Several sections of the Insurance Act have also been badly implemented. We cannot overemphasize the need for adequate legislation and policy to create the operational environment. The formulation of economic policies which will give room for investment will also help the insurance industry. As earlier stated, where there are investment-friendly policies, insurance companies would also be able to make long-term investments for better returns on such investments. Also, it is noteworthy of stating that if the economy is in a better shape, the prospective assure will have the liquidity to procure insurance.”

He observed that customer service in the insurance industry is below par. Many of these companies are having problems satisfying their customers in terms of product offerings, quality of services, and sophistication of products offered. Customer service is clearly important for winning new customers and retaining existing ones. The first step in changing the face of the industry is ensuring an exceptional customer experience. Insurance companies must find a way to provide customers with an internet-based self-service insurance platform where customers can view policy coverage, pay bills, make changes to policies, submit claims, and check the status of claim progress. Brokers should be able to obtain online quotes, proposals, and plans, designs for their customers. Employing more adequate staff with related professional backgrounds is also key. It is also important that the Chartered Institute of Insurance must regularly review and expand its curriculum to meet the present market need and build the capacity of student members. Insurance companies must also allocate a percentage of their budget to Continuous Professional Development to keep staff abreast of professional standards and practices.

The associate attorney advised insurance companies to also find ways to sensitise the populace about the use of insurance. The government also has a role to play in this by making relevant laws that will help make certain insurance policies compulsory and harsh sanctions for non-compliance of same. Generally, around the world, there is a paradigm shift from a paper-oriented process which is manual to an automated process. Insurance companies in Nigeria must follow this growing trend. Insurance companies must employ the expertise of first-tier technology firms to develop software to increase operational efficiency.

“In this time of harsh economic realities, insurance companies are still struggling to find their feet as a major financial service sector in Nigeria. The perceived stagnant growth of the insurance industry continues to be a key challenge that the country must overcome in order to encourage greater levels of investment. In view of the fact that no modern economy can function effectively without an organized insurance industry thus insurance companies need to be innovative as their success will depend on their ability to devise new ways to approach insurance in Nigeria. Furthermore, the Federal government, insurance companies, insurance professionals, and all relevant agencies must ensure that they work together to ensure the insurance industry reaches its much-publicised potential height which is obscure at the moment”, Osinuga further stated.

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