Sustaining insurance industry in VUCA environment

Insurers need to develop a new set of tools and methods and apply them swiftly and diligently along with strong risk management strategies to navigate the volatility, uncertainty, complexity and ambiguity (VUCA) environment. JOSEPH INOKOTONG reports.

There have been growing concerns about the state of the insurance industry in Nigeria, which has been confronted by numerous challenges like other sectors of the economy. The renewed focus centres on how the sector can successfully navigate the volatility, uncertainty, complexity and ambiguity (VUCA) in environmental risk.

Indeed, insurance firms in Nigeria face a lot of VUCA. To navigate this environment, they need to be agile and flexible and have a clear strategy for dealing with uncertainty. They also need to focus on building strong relationships with their customers, so that they can continue to meet their needs even in a rapidly changing environment.

In accomplishing this task, the insurers are faced with teething problems. The biggest challenges for them in navigating the VUCA environment could be the need to keep up with the fast pace of change in the insurance industry; how to deal with increasing competition from both traditional and non-traditional players and adapt to new regulations and those that are constantly changing. And the need to navigate the VUCA environment without compromising on their core values and mission.

These could definitely pose serious challenges, but it is not impossible to overcome because many insurance firms are already finding ways to adapt to the VUCA environment and thrive in the face of change. One way they are doing this is by adopting a “test and learn” approach, where they try out new ideas and learn from their mistakes. They are also using technology to their advantage, by using data analytics and digital tools to improve their operations.

Divergent views have been expressed as to whether this is the right approach for insurance firms, but the central concern has been if the insurance firms can raise the required finances needed to accomplish this goal. That has really been an important issue for consideration because, for many insurance firms, financing can be a major challenge, especially in a VUCA environment where capital markets can be volatile. However, there are a few things insurance firms can do to raise the finances they need. They can consider partnering with other businesses, working with investors, or even going public.

In addition, it is important to highlight the need for insurance firms to have strong risk management strategies in place. This is especially essential in a VUCA environment, where unexpected events and risks can have a big impact on the business. Risk management should be a priority for insurance firms. It is definitely crucial for any business, but it is chiefly vital for insurance firms. And there are a few key things that insurers should focus on when it comes to risk management. These include identifying and assessing risks, developing plans to deal with risks, monitoring and evaluating risks and communicating and reporting on risks.

Another important aspect of risk management for the industry, experts say is the need to have a strong compliance culture. This means having a culture where everyone in the organisation understands and adheres to the company’s compliance policies and procedures. This is a challenge that is often overlooked, yet it is really important for insurance firms to have a strong compliance culture because it helps to ensure that they are operating ethically and responsibly. It also helps to protect their reputation and build trust with their customers and other stakeholders.

There are several key ingredients of a strong compliance culture, but the most important ones are strong leadership from the top, clear and consistent communication about compliance policies and procedures and robust training and education for all employees. Others are regular monitoring and auditing of compliance practices and effective incentives and disciplinary measures to encourage compliance.

These ingredients are realistic for insurance firms to implement, but it does take a lot of time and effort to put them in place. It is not something that can be done overnight, but it is important for insurance firms to make the commitment to create a strong compliance culture, because it is good for the business and for society as a whole, and the rewards are worth the effort.

A strong compliance culture can help insurance firms avoid costly fines and penalties, protect their reputation, and build trust with their customers and other stakeholders. It can also help to create a culture of integrity and ethical behaviour within the organisation. And all of these things can lead to improved financial performance in the long run.

Also, it is important to consider the role of innovation in the insurance industry. There is a lot of exciting innovation happening right now, like the use of artificial intelligence, blockchain technology and virtual reality.

Obviously, it seems the regulator, operators and other stakeholders in the insurance industry are aware of the VUCA environmental risk challenges. When they converged recently in Abeokuta, Ogun State at the Insurance Industry Professionals’ Forum, solutions were proffered and ideas were shared on how to mitigate the challenges. They also pointed the way forward for the industry.

The experts noted that to navigate the ‘new normal’ that has come to stay, the insurance industry must develop a wide range of new skill sets and orientation which enables adaptability and agility. They advocated new skills from the operators that would enable them to tackle the new and emerging risks going forward.

Taking the lead, Mr Olorundare Sunday Thomas, Commissioner for Insurance/CEO, National Insurance Commission (NAICOM), while delivering his keynote address at the event, urged the industry players to adopt strategic foresight, continuous learning and development as well as effective communication and transparency as prerequisites for adjusting operating models and workflow processes in doing business.

He disclosed that there has been an increased awareness of climate-related risks and their potentially devastating effects on society, adding that this has increased focus on the significance of Environmental, Social and Governance (ESG) factors in insurers’ underwriting business as well as in investment portfolios.

Thomas asserted that “Insurers in Nigeria control assets, many of which are held over the long term, subject the insurance sector to significant ESG risk. Regulatory requirements to enhance ESG disclosures and considerations are gaining global popularity and key stakeholders, including major institutional investors, are increasingly desirous of greater ESG accountability from insurers.”

He urged the insurers to develop a new set of tools and methods and apply them swiftly and thoroughly, to successfully compete in a new Volatility, Uncertainty, Complexity and Ambiguity (VUCA) environment.

Thomas reasoned that insurers in Nigeria control assets, many of which are held over the long term, thereby subjecting the insurance sector to significant Environmental, Social and Governance (ESG) risk.

The NAICOM boss acknowledged the theme for the forum, “Sustainability of the insurance industry in the VUCA environment” as set by the organisers as a reflection of the present business realities in Nigeria as well as on the global level, noting that the environment has become so volatile, uncertain, complex and ambiguous, that requires change as the norm.

He admitted that it has become imperative for the industry to constantly identify and respond timely to emergent issues that can affect the sustainability and continued existence of the insurance business and the industry.

“Whether we believe it or not, the prevailing norm of constant and unpredictable change has now altered how we view the world and in effect how we respond to our ambiguous business milieu. It has also forced changes in how we conduct our day-to-day activities as business leaders, executives, or managers,” he submitted.

He cited typical cases in point as the volatility in the stock market, rapid changes in the technological hemisphere and the uncertainty occasioned by regulatory changes such as data privacy rules as well as the competitive scene alongside disruptive start-ups and changes in consumer tastes.

According to him, communicating in a diverse cultural and linguistic environment, global supply chain complications including strategic choices based on inadequate information and ethical dilemmas have led to complexities and ambiguities that have impacted hugely on the global economy including the Nigerian insurance sector.

He reckoned that today’s business risks are certainly different from the past, adding that as the business environment is advancing more into Artificial Intelligence, Environmental, Social and Governance issues will continue to experience issues relating to the increased cyber security threats, natural disasters, acts of terrorism, economic volatility, etc.

“There has been an increased awareness of climate-related risks and their potentially devastating effects on society. This has increased focus on the significance of ESG factors in insurers’ underwriting business as well as in investment portfolios. Insurers in Nigeria control assets, many of which are held over the long term, subject the insurance sector to significant ESG risk,” Thomas stated.

In order to successfully compete in a new VUCA environment, insurers, he noted, need to develop a new set of tools and methods and apply them swiftly and thoroughly. He stressed that some of the most essential taxonomies include, strategic vision, artificial intelligence (understanding and clarity) and organisational agility (agility and virtual). As aptly put by Frederik Bisbjerg, “In a world they haven’t seen before, insurers must do what they haven’t done before if they want to stand a chance to succeed.”

On the commission’s part, in recognition of today’s realities of the changing world and the increasing utilisation of e-platforms necessitated by recent changes in the world, the NAICOM has implemented a lot of technological transformation programmes such as the deployment of Business Process Management (BPM) solution and the NAICOM portal projects, which were concluded in 2021 and went live in 2022.

Also, work on the development of the regulatory returns and analysis module is ongoing while a complaints management system designed to facilitate real-time complaints and dispute resolution has been concluded and deployed, while the training for insurance operators and the corresponding guidelines are being worked on.

Thomas stressed that the adoption of a risk-based approach to supervision by the commission is a long-term plan for business continuity and sustainability in the sector. In recognition of the fact that insurance supervisory systems have evolved beyond rudimentary observance of rules, significant milestones have been achieved in the quest to transit from compliance-based supervision to risk-based supervision (RBS), which is focused on the assessment of insurers’ governance, risk management, and adequacy of internal controls and whether the solvency and liquidity of the insurer are sufficient to withstand unexpected shocks.

Also, to mitigate some VUCA risks, the commission has entered into a technical partnership with FSD Africa to facilitate the attainment of some of the accompanying objectives of the partnership. These include the development of a framework for sustainable innovation in the Nigerian insurance industry in fulfillment of the commission’s dual objectives of market development and protection (regulating for innovation) as well as understudying the Nigerian insurance industry and developing an implementation plan for full implementation of risk-based capital (RBC) framework including the key steps, frameworks and tools required for RBC implementation.

According to the President of Chartered Insurance Institute of Nigeria (CIIN), Edwin Igbiti, in today’s rapidly changing world, the insurance industry is faced with unique challenges stemming from the volatility, uncertainty, complexity and ambiguity (VUCA) that characterises the environment.

He noted that as professionals, it is crucial to come together to address these challenges and explore innovative solutions that will ensure the sustainability of their businesses and maintained that the conference provides professionals with the perfect platform to exchange knowledge, engage in insightful discussions and learn from the experiences and strategies of industry experts.

 

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