By Patience Saghana
The Nigerian insurance industry is today ranked 65th globally in terms of size and 6th out of the 8 largest markets in Africa. The sector has contributed less than two percent to the Gross Domestic Product GDP as a result of the unethical business practices and the deep rooted problem of fake operators in the industry. Though, the insurance industry in Nigeria has over the years recorded some measure of growth, with gross premium increasing from N 55.9 billion in 2003 to N 164.5 billion in 2008, this represents an insurance penetration of only 0.6 per cent in the country. The sector could have fair better if not for the nuisances of unhealthy practices and fake insurers.
Studies in the show that as at September 2005, the National Insurance Commission (NAICOM) set new capital requirements of N 2 billion for life insurance, N 3 billion for non-life and N 10 billion for reinsurance companies. Prior to the recapitalisation exercise, the Nigerian insurance industry had in operation 103 insurance companies, five reinsurance, five firms of actuaries, 509 brokers, 37 loss adjusters and 870 registered agents as at 31st December, 2006. After the February 2007 deadline for the recapitalisation aspect of the industry consolidation program, the number of insurance companies was pruned to 49 while the number of reinsurance companies dropped to two.
Despite the reform, insurance companies still engage in unhealthy business practices thus creating a whole in the wall for fake practitioners to penetrate the sector. The market is dominated by about twenty companies each controlling about 2 per cent of market share. The non-life insurance sector dominates the industry accounting for 84 per cent of the total premium. A further breakdown of the industry premiums receipts reveals that motor insurance generates a quarter of the industry revenues.
Overtime, the industry practitioners have resorted to price competition and not service which is the net effect of rate cutting that is now widespread in the sector.
Vanguard had exclusively reported that a consortium of seven underwriting companies paid dearly for rate cutting as they are to pay N 15 billion claims over a ridiculous N 58 million premium they collected from their clients last year. The consortium took on a sum insured of over N 210 billion fire policy of a bottling company, but charged less than 0.05 per cent of the sum insured which amounted to N 58 million, instead of the normal three per cent, or N 630 million, excluding other discounts such as fire equipment appliances, long term agreement and other special discounts
Chairperson, Life Offices Committee (LOC) of the Nigerian Insurers Association, Mrs. Mrs Yetunde Ilori, in a report to the member companies of the association, stated that there is widespread rate cutting and unhealthy competition among the companies on the group life assurance business.
After having brought the issue to the notice of the regulatory authority in the nation’s insurance industry, National Insurance Commission (NAICOM), she said the commission has risen to the occasion with the promise to sanction erring insurance companies which can not pay claims due to this unethical practice.
Ilori added that NAICOM has even threatened to descend on the statutory deposits of such defaulting insurers. This is, coming at a time when the Nigerian insurance companies are said to be recording losses on the group life insurance scheme. Insurance industry between 2002 and 2007 lost a whopping N 75.8 billion on the Nigerian National Petroleum Corporation (NNPC) group life insurance account. An indication of poor risk management by the insurance operators, which has undermined underwriting principles due to unwholesome competition to grab the oil and business account. Vanguard reliably gathered that within the period of six years (2002 to 2007), the NNPC paid out N 101 billion premium on its group life account and made claims of over N 176 billion, representing a percentage loss of 75 per cent and an average loss ratio of 202.44 per cent.
The figure shows that the corporation paid N 351.7 million as premium in 2002 and made claims valued at N 451.9 million, showing a loss ratio of 128.59 per cent. In 2003, the figure worsened with a loss ratio of 206. 34 per cent, as N 362.6 million premium was paid while claims worth N 748.15 million was settled. The insurance industry in 2005 collected as premium amounting to N 143 million as against a claims figure of N 591.1 million, showing a loss ratio of 413.3 per cent. The last financial year, 2007 was not favourable for the insurers as it paid out N 1.1 billion in claims against N 995.4 million, indicating a loss ratio of 108.6 per cent.
Section 9(3) of the Pension Reform Act 2004 states that in addition to the rates of contributions specified in the Act, employers shall maintain life insurance policy in favour of the employee for a minimum of three times the annual total emolument of the employee. Managing Director of Linkage Assurance Plc, GUS Wiggle, said fake insurance policies, particularly in the maritime industry had constituted a major threat to business, saying, they were “designed to steal people’s money.”
Wiggle said insurance companies lose N 30 billion annually on marine and motor cover, which has resulted to N 25 billion unpaid claims, with the maritime industry being the worst hit in the multi billion naira fraudulent business.
He explained that fake policies were in the increase in every line of insurance, costing consumers billions in unpaid claims as he stressed that no cover product could be sold by individual agents, brokers or companies without the approval of the state insurance regulator, National Insurance Commission (NAICOM). “Just like counterfeit money, fake insurance may appear to be legitimate, but it is actually illegal and worthless. If you buy fake insurance, you will pay premiums but they will not pay claims when the need arises”, Wiggle stated.
He further explained that fake insurance often use slick marketing of cheap pricing, saying that they offer materials that are similar to names of real insurers, advising that companies should destroy their papers when re-branding to avoid entering into the hands of counterfeits. Mr Ezekiel Chiejina, Director-General of the Nigerian Insurers Association (NIA) said insurance companies cut corners in order to survive. According to him, “On the other aspect of unethical practice in a competitive environment, many strategies could be used, but it is not as bad as it is. Some companies before the consolidation were just trying to survive, but now with size, strength, the issue of unethical practice is going underground. Because it was a time a lot of people and companies were trying to survive and now they are looking at how to stabilise and grow and they cannot sustain growth with unethical practice.
Corporate governance is good, if you see the provision of CAMA, quite a lot of things were there before. Corporate governance has helped to make our own industry to align with the international best practices. As for the issue of corporate governance, you should be aware that the insurance industry is going close and creating new strategies to solve the issue of soft market syndrome.
He admitted that insurance industry customers preferred the soft market syndrome. “Soft market is always best in favour of customers, they don’t pay much, but we want companies to be in solid position to meet their obligations that is why we are bothered about corporate governance. The Commissioner for Insurance, Mr. Fola Daniel said that National Insurance Commission (NAICOM) would closely monitor the activities of operators, especially on rate cutting, premium purchase, and non-settlement of genuine claims among others. He admitted that as a result of unhealthy competition among practitioners in the sector, unethical business practices abound in the sector.
“Regrettably, we realise that insurance products are being given at ridiculous rates. For instance, fire insurance is being given next to nothing while operators grant 90 per cent discount on motor insurance plus free trackers and other cases like that in the industry. This is the main problem in the industry. We must do something very quickly to stop these unhealthy practices.”
Minister Of State For Finance, Mr Remi Babalola said the present administration is unrepentant on an efficient, open, competitive and innovative business environment and will do all that is necessary to ensure that this sector is reinvigorated and redirected from the much talked about unethical practices. However, I urge you as professionals and insurance practitioners to place ethics and international best practices at the fore of your businesses.
“It remains a key competitive advantage that can be deployed to place you ahead of your competition at all times. Most especially in your line of business, perception remains the reality in the marketplace and a key success factor”. With the review of the Insurance Act of 2003 and the NAICOM Act of
2007, Babalola earnestly believes that the area of ethics and international best practice will be well taken care of as part of the recommendations of the committee to the Federal Government.
Government’s focus, according to the Finance Minister, “is for a balance between prudential objectives and ensuring that the Insurance industry stays efficient, competitive and innovative. Indeed, one of the major lessons from the recent economic turmoil is the need for transparent, efficient and neutral government regulation of the financial services sector. This is the platform upon which dynamic, accessible and robust markets for financial products are built a factor which this administration clearly recognises and has embarked upon.
He affirmed that a key driver of the current reforms in the industry has been the desire to instill a new approach to prudential regulation. He said, “I charge you as insurers to embrace international best practice and good corporate governance. The reforms are intended to move us beyond the current highly prescriptive regime in the industry to one where the insurers would be free to deepen the scope and level of insurance penetration in the country by introducing innovative new products for the citizenry.
