Nigeria: Insurance sector balances challenges and potential

Although penetration rates continue to lag behind those of other formal financial services, Nigeria’s insurance sector offers plenty of room for expansion over the coming years. Even so, there are a number of factors that could hamper growth and restrict earnings.

Speaking late last year, Fola Daniel, head of industry regulator the National Insurance Commission (NIC), said the Nigerian insurance market has the capacity to become the biggest in Africa and one of the largest globally.

For the sector to achieve the elevated position Daniel envisions for it, Nigeria’s insurers will have to overcome the resistance to obtaining coverage by individuals and businesses.

According to one recent study, only 2.25m Nigerians have access to the various products and services offered by insurance companies. Though penetration rates across Africa are low, with only seven countries having coverage levels above 2% of their populations, Nigeria is one of the continent’s largest and fastest-growing economies, meaning the insurance sector is underachieving in an expanding market.

The report, published in December by Enhancing Financial Innovation and Access (EFInA), an agency which promotes financial inclusion, also showed that take-up of insurance products was far lower than the level of Nigerians who had access to formal financial services, which stood at 43% of the adult population as of the end of 2012. This lack of exposure to financial services, including insurance, suggests the sector needs to work harder to sell its products, and educate the potential client base as to their benefits.

Even in areas where insurance is mandatory there is still low coverage, with motor cover the prime example. Though there are some 7m vehicles registered in Nigeria, less than 1m of these have proper coverage, according to the Nigerian Insurers Association. In response, authorities have begun a campaign to reduce the incidence of unregistered and uninsured vehicles. Implementation and enforcement will be key, of course, but if followed through this may prompt more owners to take out the minimum third-party coverage required by law since 2003.

Despite the low penetration, the sector is a still crowded one, with 49 companies in the market, according to the NIC. This tight operating environment should result in highly competitive rates for products, though most of the firms in the sector focus on the upper end of the business segment, providing coverage to companies linked to Nigeria’s main economic drivers, such as trade, transport and communications.

With GDP predicted to expand by 7% or more this year, up from the estimated 6.6% in 2012, there are openings for insurers to boost trade. One of the areas where policy writers need to lift their profile is with small and medium-sized enterprises (SMEs), with such businesses contributing almost half of GDP and providing employment to around a quarter of the national workforce. Given the low penetration levels reported by EFInA, the 17m businesses that make up the SME sector are massively under-represented in coverage totals, and represent a significant opportunity for policy writers if company owners can be persuaded of the benefits of insurance.

Slow payment of premiums by state agencies, as well as ongoing security concerns, were mentioned as two of the leading issues faced by insurers in a news report published by local media at the end of December. Delays in the release of premiums meant that private policy writers had struggled to cover their own payouts and also had fewer funds to invest in the economy, reducing the contribution to GDP.

While the government has plans to encourage low-cost or microinsurance products, and to expand the reach of sharia-compliant takaful policies to better reach Nigeria’s large Muslim community, the biggest hurdle for the industry is the low level acceptance of insurance among the wider public. As more Nigerians see their purchasing power rise, the more they may want to obtain coverage for themselves and their property, allowing the sector to deepen its penetration and lift earnings.

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