While demographics alone should mean there is plenty of room for growth, the industry’s recent performance has not been sufficient for it to reach the critical mass necessary to improve its image with clients and enhance its capacity to underwrite large risks. According to the Nigerian Insurance Association (NIA), insurance penetration (total premiums to GDP) in the West African giant reached 0.6% in 2011, far lower than other African countries, such as Kenya, with penetration of 2.5%, or South Africa (16%). Less than 6% of the population holds any kind of insurance policy.

PERFORMANCE: Combined life and non-life gross premium income grew from N155.82bn ($997.25m) to N201.28bn ($1.29bn) between 2008 and 2010 – the last year for which figures are available – and close to N250bn ($1.6bn) in 2011, according to estimates from the sector regulator, the National Insurance Commission (NAICOM). Afrinvest, a Nigeria-based stock brokerage, calculates that the sector grew by a compound annual growth rate of 26.9% following consolidation in 2007, up from 21.2% prior, and forecasts that gross premium reached N249bn ($1.59bn) in 2011.

Still small relative to the size of the economy, Nigeria’s demographic weight means it ranks on par with markets such as Vietnam or Bulgaria. While encouraging, such growth falls far short of the regulator’s ambitions of reaching N1.1trn ($7.04bn) in gross premium by 2013. Part of the lag is due to the industry’s fragmented nature, while a lack of awareness and mistrust have both played a role. Current regulatory reforms, if successful, could help drive consolidation and unlock the sector’s potential to contribute to broader economic growth. As the sector develops, the share of non-life will gradually decline; in fact, it has already started falling, dropping from 85.9% of premiums in 2003 to 75% in 2009, according to the NIA. Non-life’s share is about 34.2% on average in Africa and 42.4% globally.

MARKET STRUCTURE: The market at its current size is certainly crowded, with 30 general, 16 life and nine composite underwriters. The average capacity in the sector has risen on the back of the regulator’s decision to increase capital requirements for underwriters in 2007 to approximately N2bn ($12.8m) for life, N3bn ($19.2m) for non-life and N10bn ($64m) for reinsurers. This spurred rapid consolidation, almost halving the number of underwriters from 103 and raising the industry’s aggregate capitalisation from N30bn ($192m) to N200bn ($1.28bn) by the close of 2007.

Penetration of life insurance (stripped of pensions) was close to 0.2% of GDP in 2011, while non-life penetration reached 0.7%, according to Afrinvest. Given the separation of pension fund administrators in 2004 and of health insurance through the health maintenance organisation system, capacity in the life segment remains limited, with only seven dedicated life and 10 composite insurers currently operating.

The majority of underwriters following consolidation were of similar size, writing business of up to N3bn ($19.2m) per year. While final figures for 2011 were only expected in late 2012, a number of underwriters including Leadway, Industrial & General Insurance (IGI), WAPIC Insurance, STACO Insurance, Zenith, Cornerstone, Sovereign Trust, and Custodian & Allied have edged above the middle market.

Perhaps the most significant driver of market movements was the withdrawal of the licences of the formerly state-owned NICON Insurance and the Nigeria Reinsurance Corporation (NigeriaRe). NICON and NigeriaRe were sold to a group of investors led by Jimmoh Ibrahim in 2005. However, the firms were unable to recapitalise to the new levels and suspended in 2007.

Long the leading insurer of government assets, the closure of the newly privatised state insurers allowed a number of private underwriters to capture business.

TOP PLAYERS: The largest underwriter in 2011, Leadway, is a family-owned firm which focuses on oil and gas. Since its establishment in 1970, it has attracted some $14m of investment from the International Finance Corporation and, upon developing its own dedicated oil and gas window, has achieved combined gross premiums (life and general) of some N16.8bn ($107.52m). A close second, IGI is another composite underwriter that also has operations in Ghana, the Gambia, Rwanda and Uganda. With former Nigerian President Yakubu Gowon as its chairman, the underwriter has grown rapidly in recent years. By December 2011, its total assets reached N45bn ($288m), though only one-quarter of these were in Nigeria. Of the top 10 underwriters, significant changes in the banking sector are impacting the structure of the market and its appeal to foreign investors. Local banks Access, Zenith and Skye are selling Intercontinental WAPIC (renamed WAPIC), Zenith General and Law Union & Rock, respectively. Independent non-life insurers such as STACO, Custodian & Allied, Sovereign Trust and NEM Insurance, also part of the top 10, will likely acquire smaller players as the sector consolidates. The only new licence awarded of late was to a joint venture of First Bank and South Africa’s Sanlam in September 2010. Consolidation is still ongoing and economies of scale have yet to materialise, but the industry has been moving towards more transparency. With over 30 underwriters listed on the Nigerian Stock Exchange (of the top 10, only Leadway remains unlisted), a number have submitted themselves to independent credit ratings. Firms such as Niger Insurance, GT Assurance, Union Assurance and Crusader Insurance have all gained “A” ratings by Agusto & Company, a local credit ratings agency. While this will prove crucial in bidding for lucrative oil and gas risks, ratings are also an encouraging sign of transparency.

REINSURED: Despite playing host to two local reinsurance firms with continental reach, Nigeria’s reinsurance sector has narrowed in recent years. In addition to the withdrawal of former state-owned NigeriaRe’s licence in 2007, two more reinsurers – GlobeRe and UniversalRe – have also closed their doors in recent years. While all life risks are domesticated, just 15% of nonlife risk is reinsured within Nigeria.

Africa Reinsurance (AfricaRe), a multilateral organisation founded by the Organisation for African Unity in 1976 and owned by member states and other reinsurers, is entitled to a 5% legal cession of all reinsurance treaties in every African country and is currently the largest reinsurer on the Nigerian market. Despite the legal obligation, a full 93% of its gross written premiums in 2011 came from voluntary treaty cessions, according to international ratings agency Standards & Poor’s (S&P). With its top rating from S&P reaffirmed in June 2012, AfricaRe is overcapitalised and expects a further capital injection by the close of 2012.

Continental Reinsurance (ContinentalRe), the first and only remaining private reinsurer in Nigeria, has grown rapidly in size since its establishment in 1987 and has now balanced its exposure to Nigeria and other African countries through its offices in Kenya and Cameroon. While it estimates it captures roughly half of reinsured life risk, its share of non-life is lower than AfricaRe’s.

A third regional, reinsurer, WAICA Reinsurance, was established in 2011, replacing the former WAICA insurance pool. Headquartered in Sierra Leone, the $ 100mstrong reinsurer is a private company backed by the West African Insurance Companies’ Association and is meant to build capacity for risk retention in the region.

Although domestic reinsurance capacity has been growing somewhat with a smaller number of stronger firms, risk retention remains low. International reinsurers like MunichRe, SwissRe and the Lloyd’s market attract most of the larger risks, and domestic underwriters have historically ceded the majority of their non-domesticated risk. Only about 6% of specialised risks, such as oil and gas, remain in Nigeria. While local content rules in oil and gas require risks to be placed (up to 70%) with local insurers if capacity is available, the complex and large nature of these risks requires underwriters to develop their human capacity to underwrite them and, often, to form pools to share them.

PLACING ASSETS: Insurance, separate from pensions, has not yet accumulated a critical mass of investable assets. Burned by the downturn in the equities market since 2008, most underwriters suffered high losses in 2009 and remain risk averse in the face of equities. Meanwhile, growth in the main property markets in Nigeria has flattened out since 2010, curbing a source of traditional returns for underwriters. Insurers, like most asset managers in Nigeria, have flocked to the fixed-income market of federal government bonds, Treasury bills and the money market (see analysis).

Regulations are designed to prevent over-concentration in any one asset class, aside from sovereign bonds – 35% of life assets and 25% of non-life assets for property, for example. The growth of life premiums in the coming years and consolidation among underwriters may lead to more sources of long-term capital, but this may also drive a growing mismatch between liabilities and assets. Product diversification on Nigeria’s capital markets will be key to preserving life insurers’ investment margins over the long term.

BROKERS: Despite ongoing improvements in developing the industry’s overall capacity, brokers continue to play a central role. With retail accounting for such a small part of premiums, the number of brokers on the market has grown exponentially to dominate the commercial segment, which is majority government-linked business. An estimated 70% of industry premiums are controlled by brokers, according to the NIA, whose total commissions exceeded N2bn ($12.8m) in 2011, according to NAICOM. With 585 registered brokers and 54 loss adjustors in 2012, standards vary significantly between large international brokers, such as AON, Hogg Robinson and IBN Marsh, which capture a large share of oil and gas risk for the Lloyd’s market in London; larger local brokers, such as market leader SCIB; as well as smaller, more informal companies.

A common practice in the industry is for brokers to bid for corporate business and then shop around for the best premiums among underwriters. While this has destroyed price discipline on the market, it has also encouraged the practice of co-insuring through pools of local underwriters. Having booked the policy with one or several underwriters, it is not uncommon for brokers to then withhold premium payments, at times indefinitely. This has contributed to the abnormally high rates of receivables for underwriters, but it has also led to more noxious consequences, as clients seek to hold underwriters responsible in the event of a claim for which premiums have not been received.

NO PREMIUM, NO COVER: The regulator has long sought to address the challenges wrought by brokers’ excessive power. The concept of “no premium, no cover” (NPNC), whereby underwriters would not accept a policy on their books if no premium had been received, has been established in Nigeria for several years. Yet there are continued lapses by both underwriters seeking to boost the value of their premium income on paper and brokers seeking to maximise their margins, proof of the close relationship between some underwriters and powerful brokers. The NPNC policy has proven more successful in neighbouring francophone African countries. All covered by the same Chartered Institute of Management Accountants regional insurance treaty, 16 countries implemented NPNC in 2011, yielding immediate effects by increasing companies’ cash flow. Underwriters in Nigeria must fully provide for a policy after six months of no payment, but policies have been held on the books for much longer in the past. NAICOM has become much more stringent in revoking the licences of infringing brokers and is looking to revoke licences of brokers generating less than N1m ($6400) in commissions annually. In March 2012, for example, it withdrew 32 licences, continuing to crack down in recent months by suspending a further 105 brokers in August. “It is encouraging to see that the regulator is addressing the issues between insurance companies and brokers, particularly in regard to cash flows from end-users to underwriters,” SO Oyefeso, the managing director and CEO of Staco Insurance, told OBG. “While much remains to be done, adequate enforcement of current policies is set to create a healthier industry.” Meanwhile the regulator sees the market as under-served in loss adjustors, arguing that Lagos State alone could require 100 loss-adjustor firms.

ENFORCING THE RULES: Nigeria has six types of compulsory insurance, not all equally enforced. While better supervision of brokers will improve firms’ working capital positions, the industry regulator has more ambitious plans. NAICOM has built its credibility as a regulator on the back of its recapitalisation of the sector in 2007. While legacy issues, such as the messy privatisations of NICON and NigeriaRe, have scarred the commission, it hopes to significantly boost the sector’s contribution to the overall economy from a current capital base of N600bn ($3.84bn), according to Fola Daniel, the head of NAICOM. While a majority of underwriters were affected by the downturn in equity markets from 2008, the regulator has pushed ahead with more structural reforms beyond capitalisation levels.

Pending the full overhaul of current insurance legislation expected in 2013, the Market Development and Restructuring Initiative (MDRI) remains the guiding strategy for the sector. Launched in 2009, the initiative sought to grow gross premium income to N1.1trn ($7.04bn) by the end of 2012, create an additional 250,000 jobs, expand penetration to 30% of Nigerians and raise its contribution to 4% of GDP. While these goals may not be met, further ambitions of reaching gross premiums of N2.5trn ($16bn) by 2016 and N6trn ($38.4bn) by 2022 have been set. What may be more notable are the concrete moves taken by the regulator to promote such growth. The four main lines are to enforce compulsory coverage, sanitise and modernise the agency system, eradicate fake (informal) insurance services and introduce risk-based supervision. The MDRI also envisions three tiers of brokers – international and large and small local – in a bid to formalise industry practices and push smaller brokers to work through aggregators. The first priority is to enforce the five existing forms of compulsory insurance under NAICOM’s purview, but the MDRI envisions 16 kinds of products that would eventually be made mandatory.

COMPULSORY COVERAGE: Compulsory insurance typically accounts for over half of gross premium, although uneven enforcement has constrained the growth of retail policies. “One way to improve the challenges facing the sector is by better enforcement of compulsory insurance and more effective accountability for those that don’t comply with the rules,” Chike Mokwunye, group managing director at Royal Exchange, told OBG. The regulator has worked with the Nigerian Insurers’ Association and the Chartered Insurance Institute of Nigeria to set up a new online database to collect valid motor policies from underwriters in July 2012. Sharing this information with the Federal Road Safety Commission, the aim is to eradicate fake insurance certificates in the next few years. The next step will be to establish a similar database for marine policies, the second most-affected sector. “We expect solid growth in the motor and marine segments in the next year or two as the regulator moves to enforce compulsory insurance in these segments more systematically,” Wole Oshin, the managing director of Custodian & Allied Insurance, told OBG. “Meanwhile the association has established a platform to make sure that all policies are accessible and thus eradicate false policy papers.”

REPORTING STANDARDS: In a further bid to improve transparency, all companies listed on the Nigerian Stock Exchange are required to report under the requirements of the International Financial Reporting Standards (IFRS) beginning in 2012, with the few unlisted companies set to follow in 2013. Implemented across the financial services industry, these standards will require all underwriters to clearly segregate and provision for risk covered. The provision of this information is crucial to implementing risk-based supervision (RBS). Although NAICOM has yet to set a specific date for implementation, the shift towards IFRS will need to be completed first. The shift from the current Solvency 2 framework for risk provisioning towards RBS would heighten the pressure on many companies’ asset-to-liability mismatch (ALM). While most acute in the life segment, the industry’s average ALM has suffered from the lack of long-term investment instruments. There are 10 smaller underwriters that have been deemed close to insolvency in early 2012, with NAICOM placing them under regulatory watch.

CLAIMS: Based on British common law practice, the payment of claims does not have an arbitration court in Nigeria. The majority of claims processing is handled by the 54 registered risk adjustors. Since court cases take a long time to resolve, most are settled out of court. Loss ratios have been highest for the motor insurance segment, but all remain healthy for insurers. While some oil and gas incidents, as well as the flooding of the WAMCO milk factory in 2011 and the Dana Air crash of June 2012 have commanded high payouts, loss ratios remain low. As retail policies grow, however, there could be pressure on claims settlement processes. NAICOM has striven to force underwriters to pay claims promptly, and the number of complaints has been falling since 2008. Further consolidation would strengthen underwriters’ ability to process claims.

NON-LIFE: Although still the overwhelming force in the industry, non-life has not grown as rapidly as the life segment in recent years. Achieving annual growth of 22.1% over the decade to 2010, the segment’s growth rate dropped to 16.9% in 2009 and 0.9% in 2010, down from a peak of 44.1% year-on-year (y-o-y) in 2008, according to the NIA. Premium growth has mainly been driven by compulsory lines, yet excessive price wars in the fragmented market and inadequate enforcement have proved a dampener on industry profits and growth in penetration. A full 70% of premiums were made up of motor, marine and general accident lines in 2010. Softer rates in 2010 were sustained in 2011, with fierce competition encouraged by brokers. Low average loss ratios of roughly 26% over the past five years have sustained profitability in the sector, largely due to the fact that claims are usually dropped before proceeding to court, with most claims settled bilaterally.

MOTOR: By segment, motor insurance continues to dominate, growing at an annual rate of 22.5% since 2005 and accounting for 21% of the sector in 2010. The lack of statistical data regarding vehicles and the widespread use of fake papers to pass police checkpoints have proven disincentives for many vehicle owners to buy formal cover. Third-party motor insurance accounted for 25.41% of total industry premiums in 2010, according to BGL Securities, a Nigeria-based brokerage. However, with some 10m vehicles on Nigerian roads according to NAICOM, a figure which is expected to rise dramatically in the years to come, average premium of N5000 ($32) for third-party insurance would double the size of gross premiums alone. The establishment of the new Nigerian Insurance Industry Database (NIID) by the NIA and Chartered Insurance Institute of Nigeria in July 2012 is expected to significantly boost compliance, up from an estimated 10% in 2010 and 15.5% in 2011, according to figures from the NIA. Loss ratios are highest for motor, which accounts for over 40% of claims paid by the top 10 listed insurance companies, while competition has placed downward pressure on margins. While the 2003 act requires underwriters to charge comprehensive cover premiums of 10% of the value of an automobile, competition has forced the average down to 5% or lower.

FIRE: While motor has led growth, fire insurance has also shown healthy performance, expanding at an average of 18.7% between 2003 and 2010. Yet fire insurance remains marginal to the overall industry, accounting for a mere 11% of total premiums in 2010, according to Afrinvest. Inadequate coverage of public buildings and poor compliance by individuals continues, however. While more profitable than motor on average, poor compliance with compulsory tenant coverage has constrained penetration. Competition between leading underwriters in fire, such as Crusader, Royal Exchange and Sovereign Trust Insurance, has also been accentuated by brokers, although rates have held up slightly better in the fire segment than in motor.

LOCAL CONTENT ACT: While local capacity to underwrite complex risks remains limited, the Local Content Act of 2010, requires that all life, 70% of non-life and 40% of marine insurance be captured locally. All companies must work through a local firm if the capacity to cover the risk is available. NAICOM estimates that 33% of oil and gas risk is covered in Nigeria by leading players such as Leadway, Sovereign Trust, Custodian & Allied and Lagos State’s LASACO, accounting for 13% of total premiums in 2010. The lion’s share, however, is placed through brokers and reinsured through the Lloyd’s market. Although a number of domestic underwriters are rated by local agencies, such as Agusto & Company, one possible hurdle is the lack of ratings from global firms. Nonetheless, leading underwriters have established desks for oil and gas risk.

MARINE & AVIATION: Marine insurance, despite its significance in such a trade-dependent economy, has been plagued by poor enforcement and accounted for 10% of combined gross written premiums in 2010. The NIID plans to expand its operations to cover marine insurance certificates to crack down on fake operators. Information collected will be shared with the Nigerian Maritime Administration and Safety Agency. Compliance with local content requirements has lagged here too. In April 2012, the NIA estimated that Nigeria loses N3.7bn ($23.68m) in marine insurance to underwriters offshore, despite the existing cabotage law. The law reserves coastal maritime trade to Nigerian ships, which should be covered by local underwriters.

The aviation segment was hard hit in 2012, when two Nigerian-registered flights crashed the same weekend in June. Despite the existence of the African Aviation Insurance Pool, comprised of 52 companies and operated by AfricaRe, over half of all aviation risk is still placed outside Nigeria, according to BGL. While 30% of the Dana Air policy was held by local underwriter Prestige Assurance, roughly 90% of the risk was placed in Lloyd’s London aviation market, and the remaining 70% was handled by broker AON. While compensation had not been concluded by mid-2012, the policy has a single limit of $350m.

LIFE: The life segment has grown from a small base in recent years, despite the segregation of group life under the pensions sector. While the growth rate dropped to 15.9% y-o-y in 2010, average growth in the segment over the past decade has exceeded 24% annually and 33.1% in the five years to 2010, according to Afrinvest. Total life premiums are estimated to have reached N60bn ($384m) in 2011, or 28% of combined gross written premiums in 2010, according to NAICOM. A market of guaranteed products, individual policies have been slow in sales compared to group ones. Underwriters will be increasingly eager to move clients towards investment-linked products to shift the investment risk off their books with the looming shift to RBS, timing will be key. Initial attempts to launch non-guaranteed products coincided with the downturn in the equities market in 2008, dampening appetite for exposure to unit trusts. While the leaders in life in 2010 were AIICO, Niger Insurance and IGI, these underwriters will face significantly higher competition in the coming years from a range of new foreign entrants.

NEW OFFERINGS: Initial forays into microinsurance have focused on motor products and micro-credit insurance. Underwriters such as LASACO, a Lagos State insurer, have launched micro-products for motorcycle taxi drivers (okadas), while Standard Alliance and Oceanic General launched micro-policies for motor insurance in Delta State. While these initial efforts have been plagued with high distribution costs and the resulting unsustainable loss ratios, there is keen interest on the part of authorities for underwriters to roll out products to low-income Nigerians, particularly fishermen, farmers and traders. NAICOM commissioned a study on microinsurance from the UN Conference on Trade and Development, the International Labour Organisation (ILO) and GIZ, a Germany-based aid agency, which should be completed in second-half 2012. The report is investigating means of distribution, including through aggregators, such as trade associations, and direct distribution through mobile banking services.

While some underwriters, mainly in non-life, have expressed interest in these lower-end policies, scepticism remains. “I think micro-insurance will have to be subsidised by the government,” said Oshin. “We already have the agricultural insurance scheme, which could be used as a base.” Yet new means of distribution, such as mobile banking, will allow underwriters to cross-sell micro-policies to clients at a lower cost, leveraging existing mobile banking platforms. Scale will be key to the success of microinsurance in Nigeria: while the ILO estimates some 500m people worldwide are covered by microinsurance policies, the number remains in the thousands in Nigeria. With low margins for underwriters, these numbers will have to grow significantly for the sub-segment to become a viable source of profits.

AGRICULTURAL COVER: Agricultural insurance has been the most noteworthy venture into micro-policies thus far. The Nigerian Agricultural Insurance Corporation (NAIC), holds a de-facto monopoly on agricultural risk. Policies are subsidised by the government, where the farmers pay half of the premium and the federal and state governments pay 37.5% and 12.5%, respectively. Yet risk coverage has mainly been extended to the few large-scale mechanised agricultural ventures, while the majority of farmers have been left uncovered. By 2012, only around 1% of farmers were covered by the scheme, according to the International Centre for Energy, Environment and Development, an NGO. Floods in Sokoto and Kebbi in 2010 and drought in the Sahel in 2011 have highlighted the need for better protection. Meanwhile, the agricultural risk-sharing schemes launched by the Ministry of Agriculture and the central bank in 2011 have spurred the insurance regulator into action. Indeed, the Nigerian Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL) includes the requirement for farmers to seek some coverage for their crops in the form of credit insurance. NAICOM has moved to license more agricultural products in 2012, approving a number of products from IGI in March 2012, including plantation fire insurance, poultry and fisheries insurance, as well as multiplier crop cover. More underwriters are expected to follow suit through 2012, with weather, crop and other policies expected to be bundled with credit to private farmers.

DISTRIBUTION: While brokers remain by far the largest distribution channel on the market, positive signs indicate a looming rebalancing of underwriters’ distribution mix, which could have significant effects on their net cash positions and client acquisition. “We expect the distribution mix to change over time,” Godwin Odah, managing director of Union Assurance, told OBG. “While brokers currently have a stranglehold on the market, which is skewed towards commercial risk, bancassurance will play a growing role as retail gains traction.” Bancassurance has emerged as an alternative channel, though its growth has remained stunted by the small retail segment. As banks took larger equity positions in the sector during the 2007 recapitalisation, the prospects of growing fee income from insurance sales was appealing to many of the larger banks.

OUTLOOK: Sheer fundamentals would make Nigeria the biggest and most promising insurance market in Africa. While its distribution structure leaves brokers with excessive power to drive down underwriters’ margins, the past five years of consolidation of the sector leave it on solid foundations for growth. Further consolidation will expand underwriters’ capacity to handle the significant business generated by the local content act in oil and gas and drive growth in the long-neglected retail market, diluting the power of brokers and driving alternate channels. Foreign investors entering the market over the past four years, as well as larger local insurers, have started generating more innovation. Despite somewhat softer economic growth in 2012, the sector is likely to expand on the back of growing competition among a consolidated number of players.