Despite decades of activity, Nigeria’s insurance sector is still largely underexplored, with the industry’s penetration at less than 1% of GDP as of March 2022. The country’s demographic growth – the population is forecast to surpass 233m people by 2025 – combined with its growing economy makes the insurance sector ripe for a significant expansion in the years to come.
To unlock its potential, the sector will have to overcome historical obstacles to growth. For example, the fragmentation of the market – which reflects the country’s vast distances and regional disparities – has kept a significant number of insurers profitable, and able to explore sector-specific and geographic niches, which makes it difficult for insurers to increase product awareness. At a macroeconomic level, many Nigerians face economic issues driven by security concerns, persistent unemployment and a gradual decrease in the country’s hydrocarbons output, all of which continue to exert downward pressure on investment capacity (see Economy chapter).
However, the insurance industry has been able to take advantage of some of the opportunities that have arisen in the corporate segment. Nigeria’s economic development continues to offer diversification prospects, especially in the non-life insurance space.
Sector Performance
In 2021 the insurance sector reported a 10.2% increase in gross written premium to N560bn ($1.33bn), compared to a figure of N508bn ($1.21bn) for the previous year, according to the most recent annual figures from the Nigerian Insurers Association (NIA). The figure has risen since, with gross written premium at N551.4bn ($1.31bn) as of the second quarter of 2023 alone. The sector is relatively crowded, with 64 licensed insurance companies and three reinsurers operating in Nigeria as of November 2023. “The market is highly competitive – there are bigger companies, but even the smaller ones hold their weight,” Michael Nwanneka, a senior associate at Nigerian law firm Aluko & Oyebode, told OBG. “It is a market where you are dealing with the public, and the public is driven by value and interest. So insurers know that they have to be competitive.”
Similarly to what took place in other industries, the Covid-19 pandemic impacted normal sector activity. Lockdowns resulted in some customers not renewing their policies, leading to lower premium, while unemployment in some sectors of the economy also impacted insurance adoption. “There was lower patronage by policyholders due to a reduction in income, as some people were let go from work and some incomes were reduced,” said Nwanneka.
Insurance distribution – which is highly dependent on personal contacts in the Nigerian market – was also negatively affected by lockdowns. However, the inability of brokers and sales teams to work encouraged some operators to develop digital offerings.
Regulation
The sector’s expansion has progressed in accordance with the Insurance Act of 2003, which lays out the laws governing insurance activity. Sector oversight is the responsibility of the National Insurance Commission (NAICOM), while the NIA is an umbrella trade association for industry players.
The regulator launched the Market Development and Restructuring Initiative (MDRI) in 2009 to increase insurance penetration and gross premium by enforcing providers’ compliance with mandatory insurance requirements and their alignment with international insurance practices. When the MDRI launched, NAICOM estimated that the Nigerian insurance market could be worth as much as N6trn ($14.3bn) by 2020. However, the unaudited financial statements for 2021 released by NAICOM showed overall income from premium in the industry at just over N630bn ($1.5bn) and total assets at N2.1trn ($5bn), while NAICOM reported total assets of N2.3trn ($5.5bn) for the fourth quarter of 2022. In November 2022 Sunday Thomas, CEO of NAICOM, told a seminar organised by industry media that the regulator was making efforts to bring the insurance sector in line with international standards through a 12-point initiative to collaborate with stakeholders and boost the MDRI’s product promotions.
In 2019 brokers still accounted for a significant portion of insurance distribution, representing 52% of total gross premium, or N257bn ($612m), followed by insurance agents at 34%, or N167bn ($398m), and direct sales at 10%, or N47bn ($112m).
Despite its potential as a distribution channel, bancassurance accounted for 1% of premium in 2019. This is partly due to its record as a distribution channel in the Nigerian market. Driven by concerns from the Central Bank of Nigeria regarding the way insurance plans were being offered by banks, in 2016 the central bank suspended the distribution of bancassurance products. The ban remained in place until March 2017, when banks were once again allowed to market insurance products under new guidelines that stipulated that they could not sell products with insurance features or offer the payment of insurance premium as part of their offered banking products.
A more recent modification to bancassurance practices came in December 2022, when NAICOM published new guidelines for the distribution channel. The modification removed the limit on insurers whose products banks could market, and banks are now free to distribute products from as many insurance companies as desired rather than only from the company with which the bank has an exclusive partnership. This is likely to improve price competition in the segment.
Minimum Capital
In order to solidify Nigerian insurers, NAICOM moved to increase the minimum capital requirements. In May 2019 it published a circular increasing the minimum capital for companies across the market. Life insurance underwriting firms would have to raise their minimum capital from N2bn ($4.8m) to N8bn ($19.1m), while general or non-life insurance underwriting firms were expected to increase theirs from N3bn ($7.1m) to N10bn ($23.8m). Additionally, the minimum capital requirement for composite insurance underwriters would jump from N5bn ($11.9m) to N18bn ($42.9m), while reinsurance operators would see their minimum capital limits double from N10bn ($23.8m) to N20bn ($47.7m).
Nigerian insurers were expected to be in compliance with the change as of June 30, 2020, although this deadline was later pushed back to December 31, 2020. The pandemic led NAICOM to extend the deadline further for insurers, stating that capital increases could be done in two phases and would have to be fully completed by December 2021. However, in July 2022 the Federal High Court of Lagos ruled that NAICOM did not have the authority to unilaterally raise the minimum capital requirements for insurers without first amending the Insurance Act of 2003.
As of May 2023 the new minimum capital requirements for insurance companies had yet to be implemented. If enacted, the new limits would help insurance companies be more financially stable and increase public trust in the sector. Smaller operators would likely merge or be absorbed by competitors.
Whether or not the sector will experience a significant consolidation over the coming years remains to be seen. As of 2018, for instance, the five largest insurance companies in Nigeria had a market share of around 55%. According to a report published by Fitch Ratings in February 2020, the large number of small players in the market and its fragmented nature both act as impediments to overall growth.
Several operators were already showing signs of undercapitalisation, but after the pandemic and the economic crisis caused by the steep depreciation of the naira in 2022, small operators are likely to have limited options. If the new government elected in March 2023 provides the conditions for NAICOM to raise the minimum capital requirements, consolidation in the industry is likely to accelerate.
New Licences
Despite the nature of the market and the difficulties that the sector faces when it comes to increasing overall premium, new players are looking at Nigeria with interest. In October 2020 NAICOM issued licences for four insurance companies – Heirs General Insurance, Heirs Life Assurance, Stanbic IBTC Insurance and Enterprise Life Assurance – and one reinsurer, FBS Reinsurance. “New entrants face a crowded market, where raising awareness of the economic advantages of insurance protection remains challenging,” Nwanneka told OBG. “What the new companies have is a regional consideration first. In Nigeria, some cities are livelier than others, so if you want to get established, you want to be in the commercial hubs. This way you have more of a market to which to advertise your products from the get-go.”
The rise of technology-based insurers is also expected to create new competitors in the market. Some Nigerian start-ups are up-ending the space by developing customised products that can be accessed through mobile phones. This is expected to enhance product variety and improve the deliverability of insurance services in the near future (see analysis).
Claims
Gross claims for the sector came in at N258.9bn ($616.8m) in the second quarter of 2023, up from N242bn ($577m) in the third quarter of 2023, with net claims paid out adding up to N182.6bn ($435m). Among the non-life segments, motor claims led the way, with 88.6% of such claims being paid out. This was followed by marine and aviation (74.7%), general accident (69.6%), miscellaneous (65.1%), fire (60.8%), and oil and gas (44.4%) claims, adding up to a total of 56.4% of all such insurance claims being paid out, compared to 93.5% for life insurance claims.
Unexpected Events
Besides the pandemic, the insurance sector has had to deal with other unexpected events, some of which have had a direct impact on the number of claims. In October 2020 clashes between police and demonstrators during protests against Nigeria’s Special Anti-Robbery Squad led to N11bn ($26.2m) in claims. Between June and November 2022 severe flooding killed at least 600 people and displaced an estimated 1.5m. Although the impact of the floods on the insurance sector was still being evaluated as of May 2023, sources in the sector told local media outlets in November 2022 that the resulting claims from damaged homes and property could add up to as much as N1trn ($2.4bn).
Products
The non-life insurance segment’s performance is anchored primarily on a few business segments. In the second quarter of 2023 gross non-life premium income reached nearly N551.4bn ($1.3bn), with almost a third of those premium coming from the oil and gas segment, which accounted for just short of N113.8bn ($271.1m) and remains the biggest business segment for non-life insurance. This was followed by fire insurance, which brought in over N94.7bn ($225.6m). However, the motor segment tends to be the entry product for many insurance consumers in Nigeria, bringing in over N57.3bn ($136.5m) during the same period. The remaining premium in the non-life insurance sector were split among the marine, general accident and miscellaneous sectors.
Growth Potential
Several segments are expected to see growth in the coming years. In October 2022 Africa Re, a Lagos-based reinsurer, estimated that the agriculture sector has the potential to generate $600m in premium annually, marking a substantial possible increase from $10m in premium in 2021. With agriculture set to remain a key component of the economy, insurance companies will need to craft effective distribution strategies to cover the market, especially since small plots account for a large proportion of agriculture. According to Africa Re, between 2017 and 2022 at least 16 insurers were granted approval by NAICOM to underwrite agriculture risk.
Other sectors of the economy offer opportunities for insurers, especially as the economy diversifies away from oil production and exports. Cybersecurity insurance – covering losses incurred by cyberattacks – is a segment that is likely to see demand growth, as an estimated 71% of Nigerian organisations were targeted by ransomware attacks in 2022.
Outlook
The insurance sector has only skimmed the surface of what Nigeria’s economic growth could ultimately represent for the industry. However, raising gross written premium will likely require a change in the market’s structure. The large number of competitors and the limited financial capacity of some of the player, has made it difficult for the sector to convince consumers of the benefits that the industry has to offer. The delay in the implementation of higher minimum capital requirements is likely to continue to stall consolidation in the short term, but the lingering effects from the pandemic and the reduction in oil output are likely to encourage policymakers to take steps to foster stronger insurance providers.
Raising the low rate of insurance penetration in the country is tied to ongoing efforts to address persistent levels of unemployment and poverty. Better economic conditions are expected to play a critical role in supporting the sector’s overall growth trajectory and allowing more Nigerians to prioritise coverage.
Read More from OBG
