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| Daniel |
Chuks Udo Okonta
The National Insurance
Commission (NAICOM) has identified reasons why most insurance companies are
underperforming and not meeting shareholders’ expectations in the area of
return on investment.
The Commissioner for Insurance Fola Daniel,
who made this disclosure at an interactive session between NAICOM and
shareholders of quoted insurance companies in Lagos, noted that most companies
under-price risks; make poor investment decisions; possess huge management and
underwriting expenses amongst others.
He said: “Pricing of Risk
is very critical to insurance underwriting. How well an insurance company
performs on a particular risk depends largely on how you are able to
appropriately price the risk.
“So, if you are one of
such companies that offer prices that are not commensurate with the risk you
are taking, there is no way such a company will make profit. No company will
make profit and pay dividends if it writes business for almost free, give
rebates and gratis but pay huge claims on risk it collected little or no
premium on. This is what most of these insurance companies do. The Group Life
insurance of federal workers is a key example in this regards.
“The second point is
investment decisions. Insurance companies are expected to generate income from
investment of premium received from policyholders. So it is imperative that the
Board and management of these companies take good investment decisions to invest
in ventures that will guarantee returns on investment.
“Companies who do this
are the ones succeeding. But majority would rather invest as much as N5billion
in failing subsidiaries that will never yield dividends and thus, no return on
investment. The situation is made worst because these subsidiaries which are
not insurance related are outside the regulatory purview of the NAICOM.
NAICOM has tried to
arrest this development by putting a limit of not more than 25 per cent
investment of shareholders’ funds in non-insurance entities.
“The third point is the
issuance of policy on credit and bloated premium. Until the directives by
NAICOM for strict compliance to the No Premium, No Cover policy by insurance
operators in 2013, majority of insurance firms wrote business on credit. In
most cases, these premiums are never collected and this had a negative impact
on the bottom-line of these companies. We also had situations where companies
bloated their premium income just to be seen to be doing well, but only to
report a loss at the end of the day.
“How do you reconcile a
situation where a company reports a gross premium income of N12billion, for
instance but goes ahead to report a loss of N4billion? It is because the gross
premium as reported is a fraud and thus, nonexistent.
“The last point I want to
touch on quickly is management and underwriting expenses. This is a major
obstacle preventing most insurance companies from making profit. The management
and underwriting expenses of insurance companies in Nigeria are about the highest
in the world and I wonder why it is so. In most cases, the gross premium
incomes of some insurance companies are almost always eaten up by acquisition
and maintenance cost which unfortunately, are largely un-receipted.”
He also told shareholders
to play their responsibilities in ensuring that they ask questions as to how
well their companies are being managed by their representatives, adding that beyond
the annual general meetings which they attend, they should often seek
information and get satisfactory feedback from their board and management.
He encouraged them to engage
in intelligent and constructive interrogation of the financial reports of their
companies, stressing that if they are not doing this as a shareholders, it
means they have no interest in protecting they investments.
He tasked the
shareholders to have a change of hearts and live up to their responsibilities
by taken keen interest in what happens in their companies and also look inwards
and purge themselves of fakes.
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