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Nnamdi Duru
Nigerian Insurers Association (NIA), a body of operators, and industry regulator, the National Insurance Commission (NAICOM) have expressed opposing views on why most insurers are still unable to meet shareholders expectations with respect to profitability and return on investment seven years after consolidation.
While the regulator pointed out infractions and unethical practices on the part of the operators are responsible for this, the operators said their inability to meet investors' expectation may not be unconnected to over-capitalisation of the industry in 2007.
In the course of the last consolidation programme in the industry, life insurers were mandated to raise their capital from N150 million to N2 billion while general insurers and reinsurance companies were asked to raise theirs to N3 billion and N10 billion respectively.
The industry's capital base towers above N300 billion while operators were said to have collectively raked in premium income to the tune of N285 billion in 2013, a 15 per cent increase over the N247.58 billion they made in 2012.
The Chairman of NIA, Mr. Godwin Wiggle told THISDAY that the failure of many insurance companies to deliver on the expectations of shareholders with regard to profitability and return on investments is a pointer to excessive capitalisation.
He fielded questions on why the industry's premium income had continued to fall short of its capitalisation and how he felt when investors complained of not getting returns from many insurance companies seven years after consolidation.
"It is a question with two answers I want to put it that way. If you go back before 2007, most people complained that, do we really need that size of capital to do insurance in Nigeria, was that capital not excessive.
"That was the first question but the reality of it is beginning to dawn on everybody now that may be that N2 billion, N3, billion and N10 billion were excessive," the NIA boss said.
"We have not really used the capital to the maximum because insurance penetration has not really been deepened for us to reap the benefits of that capital. We are not a trading company that will use capital to buy and sell goods, we are insurance companies and we have guidelines to the extent of how we can invest our funds. That capital has not really got the benefits of return on investment. It is improving gradually but I think there must be some diversification," Wiggle explained.
He also encouraged insurance companies in the country to always strive to be more creative with their product offerings to ensure that they deliver on the promises to shareholders since returns on the investment of the companies were still very low and do not fill this gap.
Wiggle said "we all cannot be waiting to depend on our underwriting profit to be able to make return, we should create some levels of ingenuity in the area of investment to be able to complement it because if you look at our returns from the core area of insurance it is minimal. What is sustaining most of us is investment returns."
Allaying the fear of insurance watchers over this development, the chairman said operators have started building the process of ensuring that there is return on the capital invested in insurance companies since what makes insurance conglomerates thick is return on investment.
In some countries investment accounts for over 60 per cent of the total profit insurance companies report. It is investment made companies like Swiss-Re, AIG and others world rated institutions, he stressed.
Meanwhile, the Commissioner for Insurance, Mr. Fola Daniel said under-pricing of risks, poor investment policies and strategies coupled with excessive underwriting and management expenses and over-bloated and unpaid premiums were responsible for the poor showing of insurance companies in the country.
"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
"Majority would rather invest as much as N5 billion 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 NAICOM
"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," Daniel stressed.
The above, according to the commissioner, ensured that insurance stocks never did well in the capital market since most companies do not pay dividend and do not give bonus to shareholders while their share prices stagnate at 50 kobo per share.
"Not many of these listed insurance companies make substantial profit if at all they make any profit. The direct consequence of this is that these companies are not able to pay dividends, no bonus issue and no capital appreciation. In fact the price of most insurance stocks in the Nigerian Stock Exchange (NSE) remains at nominal value of 50 kobo," he said.
Daniel also accused shareholders of failure to effectively oversee the activities of the board and management of their respective companies, a situation he said gave rooms for fraud to be perpetuated in such companies.
Source Thisday
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