Insurance Companies to Record Low Profit in FY2022

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By Aduragbemi Omiyale

Insurance companies operating in Nigeria will struggle with lower profitability indices in the 2022 financial year, a pan-African credit rating agency, Agusto & Co. Limited, has predicted.

This will be caused by inflation and higher claims from the violence that led to the destruction of public and private properties during the #EndSARS protest of October 2020.

During the year, insurance firms and other businesses had to shut down because of the restriction of movement put in place by the federal government to contain the spread of COVID-19.

The lockdown negatively impacted insurance products distribution, especially with the inter-state travel bans restricting the movement of people and goods.

In the 2020 fiscal year, the industry paid out net claims of about N196 billion, up by 20 per cent year-on-year (representing 37.6 per cent of gross premium income [GPI]) and worsened by the violence that trailed the #EndSARS protest.

“Consequently, modest profitability indices are expected in FY 2021 and to a lesser extent in FY 2022 due to higher claims, an aftermath of the protests as well as inflationary pressures on the industry,” the foremost business information provider said in its report.

However, it said the October 2020 crisis has also emphasised the importance of insurance products, particularly with the absence of a robust social security system in Nigeria, noting that the violence could be a catalyst for insurance uptake in the near term, given that the insurance penetration rate has remained less than one per cent in Nigeria.

In the midst of these, Agusto expects a modest performance by the sector in the near term, stressing that performance would be supported by enhanced bancassurance which would allow insurance operators to leverage the more structured data and client base of the banking industry to deepen their reach in the retail market.

There are also new insurance products, particularly for the agriculture sector that have come on stream to boost GPI. Furthermore, the sharp switch to virtual channels, one of the many rapid changes witnessed during the pandemic-induced lockdowns in 2020 should be sustained in the near term, it stated.

With improved digitization, insurance companies can advertise and sell products via various digital platforms and partnership with Fintechs will also galvanise growth. However, digitization presupposes better management of cyber risks, it added.

As for the recapitalisation of the industry, Agusto said the persistent Naira devaluation has reduced the financial strength of many underwriters since the last recapitalisation exercise in 2007.

Although some insurers have strengthened their capital base through earnings retention, the ability of most operators to solely underwrite large ticket transactions has dwindled based on the lower value of capital in USD terms.

“Therefore, Agusto & Co. believes that the recapitalisation exercise could be a watershed in the industry. In addition to the benefits accruing from a larger capital base from a risk underwriting perspective, improved investment management practices will be upheld by a larger investment portfolio as insurers strive to generate adequate returns,” it said.

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