Okunlola: Transformation in Insurance Industry is Inevitable
The Partner Audit Services and Insurance Sector at KPMG, Kabir Okunlola, in this interview with Nume Ekeghe, discussed the opportunities waiting to be harnessed in the insurance sector if anticipated reforms are implemented. Excerpts:
Tell us about yourself and your career so far.
My name is Kabir Okunola, I’m a partner in financial services group in Audit at KMPG I also head the insurance which is our market facing functions specifically focused on insurance industry to make sure that we have the attention and focus as well as penetration in the market.
Can you give us a feel of the insurance landscape in Nigeria?
The insurance industry continues to be a big centre of attention for both the government and the private sector. The opportunities are very big. However, in terms of play, it has been underperforming and that is why there is a lot of attention from the private sector, from government on what we need to do to move the insurance sector to achieve its potential. In other develop market, insurance industries own banks, whereas in Nigeria banks own insurance industries before banks were asked to divert from the insurance industry. So it is a sector that still presents a lot of opportunity however, it has underperformed.
The sectors are fragmented, we still have 56 insurance companies and when you look at banks that are far bigger, we have less numbers of players. The right focus to achieve in that depth in that sector hasn’t happened. You still have the top six insurance companies owning and controlling more than 60percent of the market and that means the other fifty companies are not doing as much. And if you have a situation where you can consolidate that to have very few and strong players who have the right capitalisation and have the right investment structure and technology then what you would see is that you would be able to have the right depth in that market. And then you can have the right product development, pricing and then then focus on consumer needs would be strong to generate the desired growth in that sector.
What are the main challenges facing the industry and how can there be a turnaround?
Transformation is inevitable in the insurance industry. The underperformance for the last couple of years cannot continue and for that to happen, you fundamentally need to address some key areas on governance. I’m happy because regulators are looking in the same direction. They have issued what they call 2017 priorities areas. They are looking at governance, cost in the sector and also capitalisation and some other strategic areas to help the sector to consolidate and have the right scale to target the opportunity in the sector. Again we say that if you divide it, you have the life and non-life sector; the strength of the insurance business is the over performance of the life business and relatively, Nigeria is about 30/70 life to non-life. In other developed market, it is the other way. And what the life business does is helps the insurance companies develop the right pool of funds because life investments are able to generate sufficient long term funds and essentially match those funds to the longevity and mortality of the individuals and if you able to pull that fund, you are as insurance industry can invest in infrastructure to help government to be able to bridge the infrastructure deficit that it has which is long term funds and would be similar to what you have in the pension industry.
Under what accounting standard do insurance companies account for their insurance business?
Nigeria is in the IFRS regime now effective from 2012 and what that means is that insurance companies have to adopt IFRS and then, there is a specific IFRS that was issued for insurance companies that is IFRS4 which is generally referred to as the phase 1. It is meant to focus on presentation and disclosure for insurance so that people can better understand the business of insurance. If as an insurance company, you adopt A practice, you are allowed to continue same goes to those who adopted B practice. So what that really meant is that two insurance companies that have the size, product means and capital and market size may report performance differently depending on the standard they adopted. That is what really generated the need to have the phase 2 of IFRS which we call the IFRS17. IFRS17 is expected to be issued before the end of this year and to be effective by 2021-2022.
The overall objective of IFRS17 is that it seeks to harmonise accounting principles by insurance companies and then also focus on risk management.
Are you saying with the adoption IFRS reporting, it would increase interest and investment to this sector?
Yes it is going to engender confidence of investors of this segment.
We have been hearing about NAICOM intending to migrate to risk-based supervision of insurance companies. What are the implications?
The risk-based supervision is essentially providing regulatory oversight and supervision on it by looking at the nature of their risk. So that the intention is focused on the most risky entities and less risky entities get less risk attention. Essentially it is supposed to drive proportionate supervision so that resources that are available to the regulators are also properly applied with level and skill based on the individual risk you have in the industries. And this would go a long way because that is also what we have asking that the regulator do for a number of years. It is key pillar in supervision. For IFRS17, the principal benefit is that you are going to have consistency. Also you are going to have a risk focus reporting and then investors again would understand insurance better and make right investment decisions.
Would this practice of insurance require more specialists?
Yes, depending on the complexities and the risk assessment of individual entity. So generally what reporting entity would have to do is to look at its processes, people, and technology and its reporting functionality to see the gaps that you have in its individual areas.
It is going to be all encompassing, and it is also going to affect reporting of some entities who report less for example, then your investors must understand the rational and outlook for your performance. So in terms of investment positions, people can be better informed and take the right decisions as it relates to you from an investment perspective.
What is your outlook and what do you foresee in this sector?
From both the operators and regulators perspective, the first thing is that the right decisions are being taken and everyone is now interested in seeing the issues in this sector. And with all this happening, you can only expect results. The regulator has issued their own regulatory priority for 2017 focus on the strategic areas I mentioned earlier. So if those happen, then we expect that the operators would respond positively and take actions that are necessary to be able to be competitive in this sector. Once they do that, you would find out that ultimately the sector would benefit. So if you have stronger capital in the sector and you have stronger performance in the sector then the opportunities are also going to be there.
Then again from the government, the government is very interested in sectors that have potential to generate funds and resources within the economy and is part of what will create the gains in the long run. So the insurance sector is the right sector to have that type of investment and focus because if you do that, you are going to create employment and you are able to raise funds for infrastructure for example instead of going to borrow.
KPMG is organising an insurance conference, can you speak about that?
The insurance conference is part of an investment of KPMG thought leadership and would help coordinate decision assessment and discussions on the right opportunities and investment in the sector being a priority sector. We have brought very good resources both locally and international to talk about the sector and bring the chief executive officers and chief finance officers in the sectors to talk on the transformation of this industry.
We also going to have discussions around IFRS and help stakeholders know what they need to do to be competitive in this industry.