Rising replacement cost dents quoted insurers’ underwriting profit

Insurers’ results reflect lower profitability of underwriting Quoted insurance and reinsurance companies have reported their results for the first quarter of the year, revealing dented underwriting profits, as the cost of replacing asset continues to mount.

Rising replacement cost brought by a high inflationary environment and spiralling total expenses due to the cost of doing business has continued to undermine underwriting results.

A slump in underwriting profit and weak investment returns have failed to drive profitability, raising concerns about insurers deteriorating margins, but experts have said that there could be an improvement in earnings if firms pay more attention to the retail side of the market.

14 largest quoted insurers quoted on the floor of the bourse recorded a combined underwriting profit of N6.71 billion in March 2019, a 27.16 reduction from N9.21 billion recorded last year.

While cumulative average combined ratio improved to 99.22 percent in the period under review from 109.81 percent the previous year, the most current figure of 99.21 percent is close to the 100 percent threshold.

The combined ratio is the addition of underwriting /operating expenses and claims expenses, divided by net premium income and a ratio below 100 percent means the insurer earns more in premiums than it pays out in claims.

Analysts note that the harsh and unpredictable macroeconomic environment and low consumer purchasing power in the aftermath of a fuel hike and incessant devaluations

means revenues are growing at a slow pace, which is why shareholders returns have been waning.

An industry expert, who spoke to Businessday on the condition of anonymity said that improved underwriting discipline can be only achieved if management and board of directors embark on cost cuts, but he added that cost of diesel fuel, training and development expenses and professional fees have contributed to bloating total operating expenses.

A breakdown of the figure shows AIICO Insurance Plc recorded an underwriting loss of N3.12 billion in March 2018, from a loss position of N90.21 billion the previous year, despite a 50.21 percent increase in net premium income.

However, the largest quoted insurer by total asset and premium saw combined ratio fell to 95.80 percent in March 2019 as against 120.60 percent the previous year.

NEM Insurance’s underwriting profit increased by a mere 1.14 percent to N1.53 billion in the period under review as against N1.52 billion as at March 2018.

The insurers’ combined ratio fell by 85.10 percent in the period under review as against 89.10 percent the previous year.

AXA Mansard Plc, the largest insurer by market capitalization, bucks the trend as underwriting profit was up 44.37 percent to N1.57 billion in March 2019 from N1.09 billion the previous year.

The company’s combined ratio fell to 109.60 percent in the period under review from 121.80 percent the previous year.

Wapic Insurance Plc’s underwriting profit increased by 61.73 percent to N1.25 billion in March 2019n from N772.60 million the previous year while combined ratio fell to 108.20 in the period under review from 137.40 percent the previous year.

Mutual Benefit Assurance’s underwriting profit was up 12.95 percent to N1.78 billion in the period under review as against N1.58 billion the previous year.

Mutual Benefits combined ratios dipped to 94.51 percent in March 2019 from 99.10 percent the previous year.

Analysts have been saying that for years that insurers are not liquid enough to invest in investment securities such as bonds and equities, but the recent jerking of capital bases of firms by regulators could add impetus to balance sheet strength.

In Europe, the United States, and Asia, investment income or returns are a major driver of profit since rising claims-brought on by catastrophic eventshave eroded underwriting profit.

Insurers beset by a mirage of challenges lag their peers in Sub Sharan African in penetration, but stakeholders noted that compulsory could offer a gateway to wider penetration.

Nigeria, with a population of 200 million people, has a penetration rate of 14 percent, this compares to Ghana 2.50 percent, and South Africa, 14 percent.

Experts have unanimously agreed that cost-efficient distribution channels, such as bancassurance, internet or mobile-phone distribution will be key to selling insurance to a larger share of the population.

Nigeria’s insurance industry remains heavily concentrated around Lagos. Digitalised channels have the potential to overcome the challenges involved in selling products in rural areas.