Insurance industry post recapitalization will be stronger, resilient, and more able to absorb economic shocks - Oluyemi
Patrick Olatunji Oluyemi is the managing director/ceo, Tespauruth Consulting Limited (TCL), a finance and management consulting firm, providing services to a wide range of industries and economic sectors with particular focus on SMES, but primarily having
Insurance companies in Nigeria were recently mandated to increase their paid-up share capital by more than 200 percent. Do you think this capital increase is necessary at this time?
Leaving for a moment the precise meaning of ‘paid up share capital’, I would like to consider first of all what prompted the regulator, The National Insurance Commission (NAICOM) to issue the directive for recapitalization, at this time. See, the industry is confronted with a two headed monster which if not addressed at this time, would likely lead to systemic failure of Nigeria’s insurance industry within the next few years. I do commend NAICOM for its timely intervention, at this time.
In the first place, there is a persistent over-supply of insurance service. By this, i mean, there are simply too many players jockeying for the insurable assets and exposures in Nigeria’s pretty shallow insurance market. This has led to a fierce scramble, with price competition being almost the sole factor of competitive advantage in the industry- this is what the players refer to as ‘price cutting’, but which simply is a reflection of marketplace economics. Inadequate premiums charged have led to a sustained stunting of industry growth. For example, while industry gross written premium in 2013 was N285 billion, it was N400 billion in 2018. When the figures are deflated for inflation over the intervening period, real premium growth has been very slight indeed. Projected insurance industry top-line growth in 2019 is 10 per cent, with inflation presently (July 2019) being about 11.5 percent. There is an obvious stagnation in industry revenues collected.
This stagnation in revenues works its way through the insurance companies’ operating accounts to reflect in unimpressive returns on investment. 2018 industry Return on Equity (ROE) averaged 9.5 percent, while return on a risk-free asset class such as Treasury Bills ranged between 13-14 percent in 2018. It would be difficult to say that the Nigerian insurance industry is at
this time a preferred investment destination.
So you think NAICOM’S intervention is needed at this time?
I think it is needed, and indeed is timely, as I have indicated above.
Given the above scenario, how do you think insurance companies can meet this new capital requirement and what should they do?
The figures speak for themselves. With the insurance industry return on investment being as it is today, I think the industry as a whole would encounter difficulty in attracting fresh local capital. Local alternative asset classes offer returns significantly superior to what may be obtained in the insurance industry. However, a limited number of international players may consider this to be just the right time to take a position and, anyway, the capital requirements in Nigeria’s insurance industry are relatively modest by international standards. The reality is that more than 85 percent of insurance companies’ quoted stocks on the NSE are priced below 50 kobo. Effectively, these are penny stocks, and may look attractive in particular to the discerning foreign investor with patient capital. But we expect most of the activity to be in the realm of mergers and acquisitions (M and A). TCL, of course, expects to play a significant role in the expected flurry of activity.
If you suggest mergers and acquisition, how can your firm help out?
We are already discussing with some individual players, in match-making exercises. We will assist in a range of interlocking activities, details of which we may not go into here. We expect to record significant success in our efforts in this area.
How would you characterise the structure of Nigeria’s insurance industry today, on the eve of recapitalization and consolidation?
By turnover, you have a tight pack of about six firms, all well ahead of the rest in revenue generation. At the top of the pack is the industry giant, recording in recent times, a much reduced rate of revenue growth. This company essentially relies on very low pricing to generate huge volumes. The result is that almost all its profit before tax is obtained from investment income, as it has a truly large portfolio of investment assets. It is easy to see that this operating model is not a sustainable one, long term.
Even its shareholders enjoying dividend pay-outs today will one day ask this question: If we are an insurance company, why are we unable to make a profit from our underlying insurance operations? Perhaps they should talk to TCL about re-jigging their operating model! (Laughs). Next is a truly impressive player that in the last three years has grown premium at a compounded annual growth rate of about 16 per cent, and this with large underlying premium figures, to start with! It continues a steady, sustained growth of both operating profit and investment income. Little wonder that its stock, in excess of N6, is the highest priced, by far, among the insurance stocks quoted on the NSE. Impressive. That firm must be doing something that other players are not doing! Of the remaining four firms in industry lead by turnover, a number have bank affiliationsit seems clear that having a large affiliated bank customer base is a source of competitive strength, today. Next are a group of about ten companies with turnover between N6 billion and N18 billion. Most of these corporations continue to record slight turnover and profit growth. The third and final category (where the largest number of insurance companies are located) – with turnover less than N6 billion- can be divided into two segments. There are a number that are breaking-even or recording slight premium and profit growth. And then, there are some companies in a distressed or near-distressed state.
It is clear that the ability to generate large volumes of premium, sustainably, is the most important factor of competitive advantage in Nigeria’s insurance industry today (July 2019).
We would like you to look into your crystal ball and hazard a guess as to the emerging market structure, post-recapitalization?
A detailed review of the market players suggests that we will have no more than 21 insurance companies standing post recapitalisation. The smallest number will be life only insurance companies. Although the prospects of growth are still largely untapped in this market segment, most players are yet to build the necessary digital and direct sales platforms that will harvest the undoubtedly abundant potential returns in this sector. Also, a limited number of nonlife insurance only companies will remain in operation. But, the market will be dominated by a handful of composite insurance companies (those that underwrite both life and nonlife insurances), probably about seven companies. The large advantage that composite companies have today in cross-selling their offerings can only increase in tomorrow’s market. It will be a much stronger industry, much more resilient, and more able to absorb the shocks from Nigeria’s economic cycle.
Can we have a final word from you, sir?
I think the capital adequacy challenge of the industry will be effectively addressed in the immediate, at least, by the ongoing recapitalization. I think the industry requires to have emplaced as quickly as possible an integrated, effective and comprehensive Enterprise Risk Management (ERM) model, that will guide the actions of individual players, and with which the regulator may more effectively direct the industry. I think that the twin challenges of stunted revenue growth and unsatisfactory returns demand that Nigeria’s insurance industry admit that the presently dominant model of enterprise management is inadequate in several respects, and adopt a tested, flexible, dynamic, new model of enterprise management and corporate transformation. Happily the TCL enterprise transformation model meets all the demands of all the ticked boxes. The insurance industry, and indeed other industries and sectors of the economy, certainly will hear more about this new model in the weeks and months to come.