Drop in the Ocean: Nigeria’s $73 Million Premium Cannot Grow Its Insurance Sector

Nigeria’s insurance has always been in the doldrums for many years. The sector has always been playing a ‘second-fiddle’. However, nothing revolutionary would happen to the industry in 2016.

The Nigerian government thought it has big plans for the sector this 2016. The government’s budget for insurance this year would not change much. In the 2016 Appropriation Bill, a total of NGN14.65 billion ($73 million) was apportioned as premium payments for group life insurance to protect employees of the government in major ministries, departments and agencies, MDAs. The life cover will include the country’s intelligence, security and youth corp members. These are graduates in the compulsory one-year national youth service corp, NYSC.

This is still a drop in the ocean, $73 million, will not take Nigeria’s insurance industry to a place where it will contribute to its national development, grow Nigeria’s sprawling small and medium scale businesses, improve quality of life, business and enterprise risks management for a fast growing services and ICT sector.

Source: KPMG Consultany Services

Nigeria’s under-performing insurance industry, has little sign of improving fast. Critical data shows that just about 1% of Nigerians have at least one insurance policy. This is inclusive of motor vehicle insurance that makes up about 70% of the total market size. Total premium collected per year has been pegged at $1 billion from 2010 to 2013, compared to $50 billion for South Africa. The situation is grim when you compare Nigeria with Morocco with less than 10% of Nigeria’s population.

KPMG consultancy services in its blog post ‘Insurance Market in Africa: Where is the boom?’, took out the stress to highlight key challenges confronting the insurance industry in Africa:

  • “Low awareness and understanding of insurance across various population segments;
  • People do not trust financial service providers;
  • Given the low income levels and how challenging the business environments are, there are not enough incentives for multinational companies to enter African markets and develop the sector;
  • There is a lack of reliable information, making it very difficult to assess people’s risk;
  • The legal and judicial systems are poor;
  • There is a lack of human capital and expertise;
  • Shallow financial markets make it difficult to raise enough money to capitalise insurance/re-insurance companies; and
  • Communities often make use of informal forms of insurance rather than using the services of formal insurers.”

Everything in the above diagnosis, fits Nigeria’s case. However, Africa’s share of global insurance premium is a mere 1.5%. Moreover, South Africa’s insurance market has been the shining light in the continent. Over 70% of insurance premium collected in Africa is from the country.

What makes South Africa succeed in insurance? It is life insurance. Life insurance accounts for about 80% of its premium, most insurance companies in South Africa take life products very seriously because it is sustainable compared to motor vehicle insurance that leads in Nigeria.

Nigeria’s insurance companies are also guilty. In spite of the difficult operating environment in Nigeria, insurance companies also contribute to their stunted growth. Their claims ratio is about 50% compared to about 90% in other markets. This perhaps justifies Nigerians for not trusting insurance companies and using alternative risk management means. Their approach to selling insurance products has been fixated on old strategies that has not worked. Nigeria has a large informal sector, insurance companies in Nigeria are still largely disconnected from their yearnings and lifestyle.

Nigeria’s insurance companies will need more than $73 million annual life premium from government to attain its rightful place in the economic system. Structural reforms, rejigging of their business model, jettisoning their overt-dependency on public sector premium could put them in the path of meaningful growth.