Nigeria country focus: Local content rules create new challenges for Nigerian market

Increasing numbers of African countries are developing local content rules for the insurance sector, forcing insureds to use the local market until capacity is exhausted before taking risks to the international markets. Nigeria has been among the first to adopt such an approach and is often held up as an example in other countries where the market is looking for more support from its regulators. However, there have been some unintended consequences as the market adjusts to the new regime. One broker has been quoted as saying: “It can make the market lazy because they don’t have to develop new products or innovate, the business comes to them automatically.”hideSere Mada Kaba, Director of Risk Management and Compliance for Africa Re, says: “Local content is having an impact in Nigeria and the same thing is developing in Ghana, for example.” But not all the business does reach the local market. He explains: “Generally we have no control over the big infrastructure projects involving Chinese investment. That all depends on government when they sign the contracts and often the business will go straight back to China.” More encouragingly, he says, the local content laws have helped support growth in local and regional players, both insurers and reinsurers, and increased the amount of business retained in Africa, which ultimately benefits the local economy. Adetola Adegbayi, Executive Director of Leadway Insurance, believes however that the major problem is underinsurance. Using political risk insurance as an example, she says there is little demand for this cover, even though many people are worried in the run-up to the presidential elections later this month. “Sometimes we get requests,” she says, “but by the time you get quotes it is too expensive and people choose to manage the risks. Some international companies do buy it, including some of the large oil companies. Some of them have global programmes on a non-admitted basis and some buy cover locally under the Nigerian content regulations and then reinsure it into the international markets.” She explains that Nigerian insurers do not price for political risks, however the facultative underwriters out of London will provide it as an extension of the property reinsurance programme. Returning to the issue of underinsurance and the regulator’s desire to drive insurance into new areas, Ms Adegbayi says the rebasing of Nigeria’s gross domestic product last year resulted in both good and bad news. The good news was the size of the economy had been underestimated and that Nigeria was actually the largest economy in Africa, overtaking South Africa. The less good news was that insurance penetration was, in reality, lower than had been first thought. The figure for the 176 million-strong population had been considered to be about 0.7%—a low figure compared to other markets with economies of a similar size. However, the new figure suggests insurance penetration sits even lower, at nearer 0.45%. Cash before premium Ms Adegbayi says: “It just goes to show there is still an untapped market to explore.” The corporate insurance market is faring better than personal lines and Ms Adegbayi suggests corporate insurance buyers are “quite savvy”. Most business, she says, comes into the market through brokers. Again, driven by the regulator Fola Daniel, the industry is required to see the cash before issuing a premium. Various insurers, however, say this has had some more unintended consequences. For example, those who previously paid in instalments can no longer do so but cannot afford to pay a year’s premium upfront. Instead, they are no longer buying. Ms Adegbayi says: “It is helping cashflow for insurers. It is not helping to deepen the market penetration. If you are trying to reach the mass market but telling them that they will have to pay their insurance premium all at once, before doing anything else, and you are not allowing credit, people have to make choices. Cash before cover is a double-edged sword. It is increasing premium production and cashflow but having a negative impact on growth.” There is also concern about the immaturity in the market and the lack of understanding among insurers themselves. Ms Adegbayi says she is trying to impose mature market views on an immature market but knows her reserving levels are higher than her competitors’, which is allowing them to undercut on pricing. The risk, of course, comes if there is a claim. Again, the need to pay claims is a significant issue if the population is to trust insurers to deliver on claims promises. More international insurers are moving into the market—Old Mutual and Axa to name but two—and Ms Adegbayi says that may well bring more discipline and experience into the sector. Her views are echoed by Ukachi Orji, CEO at KBL Insurance, who says: “Volume is vanity, profit is sanity.” And Beyo Fakorede, Director Operations at Staco Insurance, adds: “No premium no cover has been pretty good for us. The problem we were having is that the brokers would collect the premiums but not pay us. Now they have to pass the funds on is has had a huge impact on the bottom line.” But like Ms Adegbayi, Mr Fakorede admits it has impacted negatively on the numbers actually buying insurance and he believes the insurance market has shrunk as a result. He is confident that the buying public will slowly get to grips with the new system and, ultimately, it will benefit both insurers and insureds. “This year it is already a little better,” he says. Understanding the market Expertise is another issue, according to the insurers, who accuse many brokers of not truly understanding the risks and looking only at rates rather than cover. Ms Adegbayi says the problem is not just with the brokers but says there is a “dearth of local insurance experts in Nigeria generally”. She welcomes the arrival of new international investors to the market and is confident that with penetration levels so low, there is room for all. The brokers are quick to defend their sector. Speaking to Commercial Risk Africa in Lagos, Ayodapo Shoderu, President of the Nigerian Council of Registered Insurance Brokers, admits: “In past years brokers have been given a terrible name—we collect premium, we sit on it and don’t turn it over to underwriters.” But he believes this has been unfair and accuses insurers of being just as bad historically in not paying claims properly. However, he welcomes the new stance from the regulator. He sums up the change as “fantastic”, giving clarity and security to insureds, brokers and insurers. Like the insurers, however, he says there have been some unintended consequences. “Once this happened, cashflow is better but the challenge we have seen is that the regulator needs to understand growth would be impacted.” The government is one of the largest buyers of corporate insurance in the country but Mr Shoderu says it has even affected the government departments’ buying patterns. “Many of them haven’t been paying upfront for their insurance but have been getting insurance protection. Now the government is finding itself uninsured in some areas. “They are having to adjust, just like the private sector. But the change is good as it is making the whole process more transparent.” Another issue for the Nigerian insurance market is the relationship between underwriting and claims, according to Alex Aquereburu, Director of Risk at Continental Reinsurance. Lagos-based Mr Aquereburu says: “There is no bad risk as long as it is priced right. You might insure 99 good apples but the one bad apple can spoil the whole basket.” He says there is a tendency for insureds “to leave the front door open” once they have bought insurance and insurers are happy to collect premiums without necessarily matching up the income to the claims experience. “Unfortunately the guy underwriting the risk does not know what is happening on the claims side,” he says. It also means the issue is rarely discussed with the client. Mr Aquereburu has urged underwriters to better understand the risks they take on—and to be more aware of the claims experience too. He welcomes the arrival of international players into the market, which he hopes will improve underwriting discipline and increase awareness across the market as a whole. Like the insurers and brokers, Mr Aquereburu has seen some teething problems with the no premium no cover regulations but is also confident that it will be good for the market as a whole. He has also seen some issues with the regulator’s local content initiative. With all local insurers being invited to take part in a risk, the policy can end up being split between almost every player in the market, with some taking just $1,000 of the risk. Mr Aquereburu says this can make it overly complicated when a claim comes as the insured has to settle with up to 40 different insurers. He also questions whether it helps with underwriting discipline as insurers can simply follow the lead without properly assessing the risk for themselves. And he too is worried that it is stifling growth in the market overall, as insurers do not need to search for business or break into new markets because it is being delivered to their door. Again, he sees these as teething problems that he hopes will be ironed out in the coming years.

Nigeria country focus: Local content rules create new challenges for Nigerian market

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