Nigeria’s insurance market has great potential given its position as Africa’s largest economy, its substantial oil and gas reserves and its young and growing population. Yet Nigeria’s insurance market has failed short on that promise due in part to the volatility of growth in the country’s real gross domestic product, along with with uneven enforcement of mandatory retail insurance lines.
In a new Best’s Market Segment Report, “Nigeria’s Insurance Market Offers Significant Potential Despite Headwinds,” analysts at AM Best cite obstacles to insurance market growth that include low consumer awareness, lax enforcement of mandatory coverage laws, and new proposed capital requirements.
The analysts argue that the industry needs the support of government to improve trust and understanding of insurance if the market is to grow in the country.
There are 57 insurance companies operating in the Nigerian market, according to the report, based on the country’s latest regulatory data. The NGN 426 billion (USD 1.2 billion) of gross written premium (GWP) generated in 2018 represented growth of 14.5% over the previous year. In the five years between 2014 and 2018, the compound annual growth rate of total GWP grew on average by 8.6% per annum.
But that growth is not what it appears. AM Best analysts note that although growth has seemingly been strong, when viewed in real terms, the market actually contracted by approximately four percentage points due to inflation that averaged 12% over the same period. Market-wide GWP (excluding health insurance premiums) grew broadly in line with inflation to reach approximately NGN 490 billion (USD 1.3 billion) at year-end 2019, according to Nigerian Insurers Association (NIA) figures.
A key factor behind the relatively slow real GWP growth has been the low insurance penetration in retail lines.
“Low retail penetration can be partly explained by the low level of awareness and trust in insurance, as well as the absence of strong financial literacy across large parts of the population,” the report says.
“Furthermore, the extremely shallow level of economic growth in recent years has affected both the demand for insurance as well as the value of insurable assets across a number of lines of business.”
Mandatory Coverage
Overcoming the challenge of penetrating the retail insurance sector is linked to ensuring the enforcement of mandatory coverages. For example, NIA figures claim that as many as 80% of the 12 million recorded road vehicles in Nigeria were uninsured in 2018, despite motor insurance being compulsory, according to the report.
AM Best suggests the industry is missing out on around NGN 50 billion which would have boosted market GWP by approximately 12% in 2018.
Another challenge: there is also a shortage of technical expertise across some lines of business.
The insurance sector’s profitability and solvency may be adversely affected by the COVID-19 pandemic, although the fact that the market has been profitable “puts it in a better position to withstand the consequences of the COVID-19-driven global recession in the medium-term,” AM Best reports.
Citing the COVID-driven economic slowdown, the insurance regulator, the National Insurance Commission, has agreed to again delay the imposition of new capital requirements for insurers. AM Best’s report indicates these new capital requirements would pose yet another challenge for the industry, requiring more than 10 companies to double their reported 2018 year-end capital and surplus figures and pressuring some smaller insurers to merge with larger insurers, if they can prove their value to investors.
To help close the protection gap, “insurers need the support of government to enforce and promote the benefits of insurance,” the report says, calling for additional steps to enforce the uptake of mandatory coverages.
For their part, AM Best suggests that insurers could improve their distribution and premium collection via mobile applications to reach a greater proportion of the population.
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