By Abel Kabiru
Insurance industry CEOs are confident that they are going to post good numbers in 2016. This confidence comes in the wake of an industry decline, where it registered a 9.2 percent growth up from the usual double-digits. Over the last five years, insurance industry has registered a compound annual growth rate (CAGR) of 20.3 percent.
Insurers attribute the stymied industry performance to a couple of factors that cut across the board: stiff competition defined by extreme price undercutting, too many players in a small market, fraud especially in the motor and medical classes, apathy by the consumers and unfavorable macroeconomic environment. The players note that the failure by government to pay suppliers and contractors on time has had a ripple effect on the entire market. Seeing that retail insurance is largely bought whenever individuals have adequate disposable incomes, majority of those depending on the government to honor its financial obligations have tended to eschew signing up or renewing their policies.
The industry is evolving gradually and the regulator, Insurance Regulatory Authority, is at the forefront of this change. IRA is moving the industry from compliance-based fixed capital standard to risk-based capital, which means that underwriters will only be allowed to carry risks that are commensurate with their capital. Insurance companies will have to raise their capital levels substantially to land big clients. The big boys with ample financial muscle will inevitably land more accounts. Small underwriters unable to marshal resources will have to either merge or be acquired.
The new regulatory regime is an international benchmark. Risk-based capital is a method of measuring the least amount of capital, which is appropriate for an underwriter to support its entire business operations in consideration of its size and risk profile. It limits the amount of business an insurer can underwrite and dictates that companies with higher risks to have higher capital. The new measures will eliminate the collapse of insurance companies, at least on account of solvency. Previously, as long as an insurer had attained the minimum capital requirement, they could write as much business as was available. The problem would arise when large claims are made and the company is not able to honor them. The underwriters have two years to get to a 200 percent solvency ratio.
However, most insurance CEOs complain about the profit margins being too low, to a point of economic unviability. One gets the general feeling that insurance business is not for the faint at heart. Huge claims and operation expenses, rammed down the throats of insurers by stringent regulatory regime have seen most underwriters barely survive.
Most insurance companies grapple with the challenge of growing underwriting profits and boosting their technical results. The difference between the premium collected, claims paid and the management expenses is rather thin. For small and young insurance companies, underwriting profits are very important because in their absence, there is negligible growth. Yet they lack the requisite capital to diversify in order to have multiple streams of income.
Their big counterparts on the other hand are well invested and have accumulated resources over the years. Their huge investment portfolios are able to cushion them from the vagaries and strictures that come with pure underwriting business. A sizeable contribution to the profits by big insurance companies results from investment income.
Going forward, the underwriters who develop unique products will carry the day. Also, companies that will develop unique delivery channels that are technology-driven will be the key market disruptors. Almost all the CEOs in the industry attest to being heavily involved in the innovation aspects of their firms, cognizant of the fact that the battle for market share will be won or lost at the field of innovation.
Technology will play a crucial role in market penetration. But with it, there will be higher cases of misrepresentation and fraud. The industry needs to guard against fraud and wastage. It is notable that in 2015, the two classes that registered the biggest claims ratio were medical and motor (private) at 75.6 and 75.1 percent, respectively.
All the CEOs in the industry are unanimous that the penetration numbers, currently at 3 percent to the GDP, need to go up. The players are jointly or severally involved in raising awareness among the public while lobbying the government to see to it that insurance becomes a common subject in primary and secondary schools curricula.
Think Business Limited, a financial sector research and publishing firm has been carrying out annual surveys focusing on the industry. The survey involves analyzing the figures from the published annual reports as well as having conversations with the CEOs to get a feeling of the direction that the industry is taking. The 2016 survey is almost complete and the findings will be published soon.