Naira Devaluation Weakens Insurance Industry’s Capital-Agusto & Co

The pan-African Credit Rating Agency, Agusto & Co, has  said that the persistent naira devaluation in Nigeria has reduced the strength of the insurance industry’s capital since the last recapitalisation exercise in 2007.

At the unveiling of the 2021 edition of the insurance report,the agency noted that although some insurers have strengthened their capital base through earnings retention, the ability of most industry operators to solely underwrite large ticket transactions have dwindled based on the lower value of the capital in USD terms.

It said:”As of December 31, 2020, Agusto & Co. said the industry had an estimated capital base of $1billion, significantly lower than $2.2 billion recorded as of December 31, 2007.As a result, the National Insurance Commission (NAICOM), the apex regulator in the industry raised the minimum capital to ₦8 billion (from ₦2 billion), ₦10 billion (from ₦3 billion), ₦18 billion (from ₦5 billion) and ₦20 billion (from ₦10 billion) for life insurers, non-life insurers, composite insurers and reinsurance firms respectively”.

Agusto & Co. estimates a 15 per cent growth in Gross Premium Income (GPI) for the financial year ended December 31, 2020. Innovation in product distribution induced by the pandemic, regulatory-backed opportunities including the digitisation of marine insurance certificates and increasing awareness of the benefits of insurance products were some of the GPI growth drivers during the 2020 financial year.

According to the agency, the violence that trailed the #EndSARS protest in October 2020 adversely impacted the Industry in terms of additional claims, which in turn impaired profitability for the 2020 financial year and would moderate the performance of some insurers in 2021.

The report said nonetheless, the riot that trailed the protest emphasised the importance of insurance products, particularly with the absence of a robust social security system in Nigeria. Agusto & Co stressed that the violence/riot trailed the protest could be a catalyst for insurance uptake, given that the insurance penetration rate has remained less than 1 per cent in Nigeria.

The report noted that recapitalisation exercise has suffered some setbacks particularly as the COVID-19 pandemic ravaging global economy, Nigeria inclusive. Consequently, NAICOM postponed the deadline for the recapitalisation exercise, which was later stratified into two phases; December 2020 and September 2021.

Besides, the report said the litigation by some industry operators and aggrieved shareholders resulted in the postponement of the December 2020 deadline for the first phase of the recapitalisation exercise.

According to the agency, the violence that trailed the #EndSARS protest in October 2020 adversely impacted the Industry in terms of additional claims, which in turn impaired profitability for the 2020 financial year and would moderate the performance of some insurers in 2021.

The report said nonetheless, the riot that trailed the protest emphasised the importance of insurance products, particularly with the absence of a robust social security system in Nigeria. Agusto & Co stressed that the violence/riot trailed the protest could be a catalyst for insurance uptake, given that the insurance penetration rate has remained less than 1 per cent in Nigeria.

Notwithstanding, the setbacks, Agusto & Co. believes the recapitalisation exercise could be a watershed in the industry. In addition to the benefits accruing from a larger capital base from a risk underwriting perspective, improved investment management practices will be upheld by a larger investment portfolio driven by a need to generate adequate returns.