There is no fretting about the financial strength of insurance companies in Nigeria, Africa’s largest economy as favourable combined ratios mean these firms are profitable without threats to going concerns.
BusinessDay reports that the average cumulative combined ratios (CR) of 15 quoted insurance firms stood at 89.37 percent in the first six months of the year despite macroeconomic headwinds.
Premium income in the review period also hit N67.01 billion.
Combined ratio is the combination of an insurance company’s claims ratio and expense ratio.
Many analysts across a broad spectrum believe that the CR ratios are the best way to measure the success of a company because it does not include investment income and only includes profit that is earned through efficient management.
Firms like Wapic Insurance Plc, Mutual Benefits Assurance Plc, NEM Insurance Plc, Consolidated Hallmark Insurance Plc and Staco Insurance Plc recorded a CR of 62.09 percent, 66.41 percent, 66.81 percent, 60.0 percent and 41.90 percent respectively, based on data collated by BusinessDay.
“The combined ratio of 89.37 percent shows that there companies are still making a profit albeit a small profit,” said an actuary with one of the big insurance firms, who preferred be anonymous, because of the sensitivity of the matter.
The improved ratios means these companies have improved underwriting results across their reporting segments, solid capitalisation with strong growth in shareholders’ equity and continued improvement in leverage and interest coverage metrics.
For instance, Consolidated Hallmark deployed shareholder’s resources in generating higher profits as return on equity (ROE) stood at (26 percent), Mutual Benefits had ROE of (27 percent) and NEM (20 percent).
On the other side of the spectrum, some insurance companies underperformed peers as CR exceeded the 100 percent threshold.
For instance, AXA Mansard Insurance recorded a CR of 134 percent and ROE of -1 percent. Lasaco, Equity Assurance and Royal Exchange recorded CR of 104 percent, 130 percent and 105 percent while ROE stood at -1 percent, -13 percent and -2 percent respectively.
Industry players say despite the leeway as evidenced by the impressive CR, Insurers in Africa largest economy are less aggressive about the payments of claims to policy holders, given their low loss ratio, otherwise known as claims ratio.
This means consumers are not getting maximum satisfaction for taking up insurance and the figure compared to other Sub Sahara Africa countries, Europe and the United States, is abysmal.
The 15 firm’s average claims ratio, otherwise known as loss ratio, was 32.73 percent, while expenses ratio was stood at 57 percent in the period under review.
“In the U.S. the loss ratio is between 90 percent and 95 percent which means for every $100 consumers are getting over 90 percent in terms of benefits,” said Debo Ajayi, Chairman TAF Consulting Group in a telephone interview.
Analysts say the environment for insurance business is challenging and unpredictable, as macro conditions, intense completion, poverty, cultural beliefs, lack of awareness, lack of trust, religious superstitions continues to stunt the growth of the sector.
Also, the perception among Nigerians that insurance companies may not pay up when there is a claim discourages people from taking up insurance.
These challenges make the country’s market underdeveloped and fragmented despite its huge population.
According a 2015 report by KPMG on the insurance sector, there are 32 non-life insurers, 17 life insurers, and 10 mixed companies catering for a total market of $1.6 billion (N320 billion).
The aforementioned figures are abysmal when compared with South Africa, the continent most developed economy that has 179 insurance companies, but it serves the market of $51.6 billion (N10.2 trillion). The average company size is also more than 10 times bigger than Nigeria, according to the report.
“Apart from the cultural issues, many people are not aware of the benefits of insurance cover,” said Alphonse Okpor, Chief Executive Officer/Managing Director, African Alliance Plc.