No fewer than 13 licensed composite insurance companies in the nation’s underwriting sector recorded ₦106 billion as at December 31, 2017, worth of shareholders’ funds.
The composite insurance license allows an organisation to underwrite both life and non-life (or general) risks.
Then financial status implies an average of ₦9 billion per operator, which was considerably higher than an average of ₦3 billion for life and ₦7 billion for non-life, in the previous financial year.
In a comprehensive report on the Nigerian Insurance Industry, conducted by Agusto & Co, a credit rating agency, it highlighted the various impacts of key macroeconomic fundamentals on the sector’s performance and challenges leading to its low penetration rate of 0.4 per cent, among other things.
The report showed the dominance of composite segment of the insurance industry, which accounted for an estimated 41 per cent of the industry’s total assets, 40 per cent of total Gross Premium Income (GPI) and 44 per cent of the industry’s pre-tax profits in 2017.
Specifically, key performance indicators of the segment consistently stood out when compared to other segments of the market, as seen in ratios such as its underwriting profit margin of 15.5% (Life: 15.8%; Non-life: 13.7%), operating profit margin of 13.5% (Life: 5.4%; Non-life: 4.0%) and Return On Equity at 18% (Life: 12.7%; Non-life: 5.5%).
Meanwhile, the National Insurance Commission (NAICOM) had earlier said that no new composite licenses would be given to any interested operators in the industry henceforth.
An insurance analyst at the rating agency explained that the performance of the composite business segment is attributable to the flexibility of the licence, which gives it a broader playing field.
Therefore, there are no restrictions to the type of business that can be undertaken within the insurance confines.
As a result, Agusto & Co noted that composite underwriters characteristically offer the highest number and variety of products and are able to capture a larger portion of a client’s pocket compared to a life or non-life insurance underwriter.
Little wonder the industry has witnessed a few transitions to a composite structure, some of which have been announced and others in the offing.
In 2017, Standard Alliance Insurance Plc announced the approval of a composite insurance licence by the regulator, following years of operating its non-life and life businesses separately.
Contained in the report are major characteristics of the composite insurance business that make it more profitable compared to its peers.
On the question of the a larger capital base, Agusto & Co explained that the minimum regulatory capital requirement of ₦5 billion for a composite insurer seeking to operate in Nigeria allows operators in the segment take on big ticket transactions, which may not be accessible to non-life and life players by reason of their smaller capital base (regulatory requirements for non- life: ₦3 billion; life: ₦2 billion).
Agusto & Co stressed that the relatively higher capital base of composite insurers reflects in the segment’s market share of premiums collected in key business lines such as Life and oil & gas business, where Leadway Insurance accounted for 26% and 24.3% respectively of total premiums generated in 2016.
The rating company stated that composite insurers have proven to be more attractive to foreign investors seeking exposure to the nation’s insurance market.
Over the years, the composite insurance segment has witnessed significant influx of foreign direct investors such as the AXA Group and the Allianz Group.
In 2015, AXA Group acquired a majority stake in Mansard Insurance’s transaction, while Allianz Group acquired Ensure Insurance Plc in 2017.
It also noted that apart from the stronger financial capacity displayed by these players, approximately 85% (that is 11 out of 13) composite insurance companies were listed on the Nigerian Stock Exchange (NSE) as at December 31, 2017, which helps to deepen governance and disclosure levels.
These higher transparency levels fostered by public listings is a boon to foreign investors seeking acquisition targets in Nigeria, explained one of the insurance analysts at Agusto and Co.
The report highlighted another merit of composite insurers as their expansion into quasi-asset management businesses (through subsidiaries), which is driven by their financial strength.
It pointed out that the pension fund management has been the most successful of these subsidiary businesses.
For instance, AIICO Insurance Plc, AXA Mansard Plc and Leadway Insurance Limited, three of the top composite companies in Nigeria in terms of GPI, have pension subsidiaries that support their life businesses, particularly through annuities’ collections.