The Role Of Insurance In Inclusive Growth: Nigeria Diagnostic

A large economy with a strong diversification imperative. Nigeria is a populous country,home to one in every five Africans. The population is growing. It is also urbanising rapidly.While the formal economy is unable to absorb the growing workforce, the informal economyis buoyant, particularly driven by small-scale traders. The economy has a strong economicgrowth track record in recent decades, largely on the back of the oil-and-gas sector; but inthe aftermath of the global oil price slump in 2014 and 2015, it experienced a recession. Asthe economy recovers from recession, there is a strong policy focus on diversificationthrough the Economic Recovery and Growth Programme (ERGP), with particular emphasison industrialisation via the SME sector as well as agricultural value chain development forfood security.The insurance sector can be an important contributor to the ERGP. Even though thefinancial sector, in particular the insurance sector, is not specifically mentioned as one of thefocus sectors of the ERGP, the success of the strategy rides in part on the facilitative rolethat the financial sector plays. The insurance sector in Nigeria has the potential to contributeto three of the five priority areas: achieving agricultural and food security; ensuring energysufficiency in power and petroleum products; and driving industrialisation by focusing onSMEs. A well-functioning insurance industry minimises the risk associated with economicactivity in these sectors and enables the efficient allocation of risk in the broader economy.Much untapped potential. Insurance penetration in Nigeria remains low and well below theAfrican and international averages, despite some growth in recent years, and total asset sizeis low relative to the size of the Nigerian financial sector. This is surprising considering thatNigeria is the largest economy in Africa. The insurance market exhibits typical characteristicsof a market in the second stage of development6: Life market nascent. The general insurance sector leads the industry in terms of grosswritten premiums, and life insurance is nascent beyond group life insurance. Compulsory lines prominent. Compulsory insurance, including group life, continues tobe a strong driver in the market. Fragmentation. At 59 licences across a relatively small premium pool, the insurancemarket is fragmented. Apart from a few larger and stronger insurers, there is a large tailend of insurers with small balance sheets and often weak business fundamentals. Formany insurers, expense ratios are high and claims ratios are either too low to provideconsumer value or too high to maintain profitability. Ultimately, this spills over intosolvency concerns, which have been witnessed for a number of operators. To date,NAICOM has used capital requirement increases to consolidate the market, with newTier-Based Minimum Solvency Capital requirements introduced in 2018. Skills shortages. The local economy is unable to generate sufficient skills to serve themarket appropriately. There is a particular shortage of general insurance business skills,underwriting skills and actuarial skills. Trust and awareness deficit. A lack of awareness of how insurance works and low trustin insurers compound development challenges.Despite these challenges, the opportunities remain substantial: (i) The diversification drivecreates more opportunity than ever for insurance to support business growth, (ii) the6The stages of market development are based on a heuristic developed by Chamberlain, Camargo and Coetzee (2017)drawing on the work of Lester (2014) and USAID (2016). Insurance markets that are in stage 2 of market development arein an early growth phase. The majority of retail products are compulsory or group-based, and voluntary individual cover ismostly limited to top-end clients. A discussion on Nigeria’s position on the insurance market development curve can befound in Section 4.4.2

annuities market is a growing driver of the life insurance sector, and (iii) there is greatuntapped potential for health insurance and life insurance among employee groups andbank account holders as relatively easy-to-reach target market segments. The interestshown by foreign insurers in the Nigerian market in recent years via the acquisition of locallicences is a recognition of opportunity.Key insurance market themesRole of insurance in individual and household resilienceLimited current impact on individual and household resilience. Less than 2% of Nigerianadults have insurance. Even for the target group that is the easiest to reach (salariedemployees), insurance uptake is only 10.6%. The National Health Insurance Scheme, despiteits aims for universal health coverage, serves only an estimated 1% of the population.Instead, most people rely on family and friends to cope with risk. Alternatively, they foregoconsumption or draw on savings, thus decreasing their resilience.Insurance uptake often not voluntary. The most popular insurance product line is healthinsurance (609,000 adults). Beyond that, uptake is often compulsory. Compulsory group lifeand motor-vehicle insurance account for a substantive part of household insurancepenetration. Voluntary, individual insurance policies are still very limited.Reach limited to urban and high-income segments. The uptake of insurance amongindividuals and households is concentrated in urban areas, largely in the south and withinspecific target markets that are typically easier to reach. Almost half of the 1.8 million adultswith insurance work as salaried employees.Distribution challenges to reaching the mass market. Distribution is largely broker-driven,and most premium collection is done through corporate payments or payroll. Agent salesare growing, but agent distribution is limited to a few insurers that are keen to push retailinsurance. Bancassurance holds much potential given the large number of bankedindividuals without insurance, but there have not been any significant developments so far,partly due to the recent bancassurance guidelines being perceived as restrictive.Opportunities for enhancing individual and household resilience. The diagnostic reportidentifies several opportunities for the insurance market to contribute towards the resilienceof individuals and households: Easy-to-reach target market. The formally employed market of 7.9 million individualsremains largely untapped (only 10.6% having insurance, 33% being women) andpresents a ready distribution channel via employee groups. Voluntary group healthpresents scope to deepen the employee benefits market for the growing middle class.The annuities market is growing fast on the back of pensions market growth and is seenas a core growth area for many life insurers. Aggregator-based distribution. To reach individuals in rural areas and the urban massmarket, distribution through aggregators that have an existing relationship with clients isessential. Mobile distribution, bancassurance and retailer distribution all hold potential.In each case, however, several barriers would need to be overcome: the trust barrier onthe demand-side, a supply-side innovation-barrier and a regulatory framework largelyorientated to broker distribution.3

Takaful insurance. Sharia-compliant insurance products hold potential to increase thepenetration of insurance to northern parts of the country, but indications are that reachis still limited, largely due to distribution constraints in serving the northern regions andthe limited availability of individuals that can serve on the requisite Shariah boards. Microinsurance. Microinsurance is regarded as an opportunity for innovation, butoverall market interest is lacklustre – understandably so, given the constraints in servingeven the upper end of the retail market. Claims ratios are low. Regulatory restrictionsthat have held back the development of mobile money and the use of airtime to paypremiums prevent scale via mobile insurance distribution.Role of insurance in business resilience and enterprise developmentInsurance contribution to business resilience mainly via extractive industry. To date, therole of the insurance sector in economic growth has been primarily through sustainingactivity in the extractive industries, particularly oil and gas.Bulk of the risk not carried domestically. Local content legislation requires the bulk of oiland-gas risks to be carried domestically, and this is has resulted in the formation ofinsurance consortia, often with numerous insurers. However, reports suggest that, whilekeeping some premiums onshore, the local content requirements are not succeeding inbolstering the domestic industry and may, in fact, introduce systemic risks through theconcentration of risk that it introduces7. Anecdotally, there are reports of smaller consortiamembers that are unable to honour claims. Ultimately, limited balance sheets and capacityconstraints mean that the majority of premiums are reinsured and, eventually, most risksare carried abroad.Insurance able to serve as an enabler for SME industrialisation, but current role limited.Only a small proportion of non-corporate business can be classified as small or mediumsized. The majority of enterprises operate at the micro-level. Demand-side data also showsthat SMEs are mostly situated in rural areas. Their informality and location make it difficultfor formal insurers to serve them. One potential avenue is via credit providers. Upscaling theSME sector depends on the SMEs’ ability to access credit for working capital. Approximatelyone-third of SMEs cited this as a main constraint to their business development. Insurance,as a risk management tool, can be an important enabler of access to credit by reducing therisk of lending to SMEs for credit providers. This would require meso-level insurancedistributed via credit providers, but indicators are that the bancassurance guidelines posechallenges to bank-based distribution especially in rural areas.Pervasive insurable risks in agriculture. Agriculture is particularly important to thediversification drive in Nigeria. It supports the livelihoods of many Nigerians, yet it is unableto meet domestic food security needs. Agriculture in Nigeria is prone to natural shocksarising from weather-related and biological risks. These shocks often have devastatingeffects on yields and disrupt the entire value chain from input suppliers to ultimate foodprocessors. Risk mitigation through insurance provision in agriculture has been limited todate, largely provided by the state-owned NAIC. The market has only recently been mademore accessible to private-sector participation, and private innovation has so far beenlimited.7See, for example: iness-nigeria/4

Opportunities for enterprise development. The diagnostic report identifies the followingopportunities for insurance to contribute to business resilience and enterprise development: Access to credit for MSMEs. Insurance, as a risk management tool, can be an importantenabler of access to credit by reducing the risk of lending to SMEs for credit providers.In particular, meso-level insurance distributed via credit providers presents anopportunity, but indicators are that the bancassurance guidelines pose challenges,especially in rural areas. Public–private partnership in agro value chains. The fragmented nature of smallholderfarmers means that, for agricultural insurance to reach scale, distribution needs to beanchored to a central off-taker, lender or processor. Government-driven schemes suchas the NIRSAL and ABP enable value chain development, credit expansion andguarantees through public–private partnerships, but indications are that much efficiencygains can be had in public-driven initiatives. Introduction and expansion of index-based products. Coordination between NAIC,NIRSAL and private insurance and reinsurance companies saw the development andlaunch of area yield insurance in Nigeria, and weather index insurance is also planned.However, the feasibility and scalability of index-based insurance in Nigeria is constrainedby low access to capital, inadequate technical skills and limited good-quality data.Role in intermediation of capitalIntermediation role of insurers constrained by small balance sheets. The insurance sectorholds only 2.5% of financial sector assets. The relatively small premium pools and short-termnature of the liabilities constrain the ability of insurers to play a significant intermediationrole as aggregator of premiums. The poor performance of the insurance industry is furtherreflected in the poor performance of the share prices of insurers. Consequently, insurershave struggled to raise capital on the public capital market, which has inhibited their abilityto efficiently manage large risks in the economy.Larger role for pensions sector. All in all, the insurance sector by itself plays a limited role ineconomic growth via its institutional investor role in the int

Figure 49: Market capitalisations of insurance companies, NGN billion as at 22 June 2018 159 Figure 50: Share price characteristics of listed insurance companies June 2014 - June 2018 . Nigeria to understand the current and potential role of insurance from three perspectives: (i) in building household resilience; (ii) in supporting business .