At the end of last week the 2019 Nigerian Insurance Industry report ‘From the Lagoon to the Ocean’ was released by Coronation Research, a leading research house in Nigeria. The report takes a critical look at Insurance industry, outlining the current state of the industry and the opportunities that exist for growth. To find out more we spoke with Guy Czartoryski,Head of Research at Coronation Merchant Bank.
In your recent report on the Nigerian Insurance sector you talk about the extreme lack of penetration and the three key opportunities you see present for growth. Cooperation of government and all regulators, Micro-Insurance and education of the market, and finally technology.If we look at the first area of cooperation of government and all regulators (insurance, telecom, banking). Why is this key? Why not just leave it all up to the insurance regulators?
To begin with, consider that the National Insurance Commission (NAICOM) has a difficult job. Imagine a situation where you are regulating 59 insurance and reinsurance companies. Some of these companies do not have much capital, some are making losses, others might not comply with regulations.
Most of the time NAICOM is, in all probability, looking after the difficult cases and resolving them. It is therefore spending disproportionate effort on the weakest companies. In such a situation you need to ask how to fix the problem in a strategic way. And the answer it to raise the minimum capital thresholds because that stabilizes the financial outlook of the industry and is likely to reduce the number of players at the same time.
This much NAICOM can do on its own. There are other factors working in its favour. If NAICOM had done this five years ago the available data and technology for industry expansion were not as developed as they are now. Today there are 38 million bank verification numbers in Nigeria, which is a very important starting point. There are over 170 million registered mobile phone lines (though not the same number of customers). Technological platforms to service several millions of customers are available.
However, it can be argued that the industry needs a deeper level of regulatory cooperation than it has at present. One of the results of our study was to show that the potential of allowing more bancassurance, or more involvement with telecom distribution, could take insurance penetration from the current level of 0.31% (total industry gross premiums divided by nominal GDP) to ten times this level over eight-to-ten years. That would benefit all parties: insurance companies, banks and telecom companies. It is a pretty easy concept to sell.
We have looked across at other insurance markets with similar GDP per capita, such as India and Kenya. Insurance penetration in India is 3.69%, in Kenya it is 2.37%. In Ghana total industry gross premiums were rising in US dollar terms between 2013-17 when in Nigeria they were falling. We are sceptical of cultural explanations for why Nigeria’s insurance industry is not performing. Nigeria’s total gross premiums in inflation-adjusted or US dollar terms have barely grown in ten years. The reasons are: lack of capital; lack of scale; too many companies; not enough regulatory cooperation.
That last point is controversial, but the evidence to back it up is strong. In India the government backed a roll-out of insurance on a significant scale, using state insurance companies. Micro-insurance was rolled out as a priority. In South East Asia a number of different methods have been used, including bancassurance and mobile telephony. In Ghana mobile telephony plays a key role. In our view the regulations governing bancassurance and distribution with mobile telephony in Nigeria are more restrictive than in other countries. Yet the strength of bank and mobile telecom distribution channels are undoubted, and they have been used successfully elsewhere. There is the argument for the regulators to work closely together.
Can you tell us about the strategic implication of the NAICOM reform?
We took a sample of 38 of the 59 insurance companies in Nigeria, those for which sufficient information is available, and calculated how NAICOM’s reforms would affect them as things stood in May this year when NAICOM issued its key circular. The answer was that only 37% of companies met NAICOM’s new capital requirements while a further 25% reached at least 75% of NAICOM’s new capital requirements. We reason that if an insurance company reaches 75% of NAICOM’s capital requirement then it may find it possible to raise a small amount of extra capital, or retain earnings, in order to comply in full. So, we think that 62% of our sample do not face significant difficulties.
And then there are the others. 11% only met 50% of the capital requirement (but not as much as 75%) and 27% did not meet 50% of the capital requirement. This means that a number of companies are going to have to raise capital. We already know of eight companies raising new capital and we expect more to come. However, some companies will not be able to raise capital on their own. The way forward for them will be to merge with other companies. But even then, we expect at least some companies to be eliminated altogether. We think the number of companies will be reduced from 59 to around 25.
The obvious comparison here is with Nigeria’s banking reforms of 2004, which raised sharply the minimum capital level of banks and reduced their number from 89 to 25. Something similar is happening in the insurance industry. The banks, as is well known, then went into a period rapid development, with total gross loans growing at a compound annual growth rate, in inflation-adjusted terms, of 26.9% between 2004-09. So, the strategic implication for the insurance industry is to have, from mid-2020 onwards, a much stronger capital base, far fewer companies, and the potential to grow rapidly.
Of course, we do not know exactly the shape of the insurance industry that will emerge in mid-2020. However, we can make some general observations. First, it is likely to have between six and eight foreign-backed (if not majority foreign-owned) leading insurance companies. This is significant because of the experience they have in rolling out insurance in South East Asia and India. Second, it is likely to have between six and eight leading wholly indigenous Nigerian insurance companies. So, the leaders will likely be evenly foreign and locally-owned.
What can insurers do to increase their profitability and RoE?
In our report we look in detail at the profitability of Nigeria’s insurance companies. The return on equity over time is generally lower than the risk-free rate, in other words the internal rate of return is less than what you would earn on a T-bill. And if the returns do not exceed T-bill yields then they get nowhere near the cost of equity. So, it not a good situation and not one in which it is easy to make the business case for raising fresh capital, unless you can argue that there is significant growth ahead.
We also look at the loss ratios of Nigerian insurers so see whether their underwriting ability, sometimes known as profitability of risk transfer, is at fault. The surprising thing, perhaps, is that the loss ratios of Nigerian insurers are not outside the bounds of international norms. There are differences between sub-sectors (Composite, Non-Life and Life) but in general the loss ratios do not seem to be the problem.
The problem comes with expense ratios. There are very high and well beyond what we consider to be normal in the global industry. But perhaps this should not be surprising. After all, we are talking about an industry which has barely grown, in real terms, over the past ten years. Fixed costs are difficult to carry when business is not growing. The companies have problems reaching the scale where their fixed costs make sense.
Adding the loss ratios and the expense ratios together comes to the combined ratio, and the industry aims for a ratio of less than 100%. Most Nigerian insurance companies exceed 100% most of the time. There are some remarkable exceptions, but in general it is not a very profitable industry. Since it is not underwriting that is to blame (in most cases) the real problem comes from lack of scale. And lack of scale is hardly surprising when, over the long term, there has been almost no growth.
How will micro-insurance products help increase awareness?
Insurance is about trust. In any market you begin with a sceptical audience. As noted above, we do not think cultural reasons explain the lack of insurance penetration in Nigeria. The role of micro-insurance is to provide insurance at low cost to many customers and, in the process, familiarize the market with the concept and operations of insurance. A reliable claims history is important here. One way of doing this is to bundle basic accident cover with other services, such as banking or telecoms services, so that the cost is not noticed and therefore goes unchallenged.
The key thing about micro-insurance is that it is widely seen as meeting a developmental goal. If you take household economics, and the devastating effects that personal accidents can have on them, then micro-insurance becomes important to achieving economic security. Once the market understands that it is buying economic security, then selling insurance becomes easier.
What are the key lessons from India that insurers can learn?
Not every market has the structural advantages that India has. There is a large network of state insurance companies, as well as state banks, to rely on. The firstpoint about India is that the regulator is called the Insurance Regulatory and Development Authority of India (IRDAI), the key word being Development. So the regulator works as a development body, not just a referee. The next lesson from India is that the public sector spearheaded the development of insurance but the private sector benefited from the market education that this brought.
How can technology assist insurers in reducing cost, boosting awareness and increasing their RoE?
Different markets develop insurance in different ways. In Nigeria all the ingredients are there in terms of technological datasets and operating platforms. And, from the middle of 2020 there will be a re-capitalized industry that will have undergone a process of consolidation. Whatever technology, or mix of technologies, will be adopted cannot be known. But all the raw elements for a transformation of the industry are in place, so NAICOM’s reforms are coming at a good time.
Mark Wright – No Longer an Apprentice
Just for context, you won The Apprentice and became Lord Sugar’s business partner in 2014 – you set up your digital marketing business Climb Online and are continuing to successfully grow this business today.
With the beauty of hindsight, would you have started your business journey differently?
When growing up, I always knew that I wanted to be in business and that I wanted to be successful. It wasn’t until I was working for a personal training college in Australia that I realised the true power of digital marketing, as the website I built and ranked on the first page of Google for key search terminology enabled them to accelerate revenue from $2,000 to $240,000 per month.
After I travelled to the UK, I wanted a bank loan to help launch my first business, but I wasn’t able to secure one. A friend suggested I try out for BBC’s The Apprentice as an alternative, which was something I hadn’t heard of, let alone watched before, and the rest is history. I don’t believe in regrets and certainly wouldn’t have changed how I started my business journey. The show provided me with an excellent PR and lead generation platform, and I have had the unique opportunity to meet and learn from some incredible business people, particularly Lord Sugar, for which I am very grateful.
The X Factor winners are often lambasted by the press and not taken seriously as artists by the music industry after winning the show. Have you experienced parallel treatment from the business community after your win?
I would certainly say that I experienced parallel negative treatment from the digital marketing industry when I first won BBC’s The Apprentice; where I was even booed going onto stage to speak at a trade event. However, I am always a big believer in the fact that how people treat and respond to others is more a reflection of themselves and it wasn’t something that I let impact me. The best people in business are those who can support and celebrate other people’s successes and that’s what I always strive to do, regardless of the treatment I receive in return.
Do you feel you have had to work harder to prove your credence as an entrepreneur?
Yes, on some level I do think I initially felt like I had to work harder to prove my credibility as an entrepreneur and a business owner. A lot of people audition and make it on to BBC’s The Apprentice out of a desire for public recognition and 5 minutes of fame, whereas I only wanted to go on the show to secure investment for my business having been rejected from a number of UK banks due to my nationality.
I still hold the record as the only Apprentice Winner to turn over in excess of £1 million during my first year in business and to actually make a profit, and this was largely due to the fact I was so focused on building a large business with strong foundations from the outset.
You became a UK Citizen earlier this year, why have you chosen to stay permanently in the UK?
Australia will always have a special place in my heart and I still have a desire to return and even open a Climb Online office there, but the UK has really become my home. I have made some amazing friends and have created a number of brilliant businesses and am very excited about what the future brings here.
What have been your stand out moments since launching Climb Online?
I have been very fortunate in that I have had many standout moments since launching Climb Online, from being listed twice on Forbes 30 under 30 to creating and hosting CLIMBCON in 2019.*
However, my real stand out moment is quite simple, and it happens almost daily and that is being in the office with my team, receiving positive feedback from clients and helping and mentoring other business owners or aspiring entrepreneurs with their own challenges. There is no feeling like helping someone else succeed or realise their own ambitions and I feel incredibly fortunate that I am able to support and give back to others in such a way.
Have you ever just wanted to throw the towel in and head back to the beach?
All business owners at some point will have that feeling of wanting to throw in the towel, particularly on the days when nothing is going right, and everything feels impossible. However, the true marker of success is the ability to continue to show up each day and work through every single challenge. The ones that do will come out on top, maybe not immediately, but eventually.
I am from a small town in Australia where my Dad owns the local car garage and my mum owns the local hair salon, so when we were all sitting round the table at dinner time, they would discuss the challenges of running a business and I would gain real insight into the hardships. So in starting and continuing to work through my business journey I have always had this in the back of my mind. The power of persistence cannot be underestimated and even on days when I feel like it, I wouldn’t ever head back to the beach.
2020 has been a tough year for business. How was your business affected?
I can honestly say that the start of the COVID-19 pandemic was the hardest period I have ever had to work through in business as like the majority, we lost clients and were forced to make challenging decisions. However, I would also say I have learnt the most about business this year and worked hard to implement an effective survival strategy. This not only meant we were able to continue to navigate through the first difficult three months, but in taking the time to look at our costs, our staff and our processes, have had the opportunity to make vast improvements that have enabled us to thrive beyond pre-COVID levels and really come out on top.
What do you think the long-term impact of COVID-19 will be? Will the economy bounce back quicker than predicted?
I think the figures from Q3 were very promising and show that a ‘bounce back’ is possible. However, with further reports revealing that UK borrowing is now at the highest since records began, it means we have a long way to go and it certainly won’t be easy.
Although there haven’t been any changes to taxes as yet, I do think these will come as we start to see economic recovery and hope any increases don’t impact business owners too heavily, particularly as they have worked so hard to survive this unprecedented period.
How has COVID-19 changed the digital marketing industry?
Although there was an initial hit at the start of the pandemic, with businesses cutting digital marketing spend as a cost-saving exercise, I would actually say the pandemic has since played into the hands of the digital marketing industry by emphasising the importance of having a strong digital presence to sell your product or service online.
There will still be agencies who will be down on a revenue. However this won’t be because the business and sales opportunities aren’t out there, but because they aren’t pushing hard enough and are ultimately using COVID-19 as an excuse. At Climb Online we have won many new clients recently just because we were the only agency to actually answer the phone, which is quite unbelievable and shows that many are still operating remotely and haven’t got the right virtual infrastructure in place.
What advice would you give for business owners struggling to drive new sales?
This is going to sound very simple, but the first thing business owners struggling with sales should do is hire a salesperson to implement a clear and consistent business development strategy. I’ve met thousands of business owners over the years and it still amazes me that the vast majority don’t have any form of sales operation to keep the pipeline full and to proactively sell the product or service. Often the business owner is hesitant to hire a salesperson due to a bad experience or because they believe no one will be able to sell the business as well as they can, and whilst the latter is likely to be true, you still need additional people on the ground generating as many leads as possible. Without a sales team, any form of sales strategy becomes inconsistent and ineffective, limiting the opportunity for growth.
Will you ever retire? Absolutely not. Never.
*CLIMBCON is the only business summit dedicated to teaching businesses how to grow and scale from real life successful entrepreneurs
in an authentic and empowering live event
The evolving payments landscape
Q&A with Prajit Nanu, Co-Founder and CEO, Nium
- The global pandemic has negatively impacted economies around the world, but we’re also seeing an acceleration in e-commerce and consumer behaviours. What trends are you seeing, and what is the takeaway for Nium?
At the start of the global pandemic, no one had a clue on where things were headed. But luckily for Nium, we have a 360-degree view on how different industries are adapting because of the number of industries we serve. For instance, we saw that there was a rise in gaming, e-learning, and e-commerce while the travel industry was significantly impacted.
According to Newzoo, the leading global provider of games and esports analytics, the games market will to grow to $217.9 billion by 2023, representing a strong +9.4% CAGR between 2018 and 2023. This is up from a previous forecast of $200.8 billion. The sudden shift away from the classroom in many parts of the globe also led to a rise in e-learning adoption, where schools have had to distribute gadgets to students to ensure they have access to learning materials. Schools in New York, US for example distributed around 500,000 laptops and tablets to their students in early April.
To cater to these sudden shifts in consumer behaviour, banks are coming to Nium with an accelerated timeline to leverage and implement our services, including instant real-time cross-border payments. This is positive because banks are reacting to new consumer behaviours promptly.
That said, while these are positive trends, we need to think about how we can sustain this momentum into the future. Initially when the pandemic hit, we saw a huge shift of revenues from offline to online channels. However, now that countries are gradually re-opening, we see that many consumers are preferring to go back to offline channels. The question now lies in how we keep up with these changes and continue to deliver great customer service.
- The world is shifting to an API economy, how is this going to impact your customers?
Our definition of an API economy is one that deploys best-of-breed products seamlessly and efficiently – and this is a core mantra of what we believe we are powering at Nium. If you think about it, banks today are being unbundled at a rapid pace. 15 years ago, if a customer wanted a loan or a travel card, they would have had to walk into a physical bank. Today, customers can turn to a small and medium-sized enterprise (SME) lender or any pre-paid travel card business.
Nium is actually leading the charge in this rapid unbundling through our banking-as-a-service (BaaS) offering. For instance, E-commerce companies no longer only provide e-commerce as a service but instead have tapped onto a new range of services within that ecosystem. Companies today can choose partners for their payment solutions – for instance, they can use X for payments, Y for card issuance, and Z for lending. The API impact that Nium makes goes beyond just a few customers; we make it easy for everyone to plug in and rapidly deploy our service.
The future of the API economy is all about how to make APIs easy to understand, and that is where Nium is driving our vision forward.
- What is Nium doing to cater to the under-penetrated segment that may not have access to payments today?
Nium is providing an infrastructure platform catered for anyone – from everyday customers and businesses, to large banks, and even to fintechs – aimed at levelling the playing field through the provision of financial services to all members of the population. In other words, our platform enables our partners to reach out to the population and provide greater access to payments than ever before.
To take a recent example, Nium partnered with Aptiv8, an IT and manpower solution provider, to launch a remittance service called MyRemit. This service allows migrant workers in Singapore to conduct digital remittance transactions via a mobile app, anywhere and anytime. This has been particularly vital during this year’s strict social distancing and lockdown measures, as migrant workers can still remit money back home for their family’s needs through a digital channel.
Similarly, Nium recently partnered with Cebuana Lhuillier, the Philippines’ largest microfinancial services provider, to launch their mobile remittance app, Quikz, in Singapore. Powered by Nium’s Remittance-as-a-service (RaaS) solution, this app allows thousands of Filipinos based in Singapore to send money to their loved ones back in the Philippines. Our platform ensures the transactions are processed securely and in real-time – providing more customers with a safe and more affordable way to make transactions.
- What was 2020 like for Nium and what is it going to be like in 2021?
This year has been interesting for Nium because the pandemic forced us to rethink and review our company playbook for success. At the peak of COVID-19, I gathered my leadership team together to reflect on the impact the world had faced, how the world is going to change, and what we, as a company, need to consider when adapting to these changes. This exercise was extremely useful and it has formed the basis of a refreshed playbook for us.
Our team members came up with many different stories on how we need to over-communicate not only to our clients, but also internally with our colleagues. We also spoke about product prioritisation. For instance, travel used to be an industry that most of our products served, but it has become much smaller today, while other industries such as e-learning and gaming have burst through the scenes. So, do we still create products for the travel industry knowing that it will come back in the next two years, or do we focus on the growing industries right now? The good thing is, because we work with clients across a large spectrum of industries, we have been able to observe these changes panning out early and react swiftly.
Come 2021 and 2022, product will be key for us. There is a lot of pent-up demand across industries that were restricted due to the pandemic, such as travel, and we are looking forward to capturing this new demand, which I believe will definitely come back once we tide over these difficult times. At Nium, we will continue to focus on growing our revenue and expanding our team worldwide.
At the same time, we are also aware of the impact that the pandemic has had on our employees this year. I want to take a brief moment here to acknowledge the efforts of our employees worldwide. They have rallied hard over the past few months, putting in the extra hours as they work remotely, to ensure they deliver quality work. Ensuring that our employees remain engaged and prioritising their mental health will also be a focus for us in the new year.
Treasury’s digital revolution: How corporates can ensure stability in uncertain economic conditions
The digital revolution in treasury may have been under way for some years now, but the past few months have shown there is plenty of room to improve and refine. We talk to Frank Nicolaisen, UniCredit’s Head of Global Transaction Banking, Americas, about how the coronavirus pandemic has intensified the need for corporates to upgrade their treasury infrastructure and what they can do to get started.
Q: The pandemic looks to have added significant impetus to the digital push in treasury. How has the use of financial technology in the treasury space evolved in recent years and where does this fit into the story?
The narrative of innovation around treasury has been building for some time – and for good reason. A host of recent innovations, such as application programming interfaces (APIs) and optical character recognition (OCR), are already live and streamlining treasury processes for corporates of all sizes.
At the core of this is the rise of e-banking – following experiences in the retail sector, corporates have moved away from branch-based or over-the-phone banking to platforms, with many banks, including UniCredit, investing to make this a seamless, fast and more efficient experience. This, in turn, paves the way for other efficiencies, such as virtual accounts – a concept that sees corporates hold a single physical bank account that can be sub-divided into “said virtual accounts, which work much like real ones, with their own budgets, permissions and account numbers, all whilst feeding into the physical parent account. This solution is growing in popularity and is especially beneficial to corporates with multiple banking relationships and complex account structures, minimising the number of physical accounts they need to maintain.
While these technologies have been around for some time, they have seen a spike in adoption during the recent economic downturn, enabling corporates to rationalise accounting processes, cut maintenance costs, increase transparency over funds and efficiently optimise their financial assets from a remote basis.
To take treasury management to the next level, even newer technologies are emerging, such as artificial intelligence (AI) and machine learning, which promise to bring a raft of benefits, including the streamlining of bureaucratic processes in a safe and secure manner.
Q: What should a successful treasury set-up look like today?
For some time, a digital, real-time treasury set up – with fully-automated routine processing – has been the vision and the gold standard. This has the capability to turn the sheer amount of data that many treasurers handle on a daily basis from an administrative burden to a source of strategic insight.
With the right technology, corporates can automate a huge range of previously time-consuming administrative tasks, such as opening, closing and managing accounts, generating cash-flow forecasts, executing routine payments; reconciling incoming payment flows, calculating FX exposures and even executing FX conversions. All of this frees team members to focus on more value-adding tasks, while reducing human error in the workflow.At the same time, the data captured in these digital systems can also be reviewed and mined for valuable insights, helping treasurers further refine their processes.
Implementing such a system, of course, will be easier for some businesses than others. Young companies, for instance, will not have to overhaul any legacy infrastructure, and can simply implement a new, modern system. Older or larger companies, on the other hand, will likely be less agile, and have to undertake the more time-consuming process of updating existing systems, while managing operational risks during the transition.
Nevertheless, establishing a robust digital set-up remains central to most treasurers’ strategic vision. Once complete, this switch-over promises benefits to corporates of all kinds – and an opportunity to future proof their business against economic shocks, the likes of which we’ve seen over the last year.
Q: How can corporates yet to initiate the transition to digital treasury get started?
The first step is to investigate the process. Treasurers can speak to their banks and other potential partners, asking questions such as: What are the stakes? What can be achieved? What treasury set-up best suits my business? What benefits is the transition likely to bring in the long-term?
This conversation typically begins either when a treasurer notices the benefits the transition has brought to other businesses, or when triggered by an urgent business need. But it doesn’t necessarily need to be prompted in this way. Starting the conversation now means treasurers are forearmed should necessity arise.
Q: How will you leverage your position as UniCredit’s Head of GTB Americas to deliver these treasury solutions to corporates?
Broadly speaking, my mandate is to continue to develop the Group’s unique, digital Global Transaction Banking (GTB) offer – helping US multinational clients thrive in Europe, and European clients access the US markets.
As part of this, I’m looking to facilitate the delivery of UniCredit’s proprietary GTB solutions from our core European markets to businesses operating in the Americas. Having previously played a key role in the expansion of UniCredit’s Tech Team in Germany – which focused on serving fast-growing technology companies – I am hoping to draw on this experience to oversee the first step in this process: the roll-out of the bank’s global e-banking portal. Once complete, this innovation promises to vastly improve the banking experience for our corporate clients in the US.
It’s one of a number of digital tools corporates can leverage to help them through the many challenges of the current environment. Over the next few years, I think we’ll see adoption continue to climb across the board and I’m looking forward to playing a part in it.
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