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.
Q&A with Clare George-Hilley, co-founder, Centropy PR
Clare George-Hilley is the co-founder of Centropy PR
Global Banking and Finance Magazine recently caught up with Clare George-Hilley, co-founder of fintech and financial services specialist PR agency Centropy, as the company toasts to three years of trading. We asked Clare about what life is like running an agency in the city, the trends she is seeing in the financial services space and what the future holds following the Covid-19 outbreak.
Why did you decide to set up Centropy PR?
I was looking for an opportunity to launch my own agency, both my husband and I had been in the public affairs and public relations industry for over a decade and we thought the time was right to go out on our own.
We could see that the financial services industry was surging, with challenger brands and new technology transforming traditional banks and setting new standards of customer service. There was a huge market opportunity to create and launch a PR agency that could provider first class comms support, alongside a deep understanding of complex regulations such as AML, KYC, and the GDPR. Likewise, many traditional technology firms are diversifying their offerings, to tap into the growing market opportunity posed by the fintech boom.
So, we worked on a business plan, designed a strategy for winning clients and officially launched in September 2017. Within a few months we had a growing portfolio of clients and a thriving business, since that point, we have never looked back!
How is Centropy doing now and what are you plans for growth?
The last three years have flown by and our client portfolio has grown and diversified quickly. We now manage PR campaigns for clients on everything from cryptocurrency, wealth management to payments and trading software.
We’ve also hosted parliamentary debates with key industry figures, including Members of Parliament (MPs) on topics such as the future of the financial services industry and the impact of challenger banks on traditional providers. The team is expanding quickly and we’re investing heavily in the latest training and support to ensure our team members are equipped to reach their full potential.
How do you see the next 12 months?
The Covid-19 outbreak has crippled the economy, forcing millions of people to work from home due to the very serious health risks. The knock-on effect of this crisis will lead to companies cutting costs where possible to save jobs, so tech will play a vital role in ensuring many businesses stay afloat.
We are already working with contactless payments specialists and other fintech companies that offer solutions to help companies survive and thrive despite the inevitable challenges ahead.
We aim to continue building our portfolio of expertise, testing ourselves with new challenges and delivering the best possible service to clients
This is a Sponsored Feature.
Lessons from past recessions and advice for business owners during the coronavirus pandemic
By Neil Davis, managing director and co-founder of Sterling Networks
What is Sterling Networks?
“Sterling Networks is a professional organisation founded in 2014 which facilitates networking events for businesses across the Midlands, Oxfordshire, Wiltshire and the South West. Over 300 members attend our fortnightly breakfast and lunchtime meetings.”
What is your background prior to establishing Sterling Networks?
“During the 1990s, I worked in the corporate team for Halifax. My wife, Tracey, and I went onto own a manufacturing business, which was also called Sterling, and produced a range of gifts, merchandise and promotional items.
“We soon realised tradeshows were a great way to meet distributors and clients. From there, the business grew exponentially, and we managed to build a network of around 500 distributors. Eventually, we became ground down by the manufacturing business – in part because the local manufacturing sector was being devastated by competition from China – and took the decision to sell the business and relocate to Spain.
“After spending several years living abroad, we moved back to the UK to set up Sterling Integrity (EXPO’S) & Sterling Networks (Networking) We were inspired by a desire to help businesses make meaningful connections with one another, and we haven’t looked back since.”
The UK has recently entered a recession, brought about by the coronavirus pandemic. What have you learned from past recessions and how are these experiences helping you to navigate the current crisis?
“I’ve lived through a number of recessions and have seen the pain that insolvency causes companies on a large scale. It’s taught me that there are those who win and sadly those who lose, and that businesses must adapt to a rise in demand for certain products or services at a time of financial crisis.
“Given the nature of what Sterling Networks offers [an opportunity for business owners to connect and grow together] I decided we could build upon the brand due to the demand for new business during the pandemic. We therefore moved our networking events from face-to-face to virtual via tools like Zoom and have gained a steady stream of new members in recent months, reaching an overall total of well over 300.
“On top of that, we’ve taken new staff on during the crisis and have launched a number of new regional groups across the country. I was determined that Sterling should come out of the pandemic with a head start, so my attitude to the recession has been much more positive than those who are forecasting nothing but doom and gloom.
“We can’t pretend high street retail wasn’t suffering long before the pandemic came along, and thousands of new businesses are sure to start up to meet the demand for the products and services that people require at a time such as this. In order to develop and grow businesses need to focus on where changes need to be made to meet this demand.”
Sterling Networks has been providing emotional support to its members throughout the pandemic. What advice have you been giving to members that could be useful to other business owners?
“I try not to be too opinionated and respect other people’s views when giving advice to members, as there are always two sides to every circumstance. I’ve been careful not to say to people that they should be doing one thing or another, as I don’t know their business and its needs quite like they do. The only thing that I have been telling members is the importance of setting up one-to-ones with one another. By doing so, they can listen to the needs and concerns of other, like-minded business owners and work out ways that they might be able to help one another.
“The pandemic has meant we all have a bit more time on our hands, so the advice I would give to people is to use this extra time wisely. Not having to travel physically from one meeting to another means there is a greater opportunity to connect with more people. It’s important to remember that individuals outside of your business can be just as valuable as those within it.”
What makes you hopeful for the future and are there any words of encouragement you can give to budding entrepreneurs?
“The key events that have happened to this country during my lifetime – whether wars, recessions, or the pandemic – have enabled me to take stock of things. While these experiences are certainly challenging, we all become stronger for living through them, and it gives me great confidence that the world will ultimately improve as a result of the pandemic.
“The whole world is effectively rebooting right now, as is the business community. I like to think entrepreneurs will recognise this opportunity to take better care of their peers, and this translates to greater collaboration between organisations. Speak to as many people as you can, ask all the questions that you need to and do your homework. This might well be a difficult time for us all but planning for the future must start now if it is to become as prosperous as I know it can be.”
Exclusive Interview with Ugo Loser, CEO of ARCA Fondi SGR
Arca Fondi SGR is a mid-sized Italian active asset management company. Founded in 1983 by a consortium made up of 12 regional banks, the company has grown in time, expanding its network of distributors and its client base. Nowadays Arca manages Mutual Funds, Pension Funds and Institutional Accounts with total AUM exceeding 30 € bln, reaching more than 100 banks and financial institutions and serving more than 800,000 final clients.
What are the key contributors to ARCA Fondi SGR’s success over the past 35 years?
Arca has always put clients and distributors first. That is to say we have always privileged fair pricing for funds and developing high quality products and services for our customers. This requires constant innovation as an objective and looking for people’s talent to be free to produce its effect
Why are people the founding element of ARCA Fondi SGR and how have you sustained this vision over the years?
We work in small teams, people are young and motivated and can perform duties with a high level of autonomy and responsibility. Innovation is asked to everyone, everyday
What makes Arca Fondi SGR different from other asset management firms in Italy?
Arca is a company focused on doing what it can do very well, that is to say mutual and pension funds, services for clients and banks. We never follow short term trends but always look for long lasting impact on the industry, like we’ve done may times in the past
What products/services has ARCA Fondi SGR pioneered?
Arca has been the inventor of “Arca Cedola”, fixed-horizon, coupon paying funds, which have been with no doubt the greatest product innovation of the past 12 years on the Italian market. This type of funds, at first strictly based on bonds and later as a balanced product, has encountered an enormous success both with clients and distributors due to its simple and effective value proposition. Arca is a market leader also in the “PIR” segment of funds, a range of product focused on mid and small sized companies, that have been the best performers in the Italian stock market for the last few years. In services, Arca is a leader in technology applied to asset management. Our website, app and digital services for clients and banks are award winning, state of the art combination of data, technology and channels, and the best is yet to come on this side.
What strategies do you have in place to sustain your market position and withstand professional competition in the country?
As I mentioned, we do not waste resources on projects with dubious results, instead we constantly invest on people, products and services. The high level of profitability that Arca has been able to maintain even in difficult years for the markets of the banking sector is a further testimony that this strategy works very well
How do you use technology to create meaningful experiences for your customers?
First of all, we have created a whole new division, Arca InnovAction Lab, dedicated to technology, data and processes. This ensures projects are delivered quickly and they are free to leave bad past practices behind. Arcaonline.it, Arca’s website, provides distributors with detailed information on clients’ portfolios, asset under management and subscription/redemption requests. It monitors aggregate selling data offering to our partners a suite functions and analytics to track commercial campaigns. And if the banks branches need assistance, they may ask Sara, our digital chatbot. A broad and timely multimedia production, covering exclusive reports, comments, presentations, videos, webinars and newsletters is also available on the website.
Customers, subscribing Arca’s funds through its distributors’ network, may access Arcaclick, a dedicated area on Arcaonline.it. With Arcaclick the client can easily browse through her portfolio of funds, analyze its characteristics, view transactions and historical funds’ performance in customizable views. Arcaclick is also a powerful source of information on Arca product range: Prospectus, KIIDs and other literature is easily accessible along with news, comments and reports. Arcaclick may also be accessed via Arca Fondi App, a free application for mobiles and tables, running on both iOS and Android. Available 24/7 and in mobility, Arcaclick gives clients the opportunity access information, news and details of their personal portfolio anytime and anywhere.
What key trends will drive pension growth in 2020 and beyond?
The Italian market for pension funds is still very small and therefore there is a great opportunity to grow. Arca Fondi manages the biggest open ended Italian pension fund and it’s been constantly at the top of its rankings. As people and workers are looking for yield and to weather short term volatility, the pension fund is very well poised to profit from this trend.
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