FBS Reinsurance CEO flags impact of naira devaluation on insurance premiums

Onome Amuge

Fola Daniel, the chief executive officer of FBS Reinsurance, recently raised concerns over the impact of currency devaluation on insurance pricing in Nigeria.

Daniel explained that the devaluation of the naira has resulted in inadequate insurance coverage for many policyholders, as the sum insured in their policies have become insufficient to cover potential losses due to inflation and the rising cost of goods and services.

The concerns raised by the CEO of FBS Reinsurance, were highlighted during a recent joint training programme organised by FBS Reinsurance and Munich Reinsurance of South Africa. The  3-day joint training programme focused on the key themes of fire insurance and reinsurance accounting, bringing together insurers and brokers from five West African countries including Nigeria, Ghana, Ivory Coast, Liberia, and Gambia.

With a combined physical and virtual attendance, the training event provided a platform for industry professionals to engage in discourse and share insights on the challenges and opportunities facing the African insurance sector.

Speaking at the event, Daniel elaborated on the far-reaching effects of currency depreciation, noting that it not only impacts the purchasing power of policyholders but also affects the ability of insurers to provide adequate indemnity in the event of a loss.

He illustrated this by using the example of a vehicle that was purchased for N80 million last year and is now insured for N60 million, representing a 25 percent depreciation.

Daniel explained that the training programme aimed to address the technical knowledge gaps that have emerged in the insurance industry, particularly the reliance on software applications for underwriting. He also elaborated on the need for experienced-driven underwriting, noting that the industry is in danger of losing the benefit of firsthand knowledge, as technological advancements, such as artificial intelligence, are beginning to eclipse the traditional approach.

While acknowledging the advantages of using AI for underwriting, Daniel maintained that there are still aspects of insurance, like marketing, that require human interaction and cannot be fully automated.

“You can do that in print, but it creates a better impression when they meet you, speak with you and ask questions which answers cannot be obtained from the publications on your website. So, the purpose of this training, having recognised the knowledge gaps, in the Nigerian and other African market, is to bridge the technical knowledge gaps, thus, impacting the much-needed knowledge,” he stated.

The CEO of FBS Reinsurance, expressed high hopes that the training programme would enrich the knowledge base of participating insurers and brokers, saying that while the training could not possibly cover every aspect of technical insurance, it dwelled on crucial topics such as fire insurance, consequential loss, and reinsurance accounting.

Daniel further expounded on the impact of currency devaluation and inflation on the insurance industry, noting that the rising prices of goods, services, and construction materials have resulted in significant changes in indemnity values.

He pointed out that, in the scenario of a vehicle or a building being damaged or destroyed, the cost of replacement or repair has increased significantly due to inflation, rendering the initial value of the policy insufficient to fully cover the loss.

Daniel stressed the importance of adequate premiums for insurance companies to provide the necessary coverage for policyholders. He highlighted the necessity of balancing the premiums with the insurance coverage, so that policyholders can offload their risks to insurers with the reassurance that, in the event of a loss, the insurance company would provide the appropriate financial support.

The FBS Reinsurance chief pointed out that, in an inflationary environment, policyholders and corporate entities tend to adopt a more conservative approach towards insurance, as they become more focused on preserving their existing assets and resources rather than committing additional funds to insurance premiums.

Daniel also addressed the issue of rate cutting in the insurance industry, sharing that reinsurers have taken steps to address the problem on both local and international levels.

He explained that reinsurers are now rating risks based on historical loss experience and using that information to establish a benchmark rate, which serves as a guide for the appropriate level of premium that should be charged for various risks.

Daniel further elaborated on the role of reinsurers in tackling the issue of rate cutting. According to him, reinsurers recognise that they cannot directly dictate the underwriting practices of insurance companies, as insurers have the freedom to underwrite risks at their discretion, even if it means underwriting them for no premium.

However, he noted that to discourage rate cutting, reinsurers have established a minimum rate for certain classes of business, and have stipulated that any risk underwritten below that rate cannot be ceded to the reinsurance treaty.

“The real strength of an insurance company is the reinsurance backing it has. So, if you do not have reinsurance backing, you would be wise to curtail the level of your acceptances to reside within your risk tolerance levels,” he posited.

Daniel also observed that the Professional Reinsurance Association of Nigeria (PRAN) has been actively engaged in efforts to maintain rational pricing practices in the insurance industry, particularly by taking keen interest in risk rating and working to prevent rates abuse. He pointed out that the minimum rate prescription implemented by reinsurers is not static and can be adjusted over time based on the performance of the risk in question.  According to him, if a previously volatile risk has been stabilised or improved due to the introduction of new measures by the insurance company or the owner of the business, the minimum rate may be revised accordingly.