Insurance sector braces for stormy waters in the wake of economic volatility

Cynthia Ezekwe

Nigeria’s insurance industry is facing a perfect storm of economic turmoil, with the potential for a devastating impact on insurers and policyholders alike. The effects of inflation, currency devaluation, and other economic challenges are already being felt by businesses, and insurance companies are struggling to weather the storm.

The insurance industry plays a vital role in Nigeria’s economy, providing financial security for businesses and individuals in times of crisis. But the sector is now facing its own challenges, as the effects of a rapidly changing economic landscape ripple through the economy. Inflation, currency devaluation, and other factors are putting pressure on insurers, who must navigate a sea of uncertainty as they try to protect their policyholders. Businesses and individuals across the country are counting on the insurance industry to remain stable and solvent, but the question remains: Can the industry weather this perfect storm?

Insurance industry experts have warned that the current economic turbulence in Nigeria could have far-reaching consequences for the sector. Inflation, which has been driven by rising food and fuel prices, has put pressure on businesses and individuals alike, and is expected to continue to affect insurers’ profitability and solvency in the long term. The devaluation of the local currency, the naira, has also increased costs for insurers, while high interest rates have made it more expensive to borrow money, further squeezing margins. The reduced demand for insurance products is also expected to have a negative impact on the industry’s growth.

Olusegun Omosehin, the chairman Nigeria Insurers Association (NIA), noted that the volatile nature of Nigeria’s economic environment and emerging risks is having negative effects on Nigerians’ appetite for insurance services, keeping insurers on their toes in search of initiatives for building public trust to win mass patronage and in search of offshore reinsurance backing for huge claims from emerging risks.

Speaking at a press briefing in Lagos State, Omosehin stated that the macro economic situation emanating from some policies of the government affected people’s lifestyle and spending habits thereby limiting their purchasing power and appetite for some insurance policies, even the compulsory insurances.

He explained that some consumers are reducing or cancelling their insurance policies as they prioritise spending on essential goods and services, leading to a decline in demand for insurance products and services.

According to the NIA chairman, the 200 percent upward review of premium on the compulsory Motor Third Party Insurance and increase in fuel price, has reduced the number of vehicles many Nigerians put on the road and the number of vehicle particulars they renew, adding that number of motor insurance certificates uploaded in the insurance industry database recorded a decline compared to previous years.

However, he pointed out that insurance chief executives have been put on their toes in search of initiatives to build public trust, credibility for patronage and offshore reinsurance backing for huge claims coming their way.

Dwelling on the issue, Ekerete Ola Gam-Ikon, an insurance management consultant, noted that the specific challenges facing the insurance industry due to economic volatility includes low returns on investment, high customer attrition, increase in claims and tightening regulatory actions as regulators are introducing new regulations to ensure the stability of the insurance sector. He added that the high rate of inflation also affects the value of insurance policies. 

Gam-Ikom stressed that falling returns on investment due to low interest rates in the financial markets have resulted in insurers earning less on the money they invest, which is putting pressure on their profitability and their ability to pay claims.

Speaking on the impact of inflation and currency devaluation on insurance premiums and product pricing, he said, “Policyholders would be expected to revalue their assets, which would lead to additional premium, and ensure they get good value of compensation when the unexpected happens, given the high rates of inflation and currency exchange.”

Gam-Ikon added that the reduction in the number of insured vehicles on the Nigerian Insurance Industry Database, which is managed by the NIA, was a clear sign of the negative impact of the current economic situation on the insurance sector.

Explaining how insurers are adapting their business models and strategies to address the challenges, he said, “While we have not heard much from the insurance operators at this time, we know from past experiences that inflationary and currency exchange rates do not necessarily change their business models, rather it enables more strategic actions towards product development and usage of distribution channels.”

Gam-Ikon projected that insurers will likely shift towards digital distribution channels, as they are less expensive than traditional broker channels. He also emphasised the need for insurers to develop innovative policies that are less vulnerable to inflation and currency exchange rates, especially for those in the middle and lower income brackets who have been most affected by the economic situation.