NAICOM should give industry 3 years to implement risk-based capital – Aduloju, Unilag insurance don

KUNLE ADULOJU‭, ‬Associate Professor‭, ‬a renowned lecturer in the department of Actuarial Science and Insurance‭, ‬University of Lagos‭, ‬is an associate member of the Chartered Insurance Institute of Nigeria and the Chartered Insurance Institute of London‭. ‬Before his journey into the academic field in 2003‭, ‬he had worked in insurance firms‭, ‬including‭, ‬The Lion of Africa‭, (‬which went down‭ ‬with the 2007‭ ‬recapitalization exercise‭), ‬ADIC Insurance‭ (‬now NSIA‭) ‬and the British American Insurance Company‭, (‬BAICO‭, ‬now Alliance and General‭), ‬where he rose to the position of head of general business‭.‬

In this interview with Business A.M‭.‬’s ZAINAB IWAYEMI‭, ‬the academic walks her through the prevalent issues in the industry‭, ‬and how best to tackle low penetration of‭ ‬insurance in Nigeria‭. ‬Excerpt‭.‬

As an academic, how would you describe insurance and what can you say about the performance of the industry in Nigeria?

3 Insurance in Nigeria is not something well known to the public compared with other areas of the financial sector. It may be as a result of development issues. In the other climes,  insurance is well known and there is a very high level of awareness, which means you can’t do anything without having insurance to support it. But in our case,  it is not like that; awareness is low. Compared with banking, children in primary, secondary schools are aware of banking and commerce. Kids are generally aware that when their parents need money they go to the bank, and when it is time for salary,  salaries are paid through the bank. Because of the role that the bank plays,  it appears that banking is better known compared to insurance. But that doesn’t underscore the fact that insurance performs a critical role as banking.

Insurance is a means of risk management. In risk management, there are control measures and financing measures. In our everyday life,  we are faced with different risks such as, the risk of accidents, domestic accidents and others and insurance is one of the means to manage those risks.  There are some risks that you cannot control and you have to finance. Insurance falls under risk financing measures. Someone can drive his vehicle negligently and hit a passerby either injuring the person or damaging the person’s car; that is a risk and insurance is there to take that risk. It is a means of transferring risk from one party to another party, called the insurer, because the other party has the expertise to insure the risk.

Importantly, insurance is a pool, you cannot just insure one person alone, you have to look at a group of people that have similar experience. This means that everyone will contribute little and out of the contribution of so many people,  few who have issues or become unfortunate as a result of related events will be paid out of the contribution of all.

In spite of the significance of insurance’s role,  there is still low insurance penetration. What factors could be responsible for this?

There are a number of reasons for that. Lack of exposure to insurance at the early stage (primary and secondary level) in life contributes to that.  But I believe that with the help of the National Insurance Commission (NAICOM) and Nigerian Insurers Association (NIA), and the Nigerian Council of Registered Insurance Brokers (NCRIB), they are all making efforts to ensure that the level of awareness increases to deepen IPR in the country.

Similarly, the educational arm of the insurance industry; that is, the Chartered Insurance Institute of Nigeria (CIIN), have been embarking on awareness and one of the things that they do is that they try to speak with the ministry of education so that insurance will become a subject in secondary school. As a result of these efforts,  insurance is now offered in WAEC and NECO,  and students have insurance textbooks which they use to prepare for the exams.

At the tertiary education level, there are some institutions that have insurance as a course; for instance, University of Lagos, LASU,  Polytechnic of Ibadan, amongst others, offer insurance and risk management courses. What the Chartered Insurance Institute of Nigeria is really trying to do is that,  in addition to offering insurance as a course, they are working on a situation where the Nigerian University Commission makes insurance compulsory at a certain level. Just like we have general studies, like entrepreneurship, insurance as well could be made compulsory for everybody; so that will also increase the level of awareness.

In addition to the low level of awareness, the weak enforcement of the regulation is another issue. For instance, the Insurance Act of 2003, specifies some insurance covers that are statutorily compulsory; like the motor insurance and the insurance of buildings, but not so many people or householders rarely comply with that.

Another factor is fake insurance for vehicles, but I think that one is  being tackled by the Nigerian Insurance Industry Database (NIID) that allows the confirmation of registered vehicles.

Poor level of insurance financial literacy generally also contributes to low penetration. Financial literacy is generally about knowledge that an individual possesses to be able to know the options available to him with regards to managing his finances and also to make informed decisions. That level of insurance literacy is still low and insurance literacy is part of financial literacy.

A lot of authors seem to have divided opinions on whether poverty can really affect the level of insurance demand, especially when people cannot even guarantee their next meal, not to talk of buying insurance, which is a promise of what will happen in future. So many will say; let me be alive before I talk of that. But there have been some changes because the general level of education is gradually improving.

How can trust issues be better resolved in the industry?

For a very long time, I have been hearing stories on how some insurers refused to pay claims over and over. I would rather say it is a stereotype and generally an assumption. I am not saying that they cannot have issues, but issues are peculiar to any other industry as well as banking, but I know that even if that happened in the past,  the situation has changed. The operators in the insurance industry are generally aware that they are accountable to members of the public. Also, they are aware that they are being checked by NAICOM. Any member of the public that has issues with the insurance body can write and get in touch with the regulatory body or the NIA, that can discipline their members and no insurer would like their names to come out in the press that they are owing.

But where people still have challenges is the information they need or how to go about it when they have a claim. In the case of third party motor insurance, many people just want to get the paper to avoid police harassment; they won’t go beyond that. What people can really do to assist themselves is to go through a broker. If you go through a broker, the broker will do every other thing on your behalf and you are not paying any additional charge for using a broker. It is what you pay to insurance companies that a broker will take his own commission from and the broker will professionally come in,  advise you on the type of insurance after identifying the type of insurance cover and even recommend insurance companies to use and they will be like a go between. That way,  if you have an issue all you need to do is call your broker who will link up with the insurance company.

I think that the issue of trust to the best of my knowledge is not really an issue for those who are enlightened and know about insurance operation, but there are occasions where there are issues especially where some people want to claim from an insurance company, but haven’t read their policy to look at the conditions of cover,  whether what they claim for is part of what is covered. So, inability to study the policy to know the terms and conditions may also be one of the challenges people have. For instance, when you take a cover for third party motor insurance, it only covers your liability and if you have not read through the policies, you may want to claim when your vehicle is having issues.

In your opinion, would a risk based capital or full recapitalisation better help position insurance in Nigeria?

I will look at it from different angles. Yes, capital is an essential part of a successful insurance industry because you need to have solid capital to carry some risk, but capital is not just all that you need to deepen insurance penetration. The current level of capital could still help to deepen insurance penetration if adequately utilised in conjunction with other things, rather than just hammering on recapitalisation.

It is good to have adequate capital.  When you have adequate capital, you will be able to reach the oil and gas and dollar based assets, which require strong capital to participate in, and I know the government promulgated the local content laws so that a certain percentage of insured would be retained in the country. But without adequate capital, there is no way to retain it. In that regard, I support recapitalisation.

With the current level of capitalisation in the insurance industry, some investors still believe that they are not getting much returns for their money. For instance, if you have a big capital you can only concentrate on big risks like oil and gas; then, what about the micro-insurance, a lot of people don’t have it.  While oil and gas may increase insurance penetration, which is a gross premium over gross domestic products, there is also a need to look at insurance density; the ratio of the population that has access to insurance.  That one does not necessarily depend on heavy based capital. It’s about what the regulators can do to penetrate the rural areas and the market women just like the banks are doing with micro finance, the petty traders,  micro, small and medium enterprises.

On the other hand, while the risk based capital is preferable, it depends on the way the regulatory body wants to go about it. Before now, regulators had planned a risk based structure; a system that allows insurers to take on a risk depending on the financial strength of individual firms, but many insurers were against that.

Risk based capital is more popular in the world as it enables insurers to cover only the things they have the capacity, so as not to run into problems. To that extent,  I am in support of it.  But in my opinion, if NAICOM wants to implement it, it shouldn’t be immediately,  it should be a gradual process. This is 2021, you can talk about that between now and the next three years. Give them time to readjust so that those who want to merge will merge and those who want to acquire will be able to do that.

When you are talking of development,  insurance benefits from development; it cannot just develop in isolation. Look at South Africa, insurance is growing in South Africa because it is able to ride on the development of the country. They have solid structures,  they have systems that work. But here, we don’t have that kind of structure. Apart from oil we depend on, we need to look at the manufacturing sector and other sectors. Many businesses have had to leave the country because of power failure.

But why hasn’t the industry thrived on some growing sectors such as the entertainment, telecommunication industry and others?

Insurers need to be more innovative. With regards to the entertainment industry,  they need to reach out to them and come up with insurance products that would meet their needs. Though there has been improvement over time, insurance operators still have a long way to go.  But this isn’t enough,  they still have a long way to go. But the issue is you cannot remove insurance from the total environment. For example,  it is easier to look at the population of South Africa in relation to the level of insurance and compare it to the performance of insurance in Nigeria. But the real deal is about what constitutes the Nigeria you want to insure.

For example, in some parts of the country where many refuse to go to school, it may be difficult to sell insurance. There is a need to also consider the social economic structure of the country and then compare the manufacturing industry to that of South Africa. It may appear like Nigeria is a bigger economy but when you look at the way it is spread,  that might not be the case.

What’s your take on the increasing adoption of technology in insurance and to what extent would insurtech define the future of insurance in nigeria?

This is a good development because that will even contribute to the level of insurance penetration. The youths nowadays believe in technology.  The youths that we have, especially the millennial, virtually do everything on their devices. I recently published a work on the millennial generation and the demand for insurance where I stressed on technology and social media as a tool that insurance needs to leverage on, so as to reach the youth which constitute a major percentage of the population. The research used a case study of the millennial generation based on reports from other countries, that estimated the millennial generation as those who are born around the 1980s to 2000, that is about 21 to 40 years.

Some of them (the youths) in the developed world were the biggest spender. Some of them have wealth acquired from their parents and some are working, and some are in the boardroom. Hence, for insurers to be able to reach and convince this generation, they need technology as a platform. I believe that insurance can benefit greatly if there is investment in technology, especially the mobile type that they use. If the products are designed to meet their specific needs at their stage in life, this would really go a long way in transforming the industry. In essence,  insurance companies should invest in that area.

Should Nigerian insurers indigenise insurance product offerings to suit cultural needs or adopt the western model?

Insurance can benefit from the global practice because there are some universal principles all over the world like utmost good faith,  insurable interest and others; but when it comes to practice,  they can adapt it to local situations.

In many companies in Nigeria,  many of our practices are fashioned according to the British system because they introduced Nigeria to us.  I believe that we need to adapt to our local situation and that is where Asian countries are better – not only in insurance but in other areas as well. Asians have their orthodox medicine that benefits them. With insurance,  we can do a lot of this,  we can come up with ideas that fit the local circumstances and adapt it. Doing that will improve the insurance situation in Nigeria.

Looking at the agricultural insurance practices in Nigeria, it is similar to what other developed countries practice, but there are some specific risks farmers face in Nigeria but are excluded in other countries. Insurers should think of how they can incorporate this and let the farmer buy the policy.  It is not a matter of just following what you inherited or what others are doing. Based on the peculiar situation, the specific need of farmers here has to be taken into consideration

How will the IFRS 17 help to position the insurance industry in Nigeria?

This is an international charter and in Nigeria, we are a part of the global world. Hence our insurance sector,  even though we need to tailor some of them to fit the local needs, still need to follow the international best practices so that the outside world would have confidence in what we are doing because international reporting values accountability. I believe it is a good thing for insurance companies in Nigeria to adopt such to give confidence to international partners for them to know we are doing things right.

Notably, insurance is not just limited to one country. For instance, any risk we insure in Nigeria today will have to be reinsured overseas. For example, if one insurance company takes a risk,  processes it to a reinsurer,  the reinsurer in Nigeria will not swallow it; they have to insure it as well overseas. But if you don’t follow the internationally recognized best practices,  like the accounting standard and the rest of them,  others may  not have confidence in your system.  Just like we have in any other sector,  we normally have an international treaty,  agreement or charter that we have to key into to keep us in track with the global practices. But when we come to the basic practices,  you can adapt to local situations,  you can do that.

Lately, there have been issues around kidnapping. How can insurance come in here?

The agricultural space is especially faced with the issue of kidnapping as one of the problems in the country. I know that some insurers cover terrorism, but they need to be specific like stating the kind of  terrorism being covered. If an insurance firm will have to design cover relating to kidnapping,  the first thing the insurance company would need to research on is the expected losses.  Insurance will not just go and endorse one cover,  first they must consider the available data in terms of how many are being kidnapped per day,  how much will be paid, if members of the public will be able to pay for that and how to determine the appropriate measure.

Also,  insurance companies will not just come up with a coverage unless that has adequate cover, they have to look into premium and management expenses. All of this would help to determine the premium of getting a solid reinsurer to back up the product. Assuming I agree to pay a 10 million premium for a particular loss,  as an insurer, I will take my portion and pass the remaining down to a reinsurer. There is a need to involve a reinsurer to cover me for kidnapping?  It is one thing to say you want to cover a certain risk. The most important thing is to have the capital, the premiums and the reinsurer, because insurance without reinsurance is nothing.

What are the roles expected of insurers to deepen insurance practices in Nigeria?

A number of things are required.  First, the insurance industry should come together alongside the regulatory body to launch a campaign of insurance awareness – which they have been doing.  I am aware that the CIIN sometimes goes to orientation camp to educate them about insurance. I think they shouldn’t stop at that. They should try to even go up to secondary school and let them know once in a while during the time of graduation  or when there is any event. When many more people are aware of the benefits of insurance,  and you assure them that insurance will pay, as well as, let them understand that there is micro insurance, according to the pocket.

Insurance firms also need to be more innovative in designing relevant policies and not just bringing what is used in the UK that started some centuries ago; they have a stable legal system and have developed their insurance over the years before Nigeria started.

In addition, insurers should not just stop at issuing cover to their policyholder after collecting the premium and go. When they issue a policy and the person pays,  they should still get in touch with the person to ensure that he/she understands the logic it covers so that the people can be relieved that they have a friend to rely upon.

As a body,  the insurance company must continue to partner with law enforcement agencies to see that the compulsory insurance is adhered to.  For instance,  only a minority are adhering to the insurance of public places. Public places are places where people have public access, such as churches. These things need to be reinforced. Similarly the insurance for buildings is not being reinforced.