…Insurance as tool to enhance liquidity
Cynthia Ezekwe
The relationship between insurance and the development of Nigeria’s commodities market is multifaceted, according to experts in the field. This is as insurance is considered a safety net for businesses and individuals engaged in the commodities market, reducing the risks associated with trading goods and services.
The effects of insurance on the commodities market also extends to encouraging investment in the commodities sector by providing protection against financial losses. Furthermore,it promotes efficiency and transparency in the market by ensuring that transactions are handled in a secure and compliant manner. In addition, it plays a key role in the growth of the commodities market by providing access to credit and other financial services.
In addition to risk transfer and reinsurance, another key function of insurance in the commodities market, according to experts, is liquidity provision. During times of market stress, liquidity may become scarce, making it difficult for market participants to sell their commodities or access funds.
Experts contend that insurers can provide liquidity by making funds available to those who need it, helping to maintain the smooth functioning of the market. This can be especially important for smaller or newer market participants who may not have access to other sources of funding.
Dwelling on the relevance of insurance to the commodities market, Lamido Yuguda, the director general of the SEC,noted that insurance is a key component of a robust risk management strategy for the commodities market. He noted that the market is exposed to a wide range of risks, including price volatility, political instability, natural disasters, and market manipulation. He stated that insurance can help to protect against these risks by providing a financial safety net in the event of a loss.
Yuguda noted that insurance can help to create a more transparent and efficient commodities market by promoting trust and confidence among market participants
Speaking at the recent Capital Market Committee (CMC) meeting held in Lagos, the SEC DG outlined plans to collaborate with the National Insurance Commission (NAICOM) and Capital Market Operators (CMOs) to improve the commodities market.
He outlined a number of specific actions that would be taken, including the development of a framework for the provision of insurance cover for commodities transactions, as well as capacity building and awareness campaigns to promote the use of insurance in the commodities market. He also emphasised the need for strong regulation and enforcement to ensure that insurance is used effectively and appropriately.
Yuguda explained that the commodities market is a market for contracts in the supply of commodities and exists because it facilitates the sale of commodities between producers of commodities, like agricultural commodities or mineral commodities, to the buyers.
He noted that there are risks associated with investments particularly in the commodities market, adding that to ensure active participation in the market, investors look to insurance to secure their investments.
“The role of insurance is key to the commodities market because it helps commodity suppliers to be able to perform under the contracts of supply and ensure that the market is not disrupted,’’ he said.
Yuguda explained that one of the main ways that insurance supports the commodities market is through the use of risk transfer mechanisms, such as futures and options contracts, and hedging. These mechanisms allow market participants to offset the risk of price fluctuations by locking in prices or setting price limits. For example, a farmer who needs to sell their crops at a certain price in the future can buy a futures contract to guarantee that price. Similarly, a manufacturer who needs to purchase a certain amount of a commodity can use an options contract to lock in a price while still being able to benefit from any potential price decreases.
In light of the above, Yuguda highlighted that the commission has been making arrangements with NAICOM to get insurance companies to work with capital market operators, especially commodities exchanges to de-risk that segment of the economy and ensure its long-term stability, adding that without the risk-sharing, liquidity, and other functions provided by insurers, the market would be more volatile and less efficient.
