Mr. Guy Czartoryski is the Head of Coronation Research, a part of the Coronation Merchant Bank. In this interview with Assistant Editor, Finance/Economy, CHIJIOKE NELSON, after unveiling a report on 2019 outlook for insurance sector, he said the nation’s underwriting sector has potential to become more vibrant than peers.
What is the interest of Coronation Merchant Bank in the insurance industry?
There are numerous ways to make sure banks can be of service to insurance company. It is all about liquidity and insurance companies are liquid and they can help manage it. Your liquidity might be in the wrong currency, because if someone smashes up their car you cannot go and completely repair it in naira because some of those spare parts are in dollars. Hence, that business inevitably is going to go to a bank. The approach we have had here is to have a separate license and what I do know is that when you run micro insurance, you can either have it in a separate license, which means that the capital has to service that particular activity.
How do you see Nigeria’s insurance sector?
An industry stakeholder once said to me that insurance is not a very profitable industry and everyone is just in this because Nigeria is a country with a large population of about ninety million adults, which makes it the most populated country in Africa and the biggest market in terms of potentials. The person said they would tolerate the low returns they are getting currently for a number of years until it opens up, because what they would gain eventually in few years time is massive compared to the low returns now.
That is one way to look at insurance in the country now. However, I also think that a recapitalised industry would approach its regulator in a slightly different way than an under-capitalised and fragmented industry. If you look at the landscape, knowing that there are 25 potential survivors, you would also find about seven or eight being foreign dominated companies and then, you would find as big as those ones, five or six being totally indigenous.
Imagine who the locally owned ones are going to be, starting with LeadWay, AIICO, among others, you now know who the home team and foreign team are going to be and that they would all be heavy weights. Given that most of them have raised capital, it would be possible for them to say we are going to have a different relationship with the regulator. But I think that is ongoing.
Your report showed that at the end of the recapitalisation exercise, the companies would reduce from 59 to 25. What are the indicators?
We listed the ones with the capacity now, others that are in capital raising exercises and assumed the others cannot raise the capital, because it is a question of how deep the pockets of the shareholders are, which means they would either be bought or merged.
Did you put into consideration the guideline after the May 20 circular?
The circular you are referring to is the one that came out July 23. The first circular said you must have capital equal to the sums; let us say N10billion for a non-life business. Capital could mean only your paid up capital, it could mean your paid up capital plus your shared premium account. It could also mean your paid up capital plus your shared premium account plus your retained earnings, or it could mean your paid up capital plus your shared premium account plus your retained earnings plus your reserves. For a few weeks, we were thinking how we would model the plan, until way July 23. We said it is paid up capital plus shared premium plus retained earnings. The regulator did clarify it.
For instance, in 2020, there would be a lot of money in insurance, but the challenge is where is this capital going to be used. If you look at the purchasing power of average Nigerians who are supposed to buy this insurance, they are mostly concerned about basic needs. So, where are the insurance companies going to deploy this money?
If a research team goes out to conduct a market survey in outer parts of Lagos and they understood what the consumers are doing, asking them five things they want, insurance would not be one of them. So, insurance is not a product you can just advertise and sell, it does not work like that, which is why micro insurance is wonderful in a way. If you are bundling a micro insurance product with something like a telecommunications company (telco), which everyone uses and you put a small slice as the telco fee as the insurance premium, then you can grow it successfully and familiarise people with the market at the same time. You cannot put up advertisement boards and campaigns telling people to buy insurance. It is different for pensions, because we see people paying pension advancements but insurance does not follow that rule. Therefore, I do not think people would be able to take out money from their account to pay for insurance.
What is your view on the government’s patronage in the insurance sector?
The government has numerous assets, such as fleet of cars, properties, which is a different scenario when you have a single car or property, which makes more sense for you to insure. If you own three thousand cars, you do not insure because you have other cars. The more access you have to a particular asset the less reason for you to insure them. However, I believe that most governments in the world should have a mandatory insurance policy on all government cars, properties and businesses, the same way they insure employees.
I do not think there is a matter of trust in government’s inability to insure its assets, but I think it is due to governments’ bureaucracy. In the past, a lot of insurance companies used to write insurance on credit and there used to be a lot of receivables in the books of those insurance companies. We all know about the delay of governments to pay up on insurance, but now there is a policy of “no premium, no cover”, which means the days of receivables are gone. Even if governments, by virtue of their policies, need to insure their assets, but due to bureaucracy in payment, the assets that should have been insured in 2019, would extend to 2020, and by that period, the insurance would have elapsed. That is why there has not been an increase in terms of government patronage in the insurance industry.
What do you have to say about using slight technicalities to deprive policyholders of claims?
The profile of insurance companies is increasing in terms of trust. What you are talking about is how people refer to insurance companies in the past. Nigerian Insurance Commission has worked on this and with the help of the insurance brokers as well, we are seeing off the technicalities you have mentioned and insurance companies have become more responsible in meeting up claims. I do not think it is major problem like it used to be, and that is why I am saying that the insurance industry has been plagued with this lack of trust issue.
There is a lot of work that needs to be done to ensure there is a cleanup concerning this, but to be honest, in the last couple of years, the issues of not been able to make claims have reduced. I remember in the year 2000, to make insurance claims could take up to two to three weeks, but now it can last for two to three days and it is increasing, which is what this consolidation would further increase because now you have more bigger players in the industry and the time of claims settlement would also be shortened. Also, with the risks appropriately priced, there would not be any issue meeting up claims. People still have the old picture in their minds, not knowing that there have been drastic developments, which is going to improve over the years.
Are the insurance companies taking advantage of the yield environment in bonds, fixed security bonds, treasure bills to earn extra income?
The investment income is the most important part of their income. If you are a German insurer doing business in Germany at the moment and you take your premium income to the bank, you would probably get a negative interest rate. But if you are a Nigerian insurance company doing Nigerian business in Nigeria you would get 15 per cent on the premium tomorrow.
How can insurance companies leverage on technology in such a way that they reduce cost and boost their return on equity?
One of the things we heard about as we talked informally before we did this report was that the loss ratios are terrible. The ratios are bad, not particularly good in the life section. In the general insurance, the non-life loss ratios are well within international averages and that is fine. There is nothing wrong with the general insurance industry’s ability to underwrite policies, they have got it absolutely right, thus the loss ratios are fine. The expense ratio is off the scale, as all Nigerian business have high expenses because you are paying for very expensive transportation, very expensive security, very expensive energy, lack of infrastructures, hence all the expenses are high in all the industries and they are very high in the insurance industry.
The combined ratio is not very good for the industry, which is why the returns are so low, but the underwriting is pretty skillful. It is just the expenses that are far too high, so if you think of that in terms of being expensive, at least part of that expense ratio is a fixed cost that you cannot get rid of. The more you can multiply your customers the lower that cost is, as you are approaching your revenues. For me, it is all about scale. With huge scale comes the profit, so really I think as you deploy technology to boost the scale, then the profit should follow.
If you look at the banks’ numbers, their fees and commissions are growing quite quickly because people are using USSD codes on their phones. If you look at the telco industry, it is the star of the GDP numbers that came out recently, because the it is going up about 11 per cent year-on-year on the back of the deployment of this technology. It is possible in insurance.
There are lots of channels, which the banks use to reach out to a lot of customers such as, mobile banking, using mobile apps. That sort of digital platform for insurance would go a long way for the insurance companies. As we speak a lot of people do not go into banks anymore, this sort of technological development can also be used in the insurance industry to increase the penetration of insurance. This requires a lot of investment and that is why a lot of insurance companies have not been able to make those investments, so getting more capital would increase that process of getting access to customers directly.
What would be your method for enhanced insurance penetration in Nigeria?
I think there are a number of business models that would work and personally, I favour this idea of micro insurance. That is not to say that other business models do not work as well or even better, going for the top level of insurance is one way of doing it. It is a little bit bigger to equate technology with micro insurance. If you have a newly registered car in Lagos, which means you are wealthy and the police can check your plate number and in real time, take that back to base and check if it is insured or not. So, that is a way wealthy of doing it, considering that only wealthy people have insured cars in Nigeria. Making some sort of insurance mandatory is a better way of doing it, because what a lot of the companies would spend their money on is most likely technology.
You agreed that banking technology can drive insurance. What is stopping it?
If you are an insurance company, you cannot just walk into a bank to say they have to sell your products. That takes a lot of education. If you go to a bank, saying I have got this great idea to sell insurance, you would get a good response, but you will put a desks as your infrastructure in the bank to sell the insurance product and you have to have a sales team within the bank to actually do it or at least incentivize your existing sales team to sell. This is hard to do now. This works well in France, while in the United Kingdom it does not work. In terms of the regulator, an insurance company can only use two banks as its partner, and banks can only use two insurance companies as its partner.
What about the rebranding that your report mentioned?
Insurance is about trust and building on it. If you have a market in place like Philippines, Malaysia, as well as large parts of India, the first thing is to familiarize the market- educate it with the whole idea of insurance and the only way to do that is to reassure people that insurance pays out. Once they have experiences of payouts, it is the essential branding tool. So, the next step would be getting them to insure more stuff.
Secondly, when people roll out micro insurance, there is a bit of door-to-door efforts. If the agency doing the campaign is not credible, it will not happen, hence another way to do it is to bundle it with products people already buy, thereby leading to people experiencing insurance without them even knowing it.