Devaluation of Naira and Inflation Impact Insurance Sector’s Viability

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The recent steep decline in the value of the Naira within the foreign exchange market, coupled with a surge in inflation rates, has initiated a concerning trend of diminishing value for assets covered by insurance policies.

According to recent investigations by Financial Vanguard within the insurance industry, it has been revealed that a significant portion of risks are currently underinsured, as the value of claims falls below the original value of the assets they were meant to safeguard.

Consequently, as claims continue to materialize within the sector, insurance policyholders are finding themselves receiving payouts significantly lower than the actual value of their insured assets.

In response to these challenges, insurance companies are increasingly resorting to off-loading their underwriting activities through ceding arrangements with both local and foreign re-insurers. However, this strategy is resulting in higher reinsurance expenses, particularly for overseas ceding, due to the weakened value of the Naira.

This scenario is expected to impede profitability within the insurance sector, despite reported increases in gross premium income. Additionally, it undermines the industry’s capacity to retain substantial risks.

Industry insiders have highlighted that the surge in reinsurance expenses exacerbates the issue of capital flight, a longstanding challenge within Nigeria’s insurance sector. This trend reflects the industry’s struggle to retain significant business operations within the country.

The full-year reports of 17 leading insurance companies listed on the Nigerian Exchange Limited further confirm this trend. While Gross Premium Written (GPW) saw a commendable increase of 25.9% to N557.5 billion in 2023 from N442.6 billion in 2022, reinsurance expenses surged by 28.4% to N133.01 billion from N103.6 billion over the same period.

The companies mentioned include Aiico Insurance, Axa Mansard, Consolidated Hallmark, Cornerstone Insurance, Coronation, Custodian Investment, Guinea Insurance, Lasaco Assurance, Linkage Assurance, Mutual Benefits, Nem Insurance, Prestige Assurance, Regency Alliance, Sovereign Trust, Sunu Assurance, Universal Insurance, and Veritas Kapital Assurance.

Meanwhile, insurance experts are urging policyholders to ensure that their assets are adequately insured and renewed based on their current market value to ensure comprehensive coverage and appropriate compensation in the event of risks materializing.

Looking ahead, it is anticipated that insurance premiums in 2024 will witness a significant increase compared to rates in 2023 for similar asset classes. However, the industry’s growth prospects are clouded by concerns over potential consumer resistance amidst dwindling disposable incomes exacerbated by Nigeria’s challenging economic conditions.

Offering insight into these developments, Mr. Ben Ujoatuonu, Managing Director of Universal Insurance Plc, emphasized that inflationary pressures are eroding disposable incomes, thereby impacting the purchasing power for insurance products. He noted, “Businesses flourish when the economy prospers, and insurance is no exception. However, with the prevailing economic conditions, inflation has significantly reduced people’s disposable income, affecting the uptake of insurance products.”


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