How Attractive is the Insurance Ecosystem in Nigeria?
A firm’s growth potential depends on the capabilities within the firm, the influence of prevailing external factors in the environment and the industry’s structure within which the firm operates. The insurance market in Nigeria is largely untapped, with only about 3 million Nigerians having any form of insurance, a paltry 1% penetration rate. Conversely, Nigeria has a comparatively high working population which provides a massive opportunity for increasing insurance penetration.
The phone penetration in Nigeria is high at over 70%, and internet use is rising. With the current penetration of technology, the insurance industry has an increasing opportunity to leverage this and access many consumers through diverse and culturally acceptable packages. On the downside, there is a strong push to improve tax generated revenues in the country. One of such tax reforms is the Value-added Tax which was increased from 5.5% to 7.5%. Although this is still among the lowest in the region; aggressive taxation may affect the inflow of investments in the insurance industry.
The National Insurance Commission of Nigeria regulates the insurance industry. The industry is still growing and contributes only 0.7% to the Nigerian GDP, which is lower than the 3% average for Africa and 12% in South Africa. To improve the penetration rate, the National Insurance Commission of Nigeria (NAICON) introduced compulsory insurance for motorist and developed an internal mechanism to eradicate fake insurance. NAICOM also put in place strategies to build consumers’ trust and develop the microinsurance subsector. All these strategies provide an excellent opportunity to invest in the industry, targeting the informal sector that constitutes a large proportion of the working population in Nigeria.
Understanding the macro environment is pivotal to a firm strategic position. However, the industry's operations also play a major role in deciding the future of a firm. The performance of the insurance industry in Nigeria is relatively weak compared to regional and global insurance sectors. With a market capitalization of ₦146 billion. It falls far behind the banking sector, which has a market capitalization of ₦2.4 trillion. The 2005 recapitalization introduced by NAICON was the first consolidation of the market which laid the foundation for growth and led to the mergers and acquisitions of firms. There is another plan for recapitalization to further encourage a stronger insurance industry in Nigeria. Nonetheless, the sector had experienced sharp growth from ₦190 billion gross premium income in 2010 to ₦302 billion in 2015. The main drivers for these were the increasing middle-class population and technological advancement, which has improved insurance penetration in the informal sector. A new transformational agenda released by the NAICOM plans to triple this income in 3years.
The industry's major players are the insurance brokers, insurance and reinsurance companies, agents and loss adjusters. The brokers are responsible for controlling over 70% of all premiums, making them a strong force in market penetration; in fact, the market has been referred to as the brokers’ market. The top insurance companies listed on the Nigerian stock market, based on gross premium income are Custodian insurance company with 23% of the market share, AXA Mansard and AIICO. Nonetheless, there is a gap, especially in the informal sector with low insurance penetration and poor understanding of the industry by consumers. The high penetration of mobile phones provides an opportunity to offer an innovative delivery system for insurance packages; most of the industry’s top players are beginning to embrace this.
The retail insurance market is an untapped opportunity in the industry as brokers largely controlled the market. The next phase of the industry will be strongly influenced by direct product distribution channels to the consumers. With the emerging opportunities in the telecommunication industry, there is a gradual growth in the ease of subscription for insurance via mobile phones. The future is expected to open up many more innovations in this direction; increasing retail products and gradually reducing insurance brokers' control. This will be made possible by the increase in social media use and penetration of phones.
