IFN Monthly Article on Nigeria: January 2018 Issue

Looming shakeup in Nigeria’s insurance industry and implications for Takaful operators

In 2011, the Central Bank of Nigeria joined regulators across the globe to adopt the risk-based supervision model in the banking industry in a bid to avert a re-occurrence of the global financial crisis. Given the evident success of this model, the National Insurance Commission (NAICOM) has indicated its readiness to replicate the same approach for Nigeria’s insurance industry.

Nigeria has a teeming population that naturally should support a brisk insurance market. However, insurance is still a foreign and unwelcome concept in many quarters due to low financial literacy, inaccessibility to insurance products, low confidence in the capacity of insurers as well as cultural and religious biases. The insurance industry currently contributes a meagre 0.35% to the country’s gross domestic product (GDP), compared to 15% in South Africa. In recognition of these constraints, NAICOM is keen on improving the industry’s relevance and efficacy. Notably, NAICOM introduced guidelines for takaful and micro-insurance in 2013 to deepen penetration. The regulator’s focus has now shifted to improving the stability of operators, which has led to the proposed adoption of risk-based supervision (RBS).

RBS is a broad framework that would enable the insurance regulator to consider all aspects of an insurers’ business such as internal controls, operational processes and corporate governance in setting capital requirements. To this end, NAICOM has expressly stated that another round of recapitalisation for all insurance providers in the country is imminent – and the shake-up is likely to impact takaful operators.

It’s been 13 years since Africa Alliance Insurance Plc heralded takaful in Nigeria by offering family takaful products. The adoption of takaful has been gradual and today there are only two exclusive takaful providers against 55 conventional insurers. The nascent takaful market has struggled to gain widespread adoption partly due to policy holders scepticism of its relatively small size and uncertainty surrounding their capacity to absorb risk. Consequently, takaful operators will undoubtedly benefit from the expected improvements to internal controls and corporate governance proposed under RBS. We also expect greater oversight on the unique risks facing takaful operators such as liquidity management and shari’ah compliance, in a way that forces operators to adopt necessary control measures to avert adverse consequences of excessive risk taking. Furthermore, with an expected upward revision to the minimum capital requirements in the insurance industry, we believe takaful operators will be open to new investments accompanied by new impetus for expansion to the overall benefit of policy holders.

In our view, these regulatory-driven developments will give the takaful market the much-needed thrust to seek out the opportunities that lurk in Nigeria’s large population.