Trends in Global Insurance and Preparing Nigeria for the Global Challenge

Transcription

1 FINANCIAL SERVICES Trends in Global Insurance and Preparing Nigeria for the Global Challenge Presentation at the Insurance Future Summit by Kunle Elebute, Partner, KPMG April 2008 ADVISORY AUDIT TAX ADVISORY

2 Outline The Place of Insurance Nigeria on the Global Landscape Lessons from Other Markets Overall Market Outlook Key Success Factors

3 1 The Place of Insurance

4 The nexus between insurance development and economic growth is well established A 2006 USAID study of the insurance sector in developing countries revealed certain key findings: A substantial and growing body of evidence suggests that robust and efficient insurance markets improve an economy s ability to organise and allocate its resources When insurance markets have the necessary capacity and infrastructure to deliver their variety of services, synergies arise between insurance and other financial services that improve financial sector effectiveness and economic productivity Countries are much more likely to experience sustained growth if their insurance markets develop well Economies that experience more growth do so in part because they have access to efficient and effective insurance products

5 2 Nigeria on the Global Landscape

6 The global insurance market is witnessing significant growth Global GDP grew by 3.9% in real terms during 2006 to $48,342 billion above the 10 year-average of 3%. Emerging markets expanded by 6.9%, twice as fast as the industrialised countries. Worldwide insurance premiums in 2006 were $3,723 billion, composed of $2,209 billion in life insurance and $1,514 billion in non-life, representing growth rates of 5%, 7.7% and 1.5% respectively. The life market growth rate was the highest since 2000 and faster than overall economic growth in most countries. Emerging market growth trebled the rate from 2005 Source: Swiss Re Sigma No.4/2007

7 The global insurance market is witnessing significant growth Life Business Development By Region 25.0% Real Premium Growth Rates (%) 20.0% 15.0% 10.0% 5.0% 0.0% World Industrialised countries Emerging markets South and East Asia Latin America and Caribbean Central and Eastern Europe Africa Middle East and Central Asia Non-Life Business Development By Region 20% Growth Rate Average Annual Growth Rate ( ) Real Premium Growth Rates (%) 15% 10% 5% 0% World Industrialised countries Emerging markets South and East Asia Latin America and Caribbean Central and Eastern Europe Africa Middle East and Central Asia Source: Swiss Re Sigma No.4/2007 Growth Rate Average Annual Growth Rate ( )

8 The insurance business model itself is transforming From Warehousing risks To Risks inherited from policyholders Risks pooled and borne by insurers Traditional reinsurance programs Large diversification + good underwriting Large amount of capital The Old World Securitisation Hedging Dynamic ALM Understanding, restructuring & transferring risks Management and intermediation of risk - risks taken from policyholders - risks pooled and structured by insurers - risks externalised through reinsurance programs and financial markets Efficient diversification Moderate capital with appropriate capital management The New World From Focus on product returns without properly measuring risk/ volatility Independent management of assets and liabilities Accounting rules not marked-tomarket (MTM) Few rated companies Few institutional investors To Focus on product risk + value Integrated ALM Accounting rules approaching MTM Many rated companies More institutional investors Source: Adapted from AXA

9 Key trends driving global insurance market growth Strong economic growth, underpinned by improved macroeconomic fundamentals, especially in the emerging markets Favourable regulatory changes and tax incentives Introduction of mandatory cover in certain areas (motor third party liability health etc.) Increased demand for life products - Increased retirement provisions in countries with ageing population - Government shift from public to private pension schemes

10 The Nigerian FS Industry Structure The Structure of the Nigerian Financial Services Industry Today Insurance Banking Pension Funds Management Capital Markets General Specialized FIs Infrastructure Providers Issuing houses Stock brokers Reinsurance Life Banks Universal, Community, Microfinance PMIs Development banks Discount Houses Finance Companies Pension Fund Administrators Pension fund custodians Portfolio Managers Investment Advisers Trustees National Insurance Commission Central Bank of Nigeria/ Nigeria Deposit Insurance Corporation National Pension Commission Security & Exchange Commission Regulatory Influence Payments: Interswitch, Valucard, ATMC, NIBBS, CSCS, Universal Banking Other providers: Securicor, Excel Cash Services, Rating Agencies Reformed

11 The Nigerian insurance sector remains globally insignificant and underdeveloped < 1% 1% of of GDP GDP in in < 5% 5% of of banks banks by by total total assets assets Employs about about 20, 20, staff staff (the (the size size of of top top 3 Nigerian banks) banks) Source: Agusto Industry Estimates; 2006 Amount (US $ Million) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 PREMIUMS IN EMERGING ECONOMIES Brazil Russia India China South Africa Life Non-Life Nigeria Source: World Insurance in 2006, Swiss Re, Sigma No. 4/2007

12 Nigeria vs the BRIC(S) Life Premium & Non-Life Volumes; GDP & Population in 2006 Life % of World Non-Life World GDP Population Insurance Insurance (US $ m) Total (Life + Non-Life) share % (US $ m) Share (US $ bn) (m) Density (US $) Penetration % Brazil 13, , , Russia , India 37, , , China 45, , ,613 1, South 33, , Africa Nigeria Source: World Insurance in 2006, Swiss Re, Sigma No. 4/2007

13 3 Lessons from Other Markets

14 Lessons from Other Markets - Brazil Summary of major factors contributing to the rapid growth of the insurance industry in Brazil: Government induced economic reforms through an economic stabilisation plan - Economic stability leading to the adoption of the national currency as a trustworthy value reference; Improved transparency and disclosures, leading to enhanced confidence and trust in the system by the public Opening of the market to foreign participants in 1996, leading to transfer of capital, introduction of new products, technologies and knowledge that helped to enhance industry performance; Introduction of a modernisation process based on IAIS* principles adopted in the most developed markets; and Introduction of several policy changes to stimulate the interest of the Brazilian populace to the benefits of insurance leading to a more mature market. *IAIS International Association of Insurance Supervision

15 Lessons from Other Markets - Brazil Contribution of Insurance to GDP Life & Non-Life Ratios These policies have increased the contribution of insurance to GDP from 0.8% in 1994 to 2.55% in These conditions provide a favorable environment for non-life insurance (benefited by the growth of economic activities as a whole), as well as for life insurance lines (a protection instrument which had lost its attractiveness during the economic instability period). Today, Brazil is the largest insurance market in Latin America, with 2006 total premiums of US $ 29.6 billion. Source: Ministry of Finance, SUSEP; 2006

16 Lessons from Other Markets - India The insurance sector in India has come a full circle from being an open competitive market to nationalisation and back to a liberalised market again Colonial Era (Pre 1938) No legislation to regulate insurance business prior to 1912 In the year 1912, the Life Insurance Companies Act, and the Provident Fund Act were passed However, the Life Insurance Companies Act, put Indian companies at a disadvantage to foreign companies Mushrooming of insurance companies to about 176 by 1938 Many financially unsound concerns were also floated suring this period & failed miserably Several frauds during 1920's/30's sullied insurance business in India Nationalisation Era ( ) The first comprehensive legislation was introduced with the Insurance Act of 1938 The Act provided strict State control over insurance business Nationalisation of life insurance business under the Life Insurance Corporation (LIC) in 1956 Non-life) insurance business/general insurance was nationalised with effect from January 1, 1973 & grouped into four companies The Malhotra Committee was formed in 1993 to initiate insurance sector reforms Insurance sector in India was liberalized in March 2000 Liberalisation Era (2000 till date) Lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership Presently, there are about: 16 life insurance companies and 15 non-life insurance companies in the market Potential for growth in the market is immense e.g. nearly 80% of Indian population is without life insurance cover as at July 2007 Life insurance premiums & general insurance premiums account for 2.5% & 0.65% of the country's GDP respectively Source: India 2010; A Lloyd s View, June 2007

17 Lessons from Other Markets - India India Insurance Environment Premium Levels (2006) Nominal annual premium growth Premium density (2005) USD 6.0bn 13% (during 2006) India: USD 4.4 per capita Premium Levels ( ) Regulator Main non-life industry association Main life industry association Insurance Regulatory and Development Authority (IRDA) General Insurance Council Life Insurance Council Premium levels vs. market share by segment (2006) Liberalisation has led to a marked increase in India s premium levels and private companies have gained a 34.6% market share Source: India A Lloyd s View

18 Lessons from Other Markets - India The Indian insurance sector consists of public sector undertakings, PSU s, foreign and private companies. However, the private companies are steadily building their customer base and currently account for 34.6% of the market share. Strengths of the private companies are highlighted below: Small & Flexible Availability of smaller less disparate workforce which enables quick response to changing market conditions Strong Claims- Paying Reputation Greater efficiency in information capture leading to better reputation for claims settlement Good Staff, Systems, Processes & Data Best-in-class staff with high remuneration Implementation of high quality systems and processes Adoption of international best practice standards to provide high quality data Product Focus Aggressive product development Greater Focus on Underwriting Emphasis placed on sound underwriting procedures with highquality back office processes Source: India A Lloyd s View

19 Lessons from Other Markets - India Distribution Channels Key Growth Drivers 70-75% of all Indian non-life premiums are distributed through direct sales agents of the insurance companies. Bancassurance is slowly picking up. Brokers account for a small percentage of all premiums distributed. Growing consumer class Influx of foreign direct investment Public Private Partnership (PPP) infrastructure development Insurer quality and client education Catastrophe exposure Source: India A Lloyd s View

20 Lessons from Other Markets - China Comparisons in 2004 Total Insurance Premium Insurance density per capita Insurance penetration/gdp Between 2000 and 2005 Gross Domestic Investment rose from Gross savings rose from Corporate savings rose from Household savings rose from Amount $ bn % Position 1.61% % 33.7% of GDP to 37.9% of GDP to 22.1% of GDP to 12.9% of GDP to World Rank % 49.5% 30.2% 16.8% By 2006, there were 93 insurance institutions in China with nearly 2 million employees accounting for 40% of the financial sector workers. Total premiums rose from $30.6 million in 2001 to $493 billion in 2005, representing $54 per head and 2.7% of GDP, of which $46.16 billion was for life, $ billion for property and health and accident $6.41 billion. Assets of insurers by the end of 2005 amounted to $0.21 trillion. China is the world s 11 th largest insurance market by total premium volume, up from 16 th in 2000, with premium volume of $62 billion. Source: China Insurance Regulatory Commission; The Geneva Association, January 2008

21 Lessons from Other Markets - China As the administrative and regulatory authority of China s commercial insurance, the CIRC considers the development of insurance as its most important task and strives to make China insurance industry big and strong. Focusing on the theme of development, the CIRC not only concentrates on efforts to boost the industry, but also emphasises risk prevention. Major regulatory measures since 2004 are as follows: Improving the Market Access Mechanism Broadening Insurance Fund Management Channels Increasing Financing Channels of Insurance Companies Improved market access mechanism for insurance branches to encourage law-abiding insurance companies with sound internal control system and adequate solvency to establish branches and increase market competition Permitted direct investment of insurance funds in the stock market Investment of foreign-exchange insurance funds in overseas markets Permitted insurance companies to invest in subordinated debts issued by banks and convertible corporate bonds Permitted insurance companies to issue subordinated debts, which provided a new financing channel for fast-developing insurance industry and helped to improve solvency status Promoting Reform Administrative Examination & Approval System Strengthening Risk Prevention Source: China Insurance Regulatory Commission Press Release, 2007 Premium rates filed at CIRC as opposed to the previous practice of approvals Simplification of the life insurance clauses Adjustment of auto insurance premium rates to address different risk elements and establish a market-oriented pricing mechanism Strengthening Internal Management Strengthening supervision of solvency adequacy Reinforcing on-site inspection Strengthening supervision of fund management

22 Lessons from Other Markets - China The Schematic below presents an overview of the development of China s insurance industry Reform & Innovation Deregulation of the Sector Development of sound risk practices Development society & economy Establishment of a modern insurance system Pioneered listing on overseas stock markets Improved corporate governance and optimised process operations No restrictions for foreign invested insurance companies, except for life which must be established as a joint venture Sustenance of balance between opening up and risk control Cooperation of international insurance supervision Adoption of principles of IAIS Development of corporate internal controls Development of long-term risk prevention framework Provision of long-term funds for economic construction, supporting investment and promoting economic growth Source: The Geneva Association, January 2008 China will remain an attractive market for foreign insurance companies for the following reasons: At 40%, China has one of the highest personal savings rate in Asia indicating a huge potential for personal-retirement savings and protection insurance. Insurance plays a major role in channelling funds into state infrastructure projects China s population is ageing fast and the government has recognised that private firms will play an essential role in creating a viable pensions system for China. Total insurance penetration (premiums per GDP) at 3.3% is still very low, compared to an 8.1% world average.

23 Lessons from Other Markets Vietnam Although China has achieved impressive compound growth of around 30% per year, it has been outstripped by Vietnam, which has grown at an even rate of 45%. Vietnam has a rapidly growing population of around 82 million people and a real GDP growth rate consistently around 7% for the last five years. Economic growth rates are forecast to remain around this level at least in the medium term. Life insurance premium income grew at an annual rate of 67% in the five-year period ending in 2004 before taking a pause in From 1999, when the new foreign entrants arrived, to 2004, total life insurance premium grew from less than $20 million to just over $500 million

24 Lessons from Other Markets Vietnam Distribution Channels Employed in Vietnam Tied Agents/ Agency Channels Post Offices Customers Brokers Bancassuranc e (Local & International Banks) Call Centres The insurance market is regulated by the Department of Insurance under the Ministry of Finance. The department supports the insurance industry with a number of measures that include: - Promoting the network of professional agents and other distribution channels introducing greater flexibility to invest insurance funds by allowing the establishment of investment management fund companies - Allowing grants of additional licenses to foreign companies promoting selfregulation of the industry - Encouraging use of insurance funds to develop the country s economy. The regulatory body and insurance companies are focusing on improving the quality and professionalism of their distribution channels & agents respectively. Source: Vietnam Association of Insurers

25 Lessons from Other Markets Vietnam Deregulation of the insurance industry in Vietnam Deregulation of market access Deregulation of distribution systems Development of insurance products and prices 100% participation of foreign owned insurers and brokers Freedom of insurers in the life and non-life segments to develop their distribution channels Insurers formulate their own strategies for agencies and compile the agency s commission tables No minimum capital requirement for establishment of branches Insurers create and determine products (noncompulsory) prices through market competition Regulations compared to best practice regulatory regimes Impartial regulations for local and foreign insurers Disclosure and consumer information Transparent regulatory process Source: Studies on the Competitiveness and Impact of Liberalization in Financial Services: The Case of Insurance services; UNDP May 2006

26 4 Overall Market Outlook

27 There are clear indications of the emergence of a vibrant insurance market in Nigeria Underlying Market Demand in Nigeria South Africa Nigeria (Select) Nigeria (Nationwide) Tunisia Morocco Egypt Population (millions) Per Capita GDP (US $) 5, , , , , ,557.0 Source: Standard & Poor s, Afrinvest Research; January 2008z GDP Growth (2007E) 4.58% N/A 7.58% 6.00% 4.31% 5.88% GDP growth and per capita income have doubled in the last five years compared with the previous two decades. Increasing literacy levels from 60% in 2006 to about 68% in A survey conducted by Standard & Poor s revealed that the wealthiest 20% of Nigeria s population accounts for 80% of national output (an estimated market of 28 million people with a per capita GDP of US $4,000 per annum). The survey further revealed that this select population is responsible for much of underlying consumer market demand that is beginning to come to light in Nigeria.

28 There are clear indications of the emergence of a vibrant sector in Nigeria The key growth drivers over the medium term include the following: Ongoing Economic Growth Industry Consolidation Compulsory Insurances Mortgage/Real Estate/Infrastructure Spend Pension Reform Local Retention (oil & gas, aviation, marine, solid minerals) MAJOR GROWTH CATALYSTS

29 Overall Outlook the shape of things to come Market-induced consolidation will lead to a restratification of the sector. Diversification into related financial services/ businesses. Entry by foreign operators in the form of equity-based partners and technical management teams will modernize and standardise the industry. The industry will increasingly imbibe world class practices and processes. Increased investment in people and technology as key business enablers Bancassurance and other innovative channels will play a major role in improving penetration levels in the industry (aligns with the retail strategy of banks). Marketing and asset management skills will flow from banking to the insurance sector. Enhancement in the regulatory capacity and more proactive regulatory measures to achieve and maintain better standards including higher levels of professional and ethical conduct in the industry. Growth in the middle class will drive emergence of life business. Listing of insurance companies will stimulate and enhance public awareness of insurance.

30 Overall Outlook - What will characterise the industry in the medium term? Dormancy Early Growth Sustained Growth Maturity North America Western America Insurance Penetration Insurance Gap Egypt VISION 2020 India South Africa Nigeria Today GDP Per Capita.. The Nigerian insurance sector is on the cusp of metamorphosis. However, key constraints/ dependencies exist in the institutional framework and critical market infrastructure.

31 The insurance breakthrough: How big is the opportunity? Key challenges to be addressed to unlock the full potential of the Nigerian insurance sector include the following: REGULATOR Realignment to international norms and practices - Solvency - Corporate governance - Transparency Risk-based approach Enforcement Regulatory convergence/collaboration (e.g. CBN) Consumer rights protection OPERATOR Skill and capacity gaps - Managing large, diversified businesses Risk and capital management Investment/asset management ROI pressure meeting market/stakeholder expectations NIA as a self-regulating organisation (SRO)? Insurance education/literacy and public awareness

32 5 Key Success Factors

33 Key Success Factors Clear articulation of vision of Nigerian insurance sector, within the context of national economic agenda. Effective engagement of all stakeholders - Government - NAICOM - NIA - Operators Focused, disciplined execution with periodic progress reporting and measurement

34 Appendix

35 Life Insurance Growth, Penetration and Density by Region Life Insurance Growth, Penetration and Density by Region Premiums (US $ M) Real Growth Share of World Market (%) Premiums in % of GDP Premiums per Capita (US $ M) America 601, North America 572, ,731.8 Latin America & Caribbean 28, Europe 940, ,119.6 Western Europe 927, ,862.9 Central & Eastern Europe 13, Asia 602, Japan & Newly Industrialised Asian Economies 500, ,368.4 South & East Asia 96, Middle East & Central Asia 4, Africa 35, Oceania 29, World 2,209, Industrialised countries 2,033, ,026.0 Emerging Markets 176, OECD 1,976, ,645.0 G7 1,609, ,225.7 EU, 15 Countries 887, ,197.8 NAFTA 579, ASEAN 20, Source: The Geneva Association, January 2008

36 Non-Life Insurance Growth, Penetration and Density by Region Non-Life Insurance Growth, Penetration and Density by Region Premiums (US $ M) Real Growth Share of World Market (%) Premiums in % of GDP Premiums per Capita (US $ M) America 727, North America 685, ,072.2 Latin America & Caribbean 42, Europe 544, Western Europe 501, Central & Eastern Europe 42, Asia 198, Japan & Newly Industrialised Asian Economies 142, South & East Asia 41, Middle East & Central Asia 14, Africa 14, Oceania 29, World 1,154, Industrialised countries 1,357, ,336.2 Emerging Markets 156, OECD 1,362, ,120.1 G7 1,121, ,508.6 EU, 15 Countries 469, ,107.4 NAFTA 693, ,579.8 ASEAN 12, Source: The Geneva Association, January 2008

37 Total Insurance Growth, Penetration and Density by Region Total Insurance Growth, Penetration and Density by Region (2006) Premiums (US $ M) Real Growth Share of World Market (%) Premiums in % of GDP Premiums per Capita (US $ M) America 1,329, ,486.3 North America 1,258, ,804.0 Latin America & Caribbean 71, Europe 1,484, ,745.7 Western Europe 1,428, ,829.5 Central & Eastern Europe 56, Asia 800, Japan & Newly Industrialised Asian Economies 643, ,033.0 South & East Asia 138, Middle East & Central Asia 18, Africa 49, Oceania 58, ,787.3 World 3,723, Industrialised countries 3,390, ,362.2 Emerging Markets 333, OECD 3,338, ,765.1 G7 22,731, ,734.3 EU, 15 Countries 1,357, ,305.1 NAFTA 1,273, ,899.9 ASEAN 32, Source: The Geneva Association, January 2008

38 Listed Insurance Companies Pre-Consolidation S/N Name of Company Market Capitalisation (Nm) S/N Name of Company Market Capitalisation (Nm) 1 Acen Insurance NFI Insurance Plc AIICO Insurance Niger Insurance 1, Amicable Assurance Prestige Assurance BAICO Insurance Royal Exchange Assurance 1, Confidence Insurance Security Assurance Cornerstone Insurance Standard Alliance Plc Crusader Insurance Plc Sun Insurance Nigeria Plc First Assurance Plc UNIC Insurance Great Nigerian Insurance Plc West African Prov. Insurance Guinea Insurance Plc Lasaco Assurance Plc Law Union & Rock Insurance Linkage Assurance Mutual Benefits Assurance N.E.M Insurance Co Plc Source: Nigerian Stock Exchange; 31 December, 2006

39 Listed Insurance Companies Post-Consolidation S/N Name of Company Market Capitalisation S/N Name of Company Market Capitalisation (N bn) (N bn) 1 Amicable Assurance Acen Insurance Baico Insurance Consolidated Hallmark Law Union & Rock Standard Alliance Confidence Insurance Security Assurance Continental Insurance Cornerstone Insurance Lasaco Assurance Custodian & Allied Equity Assurance Great Nigerian Insurance Guinea Insurance Crusader Insurance WAPIC Insurance Mutual Benefits N.E.M Insurance Niger Insurance Sovereign Trust Universal Insurance Linkage Assurance Unic Insurance ST Assurance Prestige Assurance AIICO OASIS Insurance Royal Exchange Airline Services Source: Nigerian Stock Exchange; 7 March, 2008