+

By Bismarck Rewane

CEO, Financial Derivatives Company Ltd

July 27, 2015

Growth Options for Insurance Business in Nigeria

2015 Insurance Industry Mega

ConferenceIICC

+Audience AnalysisCommissioner and regulatory officials of

the insurance industry Insurance firms and professionals Inaugurated in 2013, IICC is the umbrella

institute for: The National Insurance Commission (NAICOM) The Chartered Insurance Institute of Nigeria (CIIN) The Nigeria Insurers Association (NIA) The Nigerian Council of Registered Insurance

Brokers (NCRIB) The Institute of Loss Adjusters of Nigeria (ILAN) Distinguished Elders and Leaders of the Insurance

Industry

+Audience Analysis

Established as an advocacy vehicle for:

Policy alignment

Regulator practitioner collaboration

Self regulation and best practice

Upgrading local practices with universal

principles

+Background

The insurance industry in Nigeria has

underperformed the economy in its growth

Its profitability and size has been

suboptimal

Relative to the financial services industry

and global peers

The industry has been subject of new

capital requirements and capacity rules

+Objectives of Presentation

Discuss the alignment of the new regulations

and the business philosophy of an open

economy

To understand the new economic challenges

and opportunities of Nigeria under a new

leadership

To discuss the wider implications of the

commodity price shock on the economy,

insurance values and risks

+Outline

Historical Link between Britain and Nigeria

Nigerian Economy: Basic Facts in 2015

Oil Price Shock and its Impact

Policy Options, Choices and Actions

Implications on the Insurance Industry

Case Study for Developing Economies: Singapore

Growth Options & Opportunities

Summary and Outlook

+Historical Link Between Britain

and Nigeria

+The Industry and Britain

First insurance company in Nigeria was an

offshoot of Royal Exchange Assurance London

Subsequent insurance firms had strong British

ties and operating models

Prior to the Indigenization decree of 1976,

Britain had majority stake in the industry

The United Kingdom insurance industry

received premiums of £50.2bn in 2013

Total premium income in Africa during the same

period was £46.3bn

+UK Insurance Sector Integral part of the financial services industry 1229 insurance companies Employs approximately 320,000 people Funds under management: Over £1.8trn Total Premiums written (2013): $351.26bn

7.35% of world total world premiums Insurance Penetration: 12.18% Insurance and pension funds account for 1.6%

of GDP The contribution of brokers adds another 1%

30% of premium income comes from overseas

+UK Insurance Sector

UK insurance cluster composed of: Underwriting Broking Actuarial Marketing

Operating across a range of sectors: General insurance Life Wholesale Reinsurance

Supported by strong regulatory environment

+UK Insurance Sector

The cluster and the Lloyd’s market in

London all operate internationally

Have a highly developed skill base

Provides expertise unmatched by other

financial centres

Fosters a creative environment where

innovative solutions can be developed

Specialize in global markets

+

Nigeria

+How far away is Nigeria from the Model? Insurance accounted for 13% of the financial

sector’s GDP in 2014 Other financial institutions:87%

In UK, insurance accounts for 20% Other financial institutions: 80%

Nigeria 2014 Q1’15

GDP per sector (N’bn)

% of Total fin. sector GDP

GDP per sector(N’bn)

% of Total fin. sector GDP

Financial Institutions

1,724 87% 501 89%

Insurance 259 13% 63 11%

+

Growth rate of 5.11% in Q1’15 from Q1’14Contribution to GDP: 0.39% Consists of 58 insurance and reinsurance

companies27 are listed on the Nigerian stock exchangeStatutory regulators are National Insurance

Commission (NAICOM) and Chartered Insurance Institute of Nigeria (CIIN)

Number of Licensed Companies in Nigeria

Life 15

Non Life 29

Composite 12

Re-Insurance 2

How far away is Nigeria from the Model?

+

Class Of Business % of Total Risk Areas Covered

Accident 13.2%

Engineering 2.8%

Fire 15.2%

Marine 4.8%

Motor 9.1%

Oil & Gas 53.6%

Bond 0.4%

Aviation 0.9%

Risk areas covered varies across insurance

companies

E.g. 54% of risk covered by Custodian and

Allied Plc. is in oil and gas

How far away is Nigeria from the Model?

+According to NAICOM, total net premium

estimated at N188.75bn

Gross premium at N258.40bn

Life and Non Life Insurance Premiums, 2013 ($’m)

Direct Premiums Written

Non Life premiums * 1,406

Life premiums 457

Total Premiums 1,863

% of total world premiums

0.04%

* Includes accident and health insurance.Source: Swiss Re, sigma, No. 3/2014; Insurance Information Institute

How far away is Nigeria from the Model?

+

But issues are gradually being resolved

Industry is consolidating

There have been M&As

Crusader insurance Vs Custodian & Allied

AXA Insurance acquired Mansard

FBN Life acquired OASIS insurance

Increasing level of foreign ownership Import of international best practices

Prospect of improved growth

How far away is Nigeria from the Model?

+Nigerian Economy: Basic Facts

in 2015

+Economy

SSA’s largest economy with GDP of

$568.5bn

26th largest economy in the world

0.7% of Global GDP

35% of African GDP

76% of ECOWAS GDP

Has consistently outperformed the SSA

average growth in the last 10 years until

2015

+Slowing GDP Growth RateHas a 5 year average growth rate of 6.72%Q1’15 GDP slowed to 3.96% from 5.94% in

Q4’142015 growth of 4.3% lags SSA’s average of

4.5%

+Structure GDP is more dependent on services than

production in a 55:45 ratio Largest sectors are growing sub-optimally Below Nigeria’s economic growth of 6.22%

(2014) But insurance sector surpassed it (8.27%)Largest Sectors 2014

Contribution to GDP (%)

2014 GDP growth Rate (%)

Agriculture 22.9 4.27

Trade 17.64 5.88

Telecoms 8.34 4.75

Oil & Gas 10.8 -1.32

Insurance 0.39 8.27 Trade consists of formal & informal trade

Informal trade accounts for about 90%

Formal trade is approximately 10%

+Misery Index- Underemployment + Unemployment +InflationMisery index has increased to 33.6% in

Q1’15

Source: NBS

+Gross Capital Formation Stagnating

Not investing enough in fixed capital

Nigeria’s gross Capital Formation lags its peers at 15 % of GDP Singapore: 20% Brazil: 18% Turkey: 20%

Capital/recurrent ratio in 2015: 83/17

Buhari is targeting 30/70 in year and 40/60 in 2016

+Income is Growing but Consumption is Lagging

Growth in aggregate consumption of 4.4% is relatively at par with GDP growth of 4.3%

Income is stranded at the top of the pyramid

Gini coefficient is 48.8 Top 20% owned 25% of

income in 2008 Top 20% now control 35%

in 2013

+Relationship between Consumption, Savings and GDP Insignificant positive relationship between

national savings and interest rates

National savings is 19% of GDP Insurance constitutes 1.7% of national

savings

+Average Consumer Basket- EIUConsumer expenditure is dominated by

FB&TAccounting for 65% of household

expenditureExpenditure on transport and

communications is expected to increase Anticipations of a fuel subsidy removal Growth in mobile phone market

In reality, largest spending is on: Education Health Feeding Alternative power

+

Source: EIU

+Where is the Nigerian Economy Now?

+The Known KnownsPolitical

•Buhari is President•Economic patriot•Kept the markets guessing•In no hurry to announce cabinet•NSA and service chiefs•PDP has become a regional party as a proxy for former Biafra•APC is a mix of interest groups that need to be aligned

Economic Variables•Nominal GDP of $568bn (2014)•GDP growth rate of 3.96% (Q1’15); 4.3% (FY’15)•Inflation of 9.2% (June)•Unemployment rate of 33.6%•Exchange rate spread of N45•Oil price is down 50% from 2014’s peak of $116pb

Fiscal Policy•2015 budget of N4.49trn•Budget revenue of N3.45trn•Fiscal deficit in excess of 2%•Oil price is 9.4% above benchmark oil price of $53pb

Monetary Policy•CRR harmonized•MPR unchanged at 13% p.a.

+The Unknown UnknownsPolitical Cabinet members, heads of agencies,

ambassadors, Ministers Full extent of anti-corruption driveFiscal policy Fiscal policy direction Supplementary budget Whether fuel subsidies will be removed or

maintained Increase in VAT or implementation of new taxes Structure of tariffs and dutiesMonetary policy Approximate or true value of the naira Inflation in the next 2-3months

+Oil Price Shock and its Impact

+Oil Prices Rebound in Q2’15 but Falling Again Oil prices rebounded more

than expected in Q2’15 Gained 15% in Q2 to an

average of $62pb Down 53% from June 2014

peak of $116pb Reflecting higher demand

and Expectations oil production

growth in US will slow But concerns about Iran’s

deal and oversupply in the market is pushing it back towards $50pb

+Pre-Oil Shock (2010-2013)

Terms of TradeGrowth in GDP vs Consumption

Export prices were increasing faster than the change in import prices

Resulting in a positive terms of trade Consumption outpaced GDP growth after a dip caused by

the partial removal of fuel subsidies

+Post Oil ShockOil Price Vs. Aggregate Consumption

According to EIU, Nigeria’s aggregate consumption was $408.4bn compared to GDP of $568.5bn in 2014

Projected to decline to $363.3bn in 2015 against nominal GDP of $491bn

Sources: OPEC, EIU

+Movements in export and import prices Export and import prices dipped due to the plummet in

oil prices Exports falling faster than imports, negatively affecting our

terms of trade Crude oil being a major export Refined crude being a major import

+Exchange Rate and External ReservesExchange rate differential now at N45.57 from

N24 in May

Interbank: N198.43/$

Parallel: N244/$

External reserves fell 15.92% ($5.49bn) in

H1’15

Before a marginal recovery in July to $30.7bn

YTD decline is 10.94% ($3.77bn)

Import cover of 4.88 months

Well below EM average of 11months

+Policy options, choices & actions

+Policies Implemented (January – June)

Fiscal Policy A N10 cut in PMS price to N87

Trade Policy Common External Tariff implemented

Monetary Policy Net Open Position reviewed upwards to 0.5% RDAS scrapped, IFEM adopted CRR debits now weekly CRR harmonized to 31% MPR unchanged at 13% p.a.

+CBN’s Administrative Policies(January – June)

RDAS and interbank funds restricted to LC’s, Bills for collection and other invisible transactions

Limit placed on card usage abroad Reduced from $150,000 to $50,000

Dollarization of the economy is completely prohibited and Naira to remain the only legal tender

41 items excluded from IFEM and BDCs Staples: rice, poultry and tinned fish in sauce Euro bond/ forex bonds/ share purchases

+MPC Meeting in July

MPC maintained status quo

Despite inflation and exchange rate concerns

MPR:13%

CRR: 31%

Impact:

The naira fear factor will increase

Parallel market premium will increase

Naira will depreciate in the parallel market

towards N250

+Outlook: MPC Decision (September)

CBN may allow currency to float to N205-210 Cut MPR from 13% p.a. to 12% p.a. Reduce the CRRRationale:

The currency will find its true value Encourage lending & stimulate economic growth Remove the fear factor Stimulate economic activity with accommodative

monetary policy International investors will increase their positions

in Nigeria The divergence in rates will reduce

+Outlook: MPC Decision (September)

Impact:

Short term increased inflationary pressure

Risk investment flow reversal

Relative stability of the exchange rate

Slowdown in the depletion rate of the external

reserves level

Lead to 2% decline in interest rates

Govt borrowing costs will fall by N18.8bn in

2015

+

Fiscal Policy

+FAAC vs. Oil Prices Government funds highly dependent on oil

revenues Direct relationship between FAAC and oil prices

+State Allocation trends downwards Projected state allocation for 2015 is almost half of 2013

Other sources of revenue needed to fund government expenditure

+State Debt: Bailout Funds ApprovedA comprehensive relief package approved to address outstanding state debt obligations In excess of N800bn

N413.7bn ($2.1bn) to be shared amongst the three tiers of government 2.15% of money supply

A CBN special intervention fund of N250-300bn has been created to provide soft loans to the states

Will increase consumers purchasing power and productivity

+Supplementary Budget

Buhari’s administration expected to draft a

supplementary budget

It will reflect further austerity measures

Likely be funded through domestic

borrowing

Blocked leakages can increase revenues by

15-20%

Subsidy Removal (25% of budget) will help

increase income

+Subsidy Removal:Price Elasticity Demand of PMSSubsidy payments were 0.85% (N971bn/

$4.9bn) of GDP in 2014

+Impact of a Subsidy Removal

•Removal of fuel subsidy is expected to move $4.9bn from C to G to be used for rehabilitation of oil refineries and payments of salary arrears

Y= $568bnC=$408bnI=$95bnG=$46bn

X-M=$17bn

Y= $568bnC=$403.1bn

I=$95bnG=$50.9bnX-M=$17bn

$4.9b

n

+Subsidy Removal

Remove subsidy and reduce import bill by

15-20% of bogus demand

To complement 26% plus 5% devaluation

Will equal 48% decline in oil revenue

Bringing equilibrium to forex market

Putting the naira in the real equilibrium

exchange rate path

+

Exchange Rate Policy

+PPP: Is the Naira Undervalued  Jun-15 Jun-14

  =N= US $ PPP ('=N=/US$)  =N= US $PPP 

('=N=/US$) 

Bottle of Coke (50cl)                            100  2.00 50.00

                        100  2.00 50.00

Heineken                            350  2.11 165.88

                        350  1.50 233.33

Hamburger                          1,200  4.80 250.00

                        850  3.14 270.70

Uncle Ben's rice (S. Pkt)                         1,500  3.48 431.03

                    1,500  3.50 428.57

Toyota Corolla                 6,900,000  16800 410.71

            4,300,000 

                     16,230  264.94

Bottled Water (1ltr)                             100  0.41 241.21

                        100  1.49 67.11

Big Loaf Bread                             300  3.50 85.71

                        300  2.50 120.00

Irish Spring Soap  (1 cake)                            250  3.59 69.64

                        250  2.00 125.00

1 Packet of Benson & Hedges                            200  8.00 25.00

                        170  8.00 21.25

Chicken Drumsticks ( 1 kilo)                            800  4.40 181.82

                        800  7.45 107.38

Eggs    (One dozen)                            600  4.19 143.20

                        400  2.75 145.45

Average PPP     186.75    166.70             Naira Price at  IFEM   198.15    160.50PPP  (%)          

Decision: Naira is  Undervalued -5.76%    3.87%Spot Rate (Parallel)   244   163

Outcome:  Compared to official spot rate of N197/$1, the Naira is undervalued by 5.76%

+PPP Analysis vs. Burgernomics Using a basket of items to determine the

currency value PPP index shows that naira is slightly

undervalued by 5.76% An indication that IFEM rate may be trading at its

fair value But using a one item basket – the Big Mac Index Price of MacDonald's Burger in the US: $4.53 KFC as a proxy at N1200 in Nigeria Using the current exchange rate gives $6.06 This suggests the naira is overvalued by 25% The true value of the naira based on the

burgernomics today is N248.7/$ (parallel rate??)

+Using the Big Mac Index

One item basket: the big Mac hamburger ($4.79)

According to this index, only 2 countries have overvalued currencies

PPP holds only in the long run Over shorter periods, currencies are

often pushed far away from their fair-value yardsticks by international capital flows

Driven by broader trends in the global economy

Exchange rates are currently being buffeted by: Euro crisis Growing likelihood of a rise U.S.

interest Slowdown in China Sharp drop in the oil price

+Currency AdjustmentS&P says Nigeria cannot avoid another

devaluation of about 15%

RenCap sees naira depreciating by 18% over the next 6-12 months due to: Pent up forex demand If oil prices remain low Little scope for further policy tightening

We think further devaluation may not be necessary if fuel subsidy is removed

If at all, adjustment will be marginal

+Implications on the Nigerian Insurance Industry

+Implications on the Insurance Industry

Inflation Risk

Higher inflation increases the cost of future

claims on current policies

Erodes asset values

Increased inflation makes higher interest rates

more likely

Implies value of total assets under management

could drop

In the 2008 financial crisis, insurance companies

were some of the biggest losers

+Implications on the Insurance Industry

Interest Rate Risk

Sensitivity varies by line of business and market

For life insurers: it affects savings products where

investment returns are major source of profit

Higher interest rate encourages savings

For non-life insurers: if interest rates reduce, they

could react by raising premiums to maintain

profitability

+Implications on the Insurance Industry

Exchange Rate Risk

A devaluation increases the risk that the

assured will face higher replacement cost

It increases the risk of non-payment of future

premiums as disposable income falls

Premium on foreign re-insurance higher

+Case Study for Developing Economies: Singapore

+State of the Singaporean EconomySingapore has one of the most open and

competitive market in the world It is ranked the best country to do business in

the world It takes 3 days to start a business in Singapore

compared to world’s average of 34 daysHighly skilled workforce and favourable tax

regime created a conducive business environment

Its economy is largely dependent on exports Consumer electronics Information technology products Medical and optical devices

+State of the Singaporean EconomyGDP estimated at $307.9bn in 2014

Growth rate of 2.9% Economy contracted during the global

financial crisis in 2009 but continued to grow in 2010 due to renewed exports

Per capita GDP higher than most developed countries $81,300 (2014)

Has a low unemployment rate of 2% (2014)The only Asian country to have AAA credit

ratings from all 3 major credit rating agencies

+How did they get here?The Singapore model was born out of

necessitySingapore had a relatively small domestic

marketFor the economy to thrive, it decided to

open its economy to external markets Its government enacted economic policies

to safeguard the country from vulnerability in depending on external markets

This economic system where both market and the state have equally strong roles in the government is the Singapore model

+Singapore Insurance Sector

One of the most developed insurance markets in Asia

Regional hub for Asia Pacific region 161 registered insurers and reinsurers

Assets Under Management: $130bn (48% of GDP)

Total Premiums written (2013): $27bn 0.57% of world total world premiums

Regional centre for reinsurance Global reinsurers making up large proportion

of the offshore non-life business written

+Singapore Insurance SectorHigh insurance penetration rate – 7.3%

High per capita expenditure on insurance

Health insurance has been growing rapidly

Increasing demography of ageing population

Dominated by life insurance

High income levels and high savings rate

Life insurance penetration (67.8% of

households)

Life premium density 5.5% of GDP

+Singapore Insurance Sector

Non-life insurance penetration has risen

over the years

From 2.55% in 2005 to 3% in 2013

High per capita expenditure on insurance

Low interest rates and investment returns

impacting profitability

Focus is now on core functions like

underwriting and claims

+Singapore’s Insurance ChallengesRegulations addressing insurer solvency,

capital and risk management have been changed

New rules could swamp the industry with costs and compliance

Longstanding strategic positions maybe altered

Costs, prices and returns could soon become unsustainable if changes are mismanaged

+Global Insurance Challenges in 2015According to Ernst & Young, key

challenges for the insurance industry in 2015:

Rising competition Soft pricing conditions Tight profit margins Low interest rates will make savings product

difficult to manage Cyber crime and data insecurity Lack of experienced talent due to higher

mobility and increased competition

+Growth Options and Opportunities for the Nigerian Insurance Industry

+Growth Options and OpportunitiesAccording to Ernst and Young, the focus of

insurers in 2015 is “technology” Investing in digital platforms that

strengthen their relationships with customers across product classifications and geographies

Capitalize on data analytics, cloud computing and modelling techniques

To sharpen market segmentation strategies, reduce claims fraud and strengthen underwriting and risk management

+Growth Options and OpportunitiesSmart use of Technology

Promoting mobile app services: to take

pictures of a scene; file claims

Custodian Allied already using it

Sale of life insurance using mobile phone

network to 126million active lines

Mobile phone ownership is 84.9% in urban

areas and 55.6% in rural areas

Using social media to increase the variety of

distribution channels

+Growth Options and OpportunitiesCost control initiatives

Outsourcing a business process?

Extend borders of insurability

Attractive product packaging

Value creation and differentiation strategies

Further merger & acquisitions

Increased value generation

Cost efficiency in the long term

+Growth Options and Opportunities Diversify investments

Consider long-term investment in

infrastructure and project finance

Close collaboration between government

and the industry

To draft reforms that will promote the work

of the industry

Better and less burdensome regulation

+Growth Options and OpportunitiesFavourable demographics

Young and growing population of approx. 170m

people

Growth rate of 2.6% (4m)

Implies potential increase in customer base

Attracting new talent

To maintain dynamism and capacity to innovate

To meet changing customer demands

+

Summary and Outlook

+Summary

Nominal GDP estimated to reach $525bn in 2016 From $488bn in 2015

Sectors that will drive growth: Agric, Telecom, Financial services, Petroleum and manufacturing

Oil prices in H2’15 are likely to soften towards $45-50pb

Challenges remain that will constrain growth

Policy options are limited

+Policy Outlook

Aggressive tax collection

Removal of subsidy to increase fiscal revenue

Currency adjustment and possible removal of

forex controls

Accommodative interest rate policy

Electricity tariff adjustment

CET implementation

+Critical Events to Watch out for

MPC meeting in July and September

Announcement of Cabinet names

Likely shake up in regulatory

appointments

Passage of a supplementary budget

World Bank meeting in Peru

+Economic Outlook (Oil at $65pb)

GDP growth rate forecast of 5.5% in 2016 From 4.3% in 2015

Increased focus to diversify away from oil, with huge investments in sectors such as agriculture, manufacturing and power

Fuel subsidy will be removed and the passed PIB annulled

Aggregate consumption will riseSlowdown in the depletion rate of fiscal

revenue and external reserves

+Economic Outlook (Oil at $65pb)

Inflation will trend around the 11% level, reflecting a weaker naira

Accommodative interest rate policyEfforts to create a more attractive business

environment likely to produce modest results

Huge investment in infrastructure and a Marshall plan to reflate the economy

This will positively impact on purchasing power

+Economic Outlook (Oil at $50pb) Contraction in GDP growth rate to 3.5%

Depletion of fiscal and external buffers

Sharp reduction in monthly FAAC to an average

of N300bn

Fiscal deficit will widen to above 3% of GDP

Sharp fall in external reserves below $25bn

Increased pressure on the naira

As the CBN’s ability to defend the currency declines

+Economic Outlook (Oil at $50pb)

Currency adjustment and possible removal of

forex controls

The removal of fuel subsidies will be inevitable

As there will be no subsidies at low oil prices

Inflation will reach 13% because of imported

inflation

Increase in the electricity tariff

+Economic Outlook (Oil at $50pb)

Austerity measures will be implemented

• Possible increase in taxation

Will speed up diversification and

investment in Agriculture

Cut in government expenditure

Reduced spending on infrastructure

+Risks in Order of Magnitude

Escalation of insurgency and Boko Haram

attacks

Fuel subsidy removal

Exchange rate adjustment

Trade restrictions

Sharp fall in the price of oil

+Insurance OutlookAccording to EY,Diminishing economic growth likely to affect

demand for life and non–life productsStronger capital requirements will act as a

catalyst for consolidation of smaller insurersChanging regulatory environment will

encourage investment in real estate Cross border sales to commence January 2016

Collective investment scheme to expand further Improvement in data controls prompted by newer

and stricter regulations

+Growth Expectation for Insurance Industry But growth in the insurance sector may

remain positiveLikely to be driven by

Automotive policy Oil & gas Housing sector

Opportunity for growth in the insurance sector in the next four years is estimated at $105.24bn If it grows at par with South Africa (12% of GDP)

+Thank You