Issues in untapped insurance industry in Nigeria

The insurance or underwriting sector of the Nigerian economy, no doubt, has come of age in spite of the numerous challenges that have bedeviled her over the years. DAVID AGBA writes on some of the issues.

Insurance is a financial tool that protects individuals, families, and businesses from unexpected risks. It is a contract between the insured and the insurance company, where the insurer agrees to provide a financial payment or benefits in exchange for regular payments2. Insurance is a way to manage your financial risks, and it provides protection against unexpected financial losses1. By paying an insurance provider, you receive coverage that will preserve your way of life in case of unfortunate events.

Insurance is a contract, represented by a policy, in which a policyholder receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured. Most people have some insurance: for their car, their house, their healthcare, or their life.

Insurance facilitates investment by reducing the amount of capital that businesses and individuals need to keep at hand to protect themselves from uncertain events. According to some scholars, insurance is a barometer of economic activity in a country and thus, protects the success of emerging economies.

Insurance in Nigeria can be traced back to the 20th century when Nigeria’s economy was solely dependent on agriculture. There was a need for merchants to transport their cash crops to Europe and also reducing the risk of such transportation. This contributed to the dominance of marine insurance in Nigeria at that time.

Despite its importance for economic development, the gross premium collected by insurance companies in Nigeria is about $1.9 billion compared to the $3.8 billion collected in South Africa.

In the United Kingdom, the insurance industry contributes about 20% of the total GDP of the country. In South Africa, the insurance industry contributes 17% of the total GDP and in Kenya, the insurance industry contributes 3.4% of its nation’s GDP. However, in spite the astronomical growth of the Insurance companies from just one agency in 1918 – Royal Exchange Assurance Agency to the present number of 56 Insurance companies as stated on National Insurance Commission (NAICOM’s) website, the Nigerian Insurance industry contributes a meagre 0.7% of the total GDP of Nigeria. It will be right to say that the performance of Nigerian insurance industry is sub-optimal.

Selling insurance in Nigeria is an herculean task

Over the past years, insurance has remained a hard sell in Nigeria despite significant changes and advancements. However, embedded insurance holds the potential to address these challenges by integrating insurance products with existing services and increasing awareness, accessibility, and trust in the insurance sector.

By examining and addressing these challenges head-on, the Nigerian insurance industry can pave the way for sustained growth and development.

Why is insurance a hard sell in Nigeria?

On the sales side of insurance in Nigeria, several cultural and socioeconomic factors make it hard for insurance companies to connect to people and make customers out of them. Some of these factors are:

Lack of Awareness and Understanding: The general population needs more awareness and understanding regarding insurance products and their benefits. Many Nigerians need to become more familiar with the various insurance policies available, how they work, and the value they provide. This lack of knowledge makes it challenging to communicate the importance and relevance of insurance.

Trust and Credibility Issues: Insurance companies in Nigeria face trust and credibility challenges. Some people have experienced difficulties obtaining insurance claims or perceive insurance companies as untrustworthy. Such adverse experiences and perceptions hinder the willingness of potential customers to engage with insurance companies and invest in their policies.

Cultural and Religious Factors: Cultural and religious beliefs can significantly influence attitudes towards insurance in Nigeria. Some Nigerians view insurance as contradicting their cultural or religious practices, leading to resistance to adopting insurance as a financial instrument. Overcoming these cultural and religious barriers requires targeted education and awareness campaigns to address misconceptions and highlight insurance compatibility with personal beliefs.
Perception of Financial Burden: Many Nigerians perceive insurance as an additional financial burden rather than a protective measure. With limited disposable income and numerous financial priorities, insurance is often considered a luxury rather than a necessity. This perception makes it challenging to convince individuals to allocate their resources toward insurance premiums.
Limited Access and Distribution Channels: Nigeria’s access to insurance services and distribution channels remains limited. This is particularly prevalent in rural areas where insurance companies need more presence and face challenges in reaching potential customers. The need for more convenient access hampers the ability to sell insurance policies effectively.
Some major Challenges Facing Insurance Companies in Nigeria

Regulatory challenges and compliance issues

The regulatory environment in Nigeria presents significant challenges for insurance companies due to its complexity and constant changes. Navigating and complying with these regulations can be a daunting task.

Moreover, stricter regulations and compliance requirements place a heavy administrative burden on insurance companies, directly impacting their operational efficiency and ability to innovate.

As a result, compliance costs become substantial, diverting valuable resources away from core business activities and impeding growth.

Inadequate infrastructure and technology adoption

In addition to regulatory challenges, the insurance industry in Nigeria grapples with infrastructure limitations and a sluggish pace of technology adoption. Outdated systems and reliance on manual processes are prevalent throughout the sector, resulting in inefficiencies, delayed service delivery, and heightened operational costs.

The absence of robust infrastructure, including reliable internet connectivity and sophisticated data management systems, further exacerbates these challenges. Consequently, insurance companies need help in streamlining their operations, providing seamless customer experiences, and harnessing advanced technologies like artificial intelligence and data analytics to drive innovation and efficiency.

High Fraud rate and lack of effective prevention measures

Fraudulent activities present a substantial challenge to insurance companies in Nigeria. The industry contends with issues such as false claims, policy manipulations, and identity theft, all of which have severe implications.

Not only do these fraudulent practices result in financial losses for insurance companies, but they also erode the trust placed in them by customers. The persistence of fraud can be attributed, in part, to insufficient preventive measures and weak enforcement.

To combat this issue effectively, it is imperative to implement robust risk management systems, enhance data analysis capabilities, and foster collaboration with relevant authorities. These steps can help insurance safeguard themselves and their customers from fraudulent activities, thereby bolstering trust and maintaining the industry’s integrity.

Limited product diversity and innovation

Nigeria’s insurance market needs more product diversity, hindering its ability to cater to specific needs and demographics. Insufficient product innovation acts as a barrier, preventing the industry from attracting new customers and expanding its market reach.

Many of the traditional insurance products offered in the country must adequately address emerging risks or consumers’ evolving needs.

To adapt to the changing landscape and tap into new market segments, insurers must prioritize the development of innovative products. These products should cover cyber risks, renewable energy, and microinsurance.

The Nigerian insurance industry can enhance its relevance, broaden its customer base, and capitalize on emerging opportunities by embracing innovation and tailoring products to meet evolving demands.

Underdeveloped insurance market and low perception

Nigeria’s insurance market remains underdeveloped and is characterized by low insurance penetration rates compared to other countries. This can be attributed to several factors, including a lack of public awareness about insurance and its benefits, contributing to limited adoption.

Additionally, access to insurance services is constrained, and distribution channels are inadequate, further hindering market expansion. To increase insurance penetration, companies should implement comprehensive awareness campaigns to educate the public about the importance of insurance.

Simultaneously, efforts should focus on improving distribution channe

ls and ensuring wider availability of insurance services.

No modern economy can function effectively without an organised insurance industry thus insurance companies need to be innovative as their success will depend on their ability to devise new ways to approach insurance in Nigeria.

Furthermore, the Federal government, insurance companies, insurance professionals and all relevant agencies must ensure that they work together to ensure the insurance industry reaches its much publicized potential height which is obscure at the moment.