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7 April, 2008
Transformation and Insurance
Growth in Nigeria
Omobola Johnson
Country Managing Director, Accenture Nigeria
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A thriving insurance sector is not only the result of
an efficient financial services sector but is also an
important aspect of a healthy modern economy
The insurance sector promotes long-term savings, that support
sustainable long-term development:
Create long-term large investments for infrastructure development
Generate funds to support a deep mortgage industry
Provides a safety net to government, rural and urban enterprises andproductive individuals
Insurance companies are typically the biggest investors in long-gestation infrastructure development projects in all developed and
aspiring nations
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The Nigerian insurance industry is still
underperforming its potential and remains at a
very under-developed stage
3
4
4.3
5.3
53
6 6.5
14.6
55.
16.4
19.
.
3
.4
.4
.9
11.
5
45.3
4 .1
45.9
55.3
5 .
59.
1 .3
4 6 1
3
4
5
6
Nigeria South frica ndia Egypt Nami ia Tunisia
nsurance Density
Note:
1) Insurance Density: Premium per Capita (USD)2) Insurance Penetration: Premium Income as % of GDP
.
%
.94%
.
%
.6 %
15. %
14.3 %
13.
%
16. %
. %
3.1
%
3.14%
4.
%
.6 %
.
9%
. 5%
. %
.61%
.
%
.
%
1.
%
. 1%
.
%
. %
. % 5. % 1 . % 15. % . %
3
4
5
6
Nigeria South Africa India Egypt Nami ia Tunisia
nsurance Penetration
Source: Swiss Re Sigma Reports (2004 2007)
South Africa is ranked 2ndand 32nd compared to Nigerias 84th and 86th interms of Insurance Penetration and Insurance Density respectively
US$
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Compared to the banking industry, the Nigerian
insurance industry has not done very well
Total Banking Industry Deposits versusGross Premium Income
$ Billion
This has become more obvious post consolidation
0.74
0.92
1.45
1.79
0
20
2
2
44
57
0 20 40 60
2003
2004
2005
2006
2007
$ Billion
Total Banking Industry Assets versusInsurance Industry Assets
Banking Industry Insurance Industry
Source: Agusto Banking Reports (2004-2007), IA Reports (2002-2006)
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Regulation-driven consolidation to date has wrought
some market disruptions but little economic impact in
the insurance market in Nigeria
Flurry of mergers and acquisition, with very little synergy rewards
ntry of some foreign players
o closure of poor performing companies and very limitedrationalization of players
Wealthy company owners, but poor institutions
The overall objective of creating a stronger and more competitiveindustry is not apparent
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Very poorly developed distribution channels as influence of brokers remain high,with insurance brokers possibly controlling as much as 80% of non-life business
Collections remain poor, resulting in relatively high receivables
Unsophisticated products offerings, mainly plain vanilla with only a few companiescreating new opportunities and exploring ways of filling existing gaps in the market
Poor public perception, market is suspicious of insurance companies willingnessto pay claims as and when due
Lack of requisite skill to participate in highly specialised transactions especially inhigh value risk segments such as marine, aviation, oil and gas
Inability to attract and retain skilled talent
Low technology leverage
Low investment and asset management capabilities
Poor regulatory oversight
And the issues that have historically limited
performance in the past still persist
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The expected signs of a thriving industry and
synergies from consolidation have not been
realised
Expand to new markets and territories
Develop new distribution channels
Develop new complementary products/ broadenbusiness lines
Acquire critical mass, and benefit fromeconomies of scale
Develop new business models/ Diversify as ahedge against volatility in market
Acquire new strategic business locations
Acquire technology, or to add/ replace owntechnology
Acquire skills/ management; to add/ replaceteam skills
Enhance operational efficiency
Revenue Enhancement
Cost Reduction
Improvements in ROCE
Improvements in ROI
Improvements in ROA
Improvements in Productivity
Business Rationale Value xpected
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especially when compared to the
banking industry consolidation
Larger financial capacity: ability to participate in bigger ticket
transactions and ability to fund global expansion
Entrance of global players: increased interest in igeria and responseto international players and foreign investments
ew Products: development of new innovative products that are
appealing and meet consumer needs
ew Channels: significant large investments in the development of
alternative service delivery channels
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Post regulatory consolidation, the insurance
industry structure still suggests that there is a
need for a transformation
Highly fragmented industry
Homogenous companies
High-cost distribution system
Poor governance
Dwindling competitiveness
Under-developed channels
Commoditised products
overall, there is no real source of competitive advantage forplayers in the industry
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What should be the objectives of the Nigerian
insurance industry transformation?
Relevance/ Size/ Capacity of the Insurance businesses
Appeal of insurance to consumers, especially the retail segment
Ability to effectively compete/ partner globally
Developing/ building skills
Proliferation of alternative channels
Development of appropriate regulatory framework
In the UK, the FSA reform programme had three distinct objectives:Improve regulatory framework, reform of firms business models/
operating practices and protection of customers
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Three possible transformation scenarios
could emerge
There are three possible forms that the transformation could evolve
Insurance
Industry
OPTION 1
Consumer Led
OPTION 3
Internally Driven
OPTION 2
xternally Driven
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Consumer-led transformation will be driven
by more sophisticated customers
Sophisticated customers, exposed to the developed markets,
demand insurance products and services which are at par with
what is available in more advanced countries
Customers are demanding of a more personal approach, along with a
comprehensive range of banking, insurance and asset management
products and services
This should result in:
Strong consumer control
Price transparencyValue-adding products
Channel proliferation
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Externally-driven transformation would
entail the entrance of more global players
Responding to the emerging opportunities in the igerian insurance industry,
international companies will enter the igerian insurance market space
The typical entry strategy for the global players will be to focus on areas
where the local players have been traditionally weakFocus on the retail sector
Develop innovative products
Develop alternative service delivery channels
Pricing
This should result in:
Bigger companies with deeper pockets
More expertise in the market place
Access to larger distribution networks
Ability to attract quality skills
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Internally-driven transformation will require
industry players to co-operate and collaborate
to move the entire industry forward
It will entail the development and deployment of industry-wide infrastructure that will serve asa common operating platform for industry players
Similar to Industry collaboration initiatives in the igerian banking industry such as InterSwitch, ATMC,Credit Reference Company
But the collaboration will not compromise the ability of the insurance companies to competeeffectively and aggressively. Basis for competition will be re-defined:
Innovation
Service quality
Value
Areas of possible collaboration include:
Skills/ Capacity Building
Claims Operations and Processing
Policy management
Channel development
This should result in:
Better competitive landscape
Improved operational efficiency and productivity gains
Standardisation and improved industry credibility
And could trigger value-driven mergers and acquisitions
With meaningful cost and revenue synergies
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Insurance industry should consider
Which of these options is:
Most desirable?Most likely?
What should be the
industrys response toeach of the options?