I’ve had reasons to think about Nigeria recently, in general but also from an insurance market and acquisition environment. I’ve helped several investors looking at Nigerian insurers over the years. Familiarity with the market and the expectations of these investors has bred complexity rather than contempt. This isn’t an easy diagnosis of land of plenty or dystopian money pit.

Nigeria still presents a compelling opportunity with its expansive land, sizable population, youthful demographics, positive growth trajectory, and abundant natural resources. Beyond its renowned oil and agriculture sectors, Nigeria boasts a vibrant movie industry (Nollywood) and a robust financial services sector, albeit with banks making more headway than insurers. Wholesale and retail trade are the biggest contributors to economic growth. This dynamic mix showcases Nigeria’s diverse economic landscape and entrepreneurial spirit and an increased focus on the service sector over energy extraction and farming.

While Nigeria’s potential has long been evident, ongoing challenges test that optimism. 

Inflation (29.9% annual for January 2024) and currency depreciation (74% down against USD since January 2022) have impacted individuals and businesses, amplifying economic strains. The local impact of foreign currency denominated debt has ballooned due to Naira depreciation. Ghana’s recent default weighs on everyone’s mind.

Food security for many is now a significant risk. Infrastructure limitations persist, impeding the full realization of economic growth. High unemployment rates, coupled with security challenges and governance issues, have eroded public and investor trust. In the insurance sector, while some have some growth and success with new product lines, overall insurance penetration remains modest. Insurance adoption has not accelerated as rapidly as envisioned over the past decade or two

While Nigeria stands to gain from ongoing disruptions in the Middle East and related waterways, the nation’s oil and gas sector remains a double-edged sword—both a source of revenue and trouble. Given the historical challenges of theft and attacks on infrastructure, Nigeria may not be able to maintain let alone increase production to meet an increased demand.

The recent decision by Shell to exit Nigeria’s onshore oil sector highlights the substantial risks involved, not only to infrastructure but also to human life. As a significant portion of Nigeria’s economy is still reliant on the oil and gas sector, these developments raise concerns about potential prolonged challenges, affecting the economy and therefore adding headwinds to insurers growth aspirations.

Insurers can’t fix these challenges directly. They need to focus on perception and reputation, on paying claims and improving operational efficiencies. Some insurers are excited about mandatory health and pensions, to go along with mandatory cover for motorists, but these compliance push factors do little to promote trust in insurance unless servicing and claim payment are slick and reliable too.

Most of the growth that insurers have managed over recent years has related to growth in GDP rather than an increase in penetration. The sorts of sustained 20%+ real growth that attracts investors and revolutionises a market will not come from economic and population growth alone.

There are opportunities for growth. When someone cracks microinsurance distribution and costs, and reaps the rewards of brand awareness, that can unlock massive growth and profits over time. There are many uninsured vehicles that could be bought into the insurance net. Smaller group policies covering household help could meet a needs of employers and employees. Annuities are a growing product for some insurers, and may present a further way to accumulate assets and also demonstrate trust worthiness to the market. (On the flip side, a single failure of a provider of annuities will crush this market for decades.)

Insurers need to have a strategic plan to manage their business within the turbulent environment. Some of what’s needed:

• A focus on consolidation around key products, unsentimental views of product profitability and underwriting performance.
• Allocation of capital to products to demonstrate return on capital, or at least incorporating an appropriate cost of capital into performance measures.
• Clear separation of investment returns generated on shareholder assets when understanding operating performance. (Warren Buffet’s words can be on “the float” misconstrued to destroy shareholder value.)
• (While you’re at it, it’s way past time to carefully segregate portfolios and match or at least hypothecate assets to specific purposes.)
• Clear-eyed evaluation of participating products. Customer expectations, levels of fees and charges. Fair investment returns and bonuses. The aim is to grow trust over time and wealth for your policyholders. Performance for shareholders will come.
• In general, a greater proportion of premiums must be used for benefit payments to policyholders, distribution costs must be contained, and expenses must be decreased. This is necessary to drive customer value and build trust, while leaving space for returns to shareholders.
• A better understanding of the role and benefit of reinsurance in life insurance. Different structures and different retentions may provide better results than rolling over similar structures indefinitely.
• A Digital Distribution and Servicing Strategy than recognises the trust deficit insurers have to work with and constantly pushes that flywheel to build trust rather than just drive the next sale. Customers want ready access to policy information and up-to-date account balances and policy status. On the back end, a single view of customer is required, giving customers and servicing agents the ability to update details once – and then use those details for effective, useful communication to policyholders. The more self-service possible the more empowered customers will feel.
• Recognition that driving down unit expenses (per policy expenses) is necessary for profitability and customer value. And decreasing unit expenses requires economies of scale. And that economies of scale requires BOTH scale and low variable costs – which is a function of automation, Straight Through Processing, Standard Operating Procedures and streamlined products.

Nigeria presents an opportunity, but it’s not without risks. The time necessary to realise investment objectives may be longer than is palatable to many, and disinvesting in difficult times often leaves a bitter taste and a lightened pocket.

Focus areas will differ by entity, but based on my experience, the points above are a sensible starting point for most. Add the controversial elements of tax rule application consistency and greater market conduct regulation and Nigeria’s market could really begin to take off.