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Lagoon and Blue Ocean narratives of Nigerian Insurance sector – Report 

A recent report by Coronation Research has rated insurance penetration in Nigeria at 0.31%, which is extremely low.

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Lagoon and Blue Ocean narratives of Nigerian Insurance sector - Report 

A recent report by Coronation Research has rated insurance penetration in Nigeria at 0.31%, which is extremely low, even compared with countries with similar Gross Domestic Product per capita like India, with insurance penetration at 3.69%.  

Experience in other countries shows that, in the right conditions, insurance in Nigeria can be rolled out to India’s level in eight to 10 years. So Nigeria could go from 0.31% penetration to 3.69% penetration in 10 years.  

The Lagoon story

Nigeria’s insurance industry has not shared in the growth experienced by other Nigerian financial services, notably banks, pension funds and mutual funds. In fact, it has hardly grown in real terms over 10 years. Without scale, the industry suffers from poor returns on equity.   

The analysts believe that its smallness is also its opportunity. If it were to grow to the level reached by countries with similar GDP per capita, it might grow by a factor of 10 times in real terms in eight-to-10 years. The technological infrastructure and data necessary for expansion are largely available. 

[READ MORE: This is why Nigerian firms need Keyman Insurance]

The new capital requirements race 

The banking reforms of 2004 imposed new steep capital requirements and reduced the number of banks from 89 to 25. Insurance reforms in 2019, due for implementation by June 2020, also impose steep new capital requirements. 

According to Coronation Research, the industry players are likely to reduce from 59 to about 25. Higher capitalisation increases underwriting capacity and the potential exists to roll out a much bigger industry than currently exists. 

Insurance Firms

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Now, the Blue Ocean route

Lessons learned in Asian markets, and also in West Africa, show how insurance can be rolled out to tens of millions of customers. Cooperation between regulators is critical, as are distribution partnerships with banks and telecom companies. Fresh capital is necessary for development, but a fresh strategic approach is required to reach the industry’s potential.    

So far, Nigeria’s insurance industry has lagged behind other financial services. Conditions have not been helpful for growth. Experience from other markets, particularly in Asia, suggest three remedies.

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First, government and regulators (not only insurance regulators but bank and telecom regulators, too) need to cooperate  there are gains for all. Second, the roll-out of micro-insurancewith the development aim of financial inclusion, is key to familiarising and educating the market. Third, technology plays a key role in partnerships and distribution. 

But is the technology available? 

The distribution channels for rolling out insurance in Nigeria are available in Nigeria already but have not been deployed yet. In recent years the issuing of bank verification numbers (BVN) and SIM card registration have created significant levels of personal data.

Already, in Lagos, traffic police use number-plate recognition to check motor insurance cover. Whereas some Nigerian insurance companies are set up to process tens of thousands of customers, the technological platforms and the customer data exist to service tens of millions. 

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NAICOM’s reforms address an industry that today is small, fragmented and not very profitable. In inflation-adjusted terms, and in US dollar terms, it has barely grown over the past ten years. Of course, it could continue to stagnate in the years to come but that would:

  • be a waste of the capital being raised to meet the current regulatory initiative;
  • frustrate the experience of strategic investors (domestic and foreign);
  • leave existing technology unused; and
  • allow Nigeria to fall further behind its peers. On the other hand, given fresh capital and renewed regulatory cooperation, the industry can leave the stagnant lagoon and make waves in the blue ocean. 

[READ ALSO: Convert failed insurance firms to micro Insurers, expert urges NAICOM]

Recent pockets of growth 

While it is correct to say that the development of the industry has been essentially flat over the past 10 years, this view needs to be refined.  

First, it is clear that the Life Insurance business was growing in real terms 2008-15 (see the beginning of this section). This reflected the take-up of group life policies by companies in the formal sector. 

Second, the recent period 2016-18 has seen some growth in real terms, though it came after a significant contraction in business in 2016.  

Third, the part of the industry which is expanding in real terms likely reflects gains in market share by the leading companies from the less successful companies, some of which have serious issues. In other words, a process of competitive selection during and after the recession of 2016-17 may be underway already.  

Recovery, rather than growth, among Non-Life insurers 

While the Composite Insurers have shown a degree of recent growth, the leading group of 10 Non-Life Insurers has not done so well. Collectively these companies experienced a significant fall in business at the onset of the 2016-17 recession and have only begun to slowly climb out of it.

In inflation-adjusted terms, Gross Premium Income fell by 18.7% in 2016, then rose by 3.3% in 2017 and by 4.4 % in 2018. 

Asian countries and Ghana demonstrate how to grow 

Where can the Nigerian insurance industry look to for examples of successful growth? In any survey of the global insurance industryAsia stands out for its recent gains in insurance take-up. To a large extent, this has happened because Asian governments have prioritised the development of micro-insurance and demanded cooperation from regulators and insurance companies to achieve their objectives.  

In Asian countries, where micro-insurance has been rolled out, the insurance industry as a whole has benefitted from the familiarisation process that micro-insurance brings. As a result, insurance penetration and density have risen quickly, as we shall see in this section. Levels of insurance take-up are now many times what they are in Nigeria. 

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Key case studies come from Malaysia, Philippines and India. We have garnered data from India and present it here. 

An answer closer to home than Asia 

One need not go as far as Asia. Ghana is an example of a country where micro-insurance take-up has risen from almost nothing to 28% of the population over a period of eight years. If Ghana’s experience could be replicated in Nigeria the effect would be revolutionary. 

[READ FURTHER: AIICO Insurance to increase share capital by 80%]

Will the multi-nationals bring their experience to Nigeria? 

An important point about the Asian experience is that the same companies that cite Asia as a core geography for growth are the ones that have acquired insurance companies in Nigeria. 

What it means: For example, Axa and Allianz. Axa bought Mansard Insurance in 2014 and Allianz bought Ensure in 2018. Other global insurers present in Nigeria are Prudential in its partnership with Zenith Life Insurance and Sanlam with FBN Insurance, as well as Saham of Morocco with Saham Unitrust. 

Therefore, the experience of Asia’s roll-out of micro-insurance is familiar to the shareholders and management of several Nigerian insurance companies. There is no doubt that they could put their experience to use in Nigeria; the question is whether the legislative and regulatory environment will allow them to achieve this. 

Micro-insurance roll-out and partnerships with other industries 

In Asia, there are two conditions that spur the roll-out of insurance. The first is that governments sponsor the roll-out of micro-insurance and work to ensure that regulators work together.  

What it means: This means bringing central banks, insurance regulators and telecom regulators together to pursue the common objective of developing the insurance industry.  

The second is that the roll-out of micro-insurance provides education, mass-awareness and initial market penetration which the insurance industry requires.  

What it means: The initial micro-insurance roll-out involves partnerships that can be with banks (bancassurance), or with telecom companies, or with government institutions. Even if insurance renewal data suggest that traditional insurance company outlets remain the main points of sale, it is partnerships that get the ball rolling by giving insurers access to the mass market in the first place.  

[ALSO READ: Universal Insurance Plc appoints new Non- Executive Director]

 

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Abiola has spent about 14 years in journalism. His career has covered some top local print media like TELL Magazine, Broad Street Journal, The Point Newspaper.The Bloomberg MEI alumni has interviewed some of the most influential figures of the IMF, G-20 Summit, Pre-G20 Central Bank Governors and Finance Ministers, Critical Communication World Conference.The multiple award winner is variously trained in business and markets journalism at Lagos Business School, and Pan-Atlantic University. You may contact him via email - [email protected]

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Blurb

Central Banks Digital Currencies (CBDCs) – a Gift or a Curse?

Should we expect a CBN announcement on e-Naira soon?

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China recently became the first MAJOR economy to create its Central Bank Digital Currency (CBDC).

Specifically, China’s CBDC has gone from the testing phase to actual implementation. Such that the digital yuan is now ready for use in regular transactions. The expectations are that by the time athletes gather for the upcoming Winter Olympics, visitors to the country can pay for a wide range of goods and services using the Digital Yuan. (Think about using government digital currency to settle Hotel and Restaurant bills, Taxi rides, etc.).

Across the world, Central Banks are racing to implement Central Bank Digital Currency (CBDC). The latest BIS 2021 survey identified that 86% of Central banks are engaged in developing a CBDC.

In this article, we ask the question: What exactly are Central Bank Digital Currencies (CBDCs), and why are so many central banks are working towards their implementation?

READ: Very few nations permitted to issue their Crypto – IMF

What is a Central Bank Digital Currency (CBDC)?

Specifically, CBDCs are legal tenders issued by a country’s central bank which will only ever be available in digital format AND will be acceptable from day one for payments of goods and services once implemented.

Fund settlement will be facilitated by the issuing Central bank who may / may not choose to partner with an approved list of institutional counterparties. The Bank of International Settlements (BIS) has a more technical definition here.

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READ: U.S Central Bank leader says no rush into crypto dollar

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For the avoidance of doubt, CBDCs are neither the same as Electronic Funds Transfers (EFTs) nor are they Cryptocurrencies. Despite many similarities such as contactless settlement between counterparties, key differences are that Central Bank Digital currencies are legal tender AND represent a direct claim on a central bank by end-users.

  • So, if you are one of those people who likes to “spray” very crispy notes at Owambe… better be prepared as with digital currency, you will never see any physical notes to “spray”.

READ: Leader of world’s most powerful central bank says Crypto unreliable for wealth preservation

Which countries have CBDCs on the horizon?

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The latest BIS 2021 survey of 65 central banks identified that 86% of Central Banks are engaged in developing digital currencies. Out of which 60% of central banks have begun research work whilst 14% of central banks are already in the pilot and proof of concept phase.

For a list of countries at various stages of CBDCs implementation, you can click here and here or view the image below.

READ: U.S. dollar share of global currency reserves rose to 61.9% in Q1 2020 – IMF

How will the CBDCs work?

For now, each Central Bank is determining its own scope and CBDC functionality as there is no standard global framework regarding infrastructure requirements and functionality scope (e.g. some central banks simply want to focus on domestic payments whilst others want both domestic and international payments focus).

However, having said that, the underlying workflow will likely be similar across the world, in the sense that workflow will include solutions on distribution and utilization.

READ: Computers might steal Satoshi Nakamoto’s Bitcoin fortune

  • Distribution: Central Banks will create the digital currency and permit a list of commercial banks to access to the central payment network for onward distribution to end customers. Given that CBDCs are digital, the Central Banks will be able to track exactly who is holding how much of their currency and how exactly their currency is being spent.
  • Utilization: End-users will have a tool (e.g. digital wallets) to help them be aware of their CBDCs balances. Further, these wallets can be presented (i.e. scanned) at participating locations for transaction settlements (think QR codes on a phone app).

In other words, as a CBDC end-user, you only need access to the internet and electricity for spending. Intermediaries such as SWIFT will be bypassed. (You can read more about how the digital yuan will work here).

READ: Former Access Bank CEO, Aigboje Aig-Imoukhuede, launches new book, Leaving the Tarmac: Buying a Bank in Africa

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Why are so many Central Banks rushing into CBDCs?

Firstly, faster cross-border trade settlements / International Trade ambitions:

The widely accepted use of CBDCs will facilitate faster cross-border settlements between participating counterparties. Regardless of your location, there will be less need to convert from local currencies into reserve currencies such as USD, GBP, EUR, and vice versa via financial intermediaries.

Additionally, for a country such as China which has long sought to expand its global reach in international trade, the digital yuan provides mouth-watering opportunities.

  • As a simple example, for international trade facilitation, end-users of smartphones built by Chinese-owned phone companies can potentially be enabled to access the Digital-Yuan, and that digital yuan can be spent with Chinese-owned firms across the world. These payment transactions can take place on the People’s Bank of China (PBOC) controlled network and bypass any existing financial intermediary (you can read more about digital yuan opportunities here).

Secondly, from a domestic perspective, CBDCs will be a potential game-changing macro-economic tool.

For countries not interested in global trade dominance, digital currencies offer Central banks an exciting opportunity to transform monetary policies. Specifically with regards to financial relationships and money transmission mechanisms (too much grammar but we have all heard of stimulus and intervention funds!!)

Under the current state, when a Central Bank wants to increase or decrease money going into the hands of consumers, it does so via a range of tools (i.e. alter interest rates, set reserve ratios, buy/sell short-term instruments, etc.). Unfortunately, this current approach has some limitations which include:

  • Transmission mechanisms: Despite all the tools available to Central Banks, they ultimately rely on financial intermediaries (i.e. banks). Existing monetary policy tools simply aim to influence commercial banks to increase or decrease the amount of money/funds available for onward lending to end consumers.
  • These tools, as well as, associated end-user responses may not often work as fast as Central Banks would like. As an example, most bank customers will tell you that loan application processes can be extremely cumbersome and sometimes subjective.
  • Also, think about folks in remote areas who truly need credit for their business expansion but are not financially included or are not able to complete the plethora of loan application forms or are missing IDs for authentication, etc.
  • All these limitations create latency challenges for Central Banks looking to influence macroeconomic indicators quickly.
  • Monitoring: Under the current approach, it is cumbersome for Central Banks to continually track existing money in circulation and utilization purposes. Think about CBN intervention funds and how difficult it is for the CBN to know exactly how its intervention funds are being spent once the funds are disbursed to applicants.

Fortunately, with digital currencies, given that they leave digital footprints, Economic Surveillance is facilitated (i.e. Central banks can monitor exactly who owns how much and what it is being used for); arguably giving Central Banks an opportunity to better direct funds to parts of the economy requiring support.

Thirdly, Technology advances driving the growth of the Digital Economy and lowering operating cost dynamics.

  • The unrelenting growth of the Digital Economy: The use of physical cash continues to decline driven by the exponential growth of contactless services such as e-commerce (Amazon, Alibaba, eBay), contactless interaction (Zoom, Facebook-Portal, Google-Nest), etc.
  • Global eCommerce is now projected to be over 25% of total retail sales across the world and the US estimates that Digital Economy accounted for 6.9% of 2017 GDP which made it the seventh (7th) largest component of GDP and still growing.
  • Given that no one needs physical cash for transactions in the digital economy, Central banks are warming up to the need to implement CBDCs for transactions in this emerging digital economy.
  • Changing unit cost dynamics: From a central bank perspective, there are significant costs incurred for maintaining oversight of existing payments and settlement systems. Furthermore, there are additional costs for creating cash, transporting, storing, and securing existing stock of physical cash. As existing systems become outdated and population growth continues apace, there will be an inflection point for when it will simply be cheaper to create digital currencies to drive financial inclusion. Especially as cloud computing processing capacity continues to expand at a cheaper unit cost.

Are there risks/issues to be concerned about with Digital Currencies?

The answer is yes, whilst there are benefits, there are also some risks and concerns such as the risk of excessive Economic Surveillance, Privacy concerns, ease of implementing, and Negative Interest (aka financial wealth tax).

Economic Surveillance can easily be a double-edged sword especially in the hands of an authoritarian regime, as an increased level of economic oversight can easily lead to financial repression or targeting opponents. However, just like with CCTVs, the risk of misuse cannot be a unilateral reason to discredit the opportunities available with CBDCs. (You can read more about concerns here)

So, what about Nigeria?

The Central Bank of Nigeria (CBN) was not included in the BIS 2021 survey, additionally, the CBN has not formally outlined its position on whether it plans to implement a Central Bank Digital Currency in the future (e-Naira).

However in February 2021, (as part of its explanation of its regulatory directive on Cryptocurrencies), the CBN acknowledged the emerging trend of Central Banks’ ability to issue legal tender digital currencies.

Nairametrics founder, Ugodre mentioned on his Twitter Spaces show “OnTheMoney” that a senior official at the CBN informed him that the Apex bank was seriously considering digital currency and had put together a team to explore its possibilities.

So, should Nigerians expect an e-Naira soon?

Firstly, with regards to innovation, the Nigerian payments landscape continues to evolve rapidly as the CBN drives innovation as part of its National Financial Inclusion Strategy (NFIS). Thus far, this strategy has resulted in the deployment of new products in the Nigerian payments space such as Money Market Operators (MMOs), Payment Solutions Service Providers (PSSPs), Agent/Super Agents, Payment Service Banks (PSBs), etc.

Furthermore, the CBN is keen to leverage its regulatory sandbox for more innovations and has very recently in 2021 issued new guidelines on open banking, as well as, QR codes.

Consequently, having a digital Naira should not be ruled out as an additional tool to drive financial inclusion in Nigeria,

Secondly, based on industry statistics, Nigerians are quick to adopt technology that facilitates convenience at minimal cost to end-users.

  • Specifically, CBN payments statistics reports show that the use of cash and ATMs in Nigeria continues to decline rapidly. The latest annual report shows Cash/ATM usage has declined from 18% of transactions in 2015 to 6% of transactions in 2019. In other words, 93% of activity was done electronically (across platforms NIP, REMITA, MMO, etc).
  • Furthermore, NCC reports show high penetration rates for mobile technology with over 195 million active mobile phone subscribers (95% penetration) and 150 million internet subscribers (73% penetration rate).

These reports lend credence to the perception that Nigerians are quick adopters of new technology where the technology enhances convenience at minimal cost to end-users.

Consequently, a digital Naira will likely have high adoption rates to the extent that end-users do not expect to incur additional onerous charges.

Finally, from a CBN perspective, we already know that the APEX bank prefers direct interventions as part of its macroeconomic toolkit. Arguably having a digital Naira (e-Naira) allows the CBN to better facilitate direct transmission to target beneficiaries in key sectors, whilst monitoring the use of the funds disbursed, and expedite recovery when funds are due for repayment.

So, should we expect a CBN announcement on e-Naira soon? Your guess is as good as mine.

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Why SEC should support democratization of sale of foreign securities

In the spirit of progressive engagement and dialogue, many voices now suggest that the SEC take a fresh look at its latest position.

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The directive of the Nigerian Securities and Exchange Commission (SEC), issued 8th of April 2021, has been met with consternation and a straightforward (but hopefully simplistic) interpretation that; “the government is out to stifle innovators, again.”

These perspectives aren’t unfounded, as innovators of all shades have taken a heavy beating lately due to a number of direct government policies or interpretations of these policies – irrespective of how well-intentioned these policies may be. On the contrary, micro-investment platforms deserve a fair shot within Nigeria’s capital market.

This is especially true considering that the recent regulatory fervour coincides with a period where the innovation ecosystem is recording new milestones and gaining traction, solving problems for users in all walks of life, democratizing wealth creation, and creating high-value jobs, all of which Nigeria desperately needs.

READ: Crypto market surges above $2 trillion, as Bitcoin stages a huge comeback above $60,500

In the last six months alone, Nigerian startups have gained the confidence of some of the best investors locally and globally, leading to never-before-seen innovations, acquisitions, and investments into the economy. This promotes interest in the Nigerian innovation ecosystem from foreign market actors and increases its relevance as a high-value job creator. Some now wonder if our regulators want more or less of this positive momentum.

This latest notice from the SEC warned Capital Market Operators (CMOs) to desist from selling securities not quoted or registered, as only registered securities in Nigeria can be issued, sold, or offered for sale. Ostensibly, the directive requires CMOs registered with the SEC to offer only securities listed on any exchange in Nigeria to the public.

READ: XRP posts a big bang, as legal tussle with SEC lingers

The challenge here is that High Net worth Nigerians (HNIs) have always had access to foreign securities offered or acquired through registered CMOs for the apparent benefit of the upside available in markets such as the United States. This should be democratized to allow Nigerians with smaller incomes to have access to valuable global stocks within fair rules, and this is what the likes of Trove, Chaka, Bamboo, and Risevest have done. In fact, this democratization should be applauded as one of the outputs of a thriving innovation ecosystem that provides practical
palliatives for the stifling inflation and erosion of value we have all experienced as Nigerians.

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After all, what is suitable for Dangote should also be good for Musa, who earns NGN50,000.00, and thanks to any of the apps mentioned above, can today invest in shares of Dangote sugar while also adding a quarter of a Google stock to his portfolio every month. This “magic” of innovation is a poverty alleviator that should be encouraged and nurtured while ensuring that the public is protected from any harmful financial practices.

READ: Flour Mills shares surge by 6.9%, lifting the miller’s capitalization by N8.2 billion

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It is important to acknowledge at this point that the SEC has been a positively progressive regulator, generally engaging its public fairly. The issuance of the guidelines for crowdfunding and accommodation of FinTechs within the capital market was encompassing and engaged stakeholders of all hues. This should be commended. The SEC’s position classifying crypto as an asset class is also fair, refreshing, and proactive. We need more of this and not less.

At a time when we are exploring how the Nigerian capital markets can become a viable option for listing tech startups, this latest body language of the SEC, and the Nigerian government as a whole can be further misinterpreted.

In the spirit of progressive engagement and dialogue, many voices now suggest that the SEC take a fresh look at its latest position, as these innovations are widespread, publicly accepted, and valuable. Furthermore, these innovations support some of the registered and regulated CMOs by offering white-label solutions that are accelerating the ability of these legacy CMOs to better serve their HNI customer base, with local and foreign securities. The emergence of these innovative micro-investing platforms has triggered investments into local Nigerian securities in multiple folds. The volumes these innovative platforms channel into Nigerian stocks are arguably the most significant development in Nigeria’s capital market in a decade.

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By virtue of the existence of these innovators, their combined strength has introduced over 150,000 new market participants who are primarily millennials: a majority of whom purchased their first set of stocks through these platforms. Before now, they had no active interaction with the capital market. These new entrants are now trading in excess of NGN10,000,000,000 (Ten Billion Naira) monthly through these apps. Note that a good chunk of the highlighted trade volume is routed through local CMOs to purchase Nigerian securities on the Nigerian Stock Exchange(NSE). Long term, these innovations would also serve as a channel to offer Nigerian guarantees to a global audience which would be a massive positive for the economy.

The quest for diversification of portfolios to include foreign securities can only be good overall. It underscores the global trend in cross-border trade in securities as disintermediated by technology and the need to enhance portfolios’ value globally.

Rather than curbing the practice of offering Nigerian and international stocks in a basket, this micro-investing trend should be allowed to flourish within reasonable regulatory frameworks. These platforms make investments attractive, easier, and affordable. Micro investing will curb the menace of pyramid and Ponzi schemes while introducing a new generation into Nigeria’s securities market in parallel with their appetite for global securities. Regardless of what we decide, the world has gotten smaller, and information that enables people to easily seek the best economic outcomes is readily available. While other nations gain from micro-investing, shouldn’t our people do too?

The ultimate beneficiary of increased wealth for Nigerians is the Nigerian economy. Rather than shutting Nigerians off from the rest of the world, we should be accelerating global access for our millions of people; hence this is the time for dialogue, not shutdowns.

 

Kola Aina is the Founding Partner at Ventures Platform and writes from Lagos, Nigeria.

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