Insurance Companies in Nigeria and around the world operate in the financial services sector. The business of insurance involves the insurance company guaranteeing replacement or repairs or shorty for an asset or service that may have been damaged or impaired or defaulted under terms and conditions in exchange for a premium.
For example, an insurance company insures your vehicle against it being stolen or damaged by accident by replacing it or repairing it at no additional cost to you in exchange for the premium you must have paid upfront.
How it works
In the example above, if the value of the sum insured is N5million you typically will pay a premium of N250k to the insurance company. If the car gets stolen or gets damaged the insurance company is obligated to pay a maximum sum of N5million towards repair or replacement of the vehicle depending on the claim type.
The But is…
Your premium typically has a duration of one year. If during the year you do not have any claims, the insurance company does not return any part of the premium to you.
Above is a basic overview of the insurance business model. However, from an investors point of view there is a little more to it than above. The insurance business as you must have drawn from above is a risky one and so insurance companies that are profitable are also associated with proper risk assessment to ensure the risk they are taking on is not too much to drive them into losses. So lets look at how they make money?
The Money Channels
Insurance Companies make money in two major ways;
- Net Premium Income
- Income from Investments.
Understanding Net Premium Income
Net premium income is the income the insurance company makes after it deducts claims against it in a particular year from the gross premium it receives. This is called Underwriting Profits.
Using the vehicle example above, the insurance company receives a premium of 5% (N250k) in exchange for insurance of N5million. So assuming it agrees to insure 5000 cars worth N5million each it basically has taken a risk of N25billion in exchange for a premium of N1.25billion. They also know that it is unlikely that all vehicles insured will make claims during the year.
This is part of their risk assessment. So if during the year, they pay claims of N500million then their underwriting profits is N750million. So the higher the claims during a financial year the lower the underwriting profits and vice n versa.
Understanding Income From Investments
Insurance companies also make money through investing. Remember they receive a lot of money from premiums during the year in exchange for a commitment to pay claims. These premiums are also interest free unlike bank deposits where banks pay some form of interest for the amount deposited with them.
Rather than allow the premiums lay idle, they also invest the premiums in several assets such as bonds, shares, treasury bills, private equity, real estate etc. The income derivable from these investments is an addition to the underwriting profits. Around the world insurance companies are often bigger than banks and next to Pension funds own billions of dollars in investments.
Warren Buffet for example, is able to finance a lot of its investments from premiums received from GEICO (a multibillion dollar insurance company it owns). Premiums are purely cash backed and free of interest making them one of the most liquid armory required for investing.
What about Profits?
If you noticed, I have not talked about other expenses. Insurance companies do run a huge operation and employ staffs. Therefore, profits are actually made after you deduct operating cost and taxes from Underwriting Profits and Investment Income you have a positive number.
Is it Possible to have an underwriting Loss
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Underwriting losses are very common in economies where competition is rife. In this instance, Insurance companies offer several layers of discounts to customers making their premium fall below what they typically would have received. For example, instead of 5% they can ask for 2.5%.
The aim here is similar to a turnover model. They believe if they collect a lot of premium at a cheap percentage to claims, even if the claims is more than gross premium and leads them to an underwriting loss they adequately make up for it through income from investments.
This is because the larger the premium (cash) the more investment you can make and the more investment income you get which covers for the underwriting loss. To them, as long as you make better than the year before, profits at the end of the year really doesn’t matter whether you make underwriting losses.
What I look out for as an Investor
As an investor, I try as much as possible to take my self away from what the markets think and stick to the basics. Insurance companies must make improved underwriting profits, increase investment income and post increased profitability. This is how they are judged. They must have a very good risk management system and balance the need for increased gross premium growth due to competition with the need to mitigate risk. You can forgo one for the other. But that is my take, others might think differently.
Updated in 2019: This story was previously published in 2013, and has been revamped for public education.
GEEP provides COVID-19 palliative microloans to 87,614 traders
The loans were in line with the government’s policies to reduce poverty and boost productivity.
The Federal Government of Nigeria, through the Government Enterprise and Empowerment Programme (GEEP), has provided a COVID-19 palliative relief loans to about 87,614 traders across twenty states. This was disclosed earlier today through a brief press statement that was made available via the government’s official Twitter handle.
According to the disclosure, the microloans have helped to reduce extreme poverty and encouraged productivity following the easing of the lockdown. Part of the statement said:
“In line with the vision of the Nigeria Government to curb poverty and boost productivity in different parts of Nigeria, GEEP has provided palliative microloans to 87,614 petty traders hit by COVID19 pandemic in 20 states of the country in the first phase of disbursement.
“These palliative microloans have helped petty traders revive their businesses, as the government eases lockdown measures nationwide. The second phase of the disbursement will target 412,386 petty traders across the country.”
In line with the vision of @NigeriaGov to curb poverty and boost productivity in different parts of Nigeria, @geep_ng has provided palliative microloans to 87,614 petty traders hit by #COVID19 pandemic in 20 states of the country in the first phase of disbursement.#GovtAtWorkNG
— Government of Nigeria (@NigeriaGov) August 10, 2020
The Federal Government also announced that the second phase of the loans would be disbursed to a 412,368 trader across the country in a bid to restart economic productivity as the government eases the economic lockdowns that have heavily affected the informal and formal sectors.
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The palliative schemes under the GEEP scheme include FarmerMoni, TraderMoni, and MarketMoni.
FG releases new details on MSMEs support scheme, budgets N200 billion for loans
The Bank of Industry will also join to coordinate the implementation of the scheme.
The Federal Government has released new details on the Micro Small and Medium Enterprises (MSMEs) support scheme being rolled out under the National Economic Sustainability Programme.
According to estimates provided, the sum of N50 billion will be used to provide payroll support, N200 billion for loans to artisans, and N10 billion support to private transport companies and workers
The government disclosed in a tweet on the official handle of the government, the support scheme will include a Guaranteed Off-take Scheme for priority products, and an MSMEs Survival Fund.
The Federal Govt is rolling out, under the NESP, support schemes for MSMEs nationwide, including a Guaranteed Offtake Scheme (guaranteeing off-take of priority products); and an MSMEs Survival Fund that will make payroll support available to save jobs & sustain local production. pic.twitter.com/yLkHQn6zy3
— Government of Nigeria (@NigeriaGov) August 10, 2020
Modalities for the take-off scheme
The first track is a Guaranteed Off-take Scheme which will ensure continued local production and safeguard 100,000 existing small businesses to save 300,000 jobs.
Priority products include processed foods, personal protective equipment, hand sanitizers, face-masks, face-shield, shoe-covers and pharmaceuticals.
The implementation committee chaired by Ambassador Mariam Katagum, Minister of the Federal Ministry of Industry Trade and Investment, will collaborate with private sector MSME associations to verify and screen applications from bidding MSMEs, define quantity and price of products required, and also get participants to join in the procurements.
SME survival fund
With a budget of N15 billion, the SME survival fund is expected to sustain 500,000 jobs in 50,000 SMEs.
Major sectors to benefit from the SME survival fund include hotels, restaurants, creative industries, road transport, tourism, private schools and export-related businesses.
The committee will identify eligible SMEs and screening and verification for this fund will be based on company registration, and tax registration. The implementation committee will approve disbursements through microfinance banks and fin-tech credit providers.
MSMEs that are unregistered will receive support to complete registration with the Corporate Affairs Commission (CAC), and all participants will be expected to make payments based on signed agreements.
The Bank of Industry will also join to coordinate the implementation of the scheme.
The scheme will last 3 months with Ambassador Mariam Katagum as Chairman, while Ibukun Awosika, Founder of The Chair Centre Limited (TCCL), and First Bank Nigeria will serve as the Vice Chairman.
More details are to be released subsequently from the Implementation Committee.
In July 2020, the Federal Government announced plans to roll out a N2.3 trillion stimulus package and survival fund for Micro Small and Medium Enterprises (MSMEs) to stay afloat amid the economic challenges imposed by the pandemic.
The Vice President Yemi Osinbajo, who also heads the Economic Sustainability Committee, announced it at the 2020 edition of the Micro MSMEs Awards held virtually in July.
To benefit from the scheme, MSMEs would have to go through a rigorous and painstaking verification process which will be based on certain criteria.
MSMEs that have between 10 to 50 staffs are qualified for this fund. The businesses must make their payroll available to the government for verification while applying for the fund. Once qualified, the MSMEs will be eligible to have their staff salary paid directly from the fund for 3 months.
How new CAMA 2020 will enhance SMEs’ ease of doing business
President Buhari recently assented to the Companies and Allied Matters Bill 2020.
The new Companies Allied Matters Act (CAMA) 2020 is expected to enhance the ease of doing business in Nigeria. The new document has repealed and replaced the extant CAMA 1990 with key amendments that would remove some bottlenecks from the old act.
The revised Act will make Nigeria’s business environment as competitive as its counterparts around the world.
Back story: Nairametrics had reported when President Muhammadu Buhari assented to the Companies and Allied Matters Bill 2020, which was recently passed by the National Assembly.
He explained that some innovative processes and procedures were included in the new document to ease the operations of companies. Some of them are the introduction of Statements of Compliance, which replaced “authorised share capital” with minimum share capital to reduce costs of incorporating companies; and providing for electronic filing, electronic share transfers, e-meetings as well as remote general meetings for private companies.
Provisions that aid ease of doing business:
* Provision of single-member/shareholder companies- Section 18 (2) of the new CAMA now makes it possible to establish a private company with only one member or shareholders.
* Restriction on multiple directorship in public companies- S.307(1) of the Act frowns at a person from being a director in more than five (5) public companies at a time.
* Appointment of Company Secretary now optional- Going forward, the appointment of company secretary for private company is optional. According to Section 330 (1) of the new CAMA, the appointment is only mandatory for public companies.
* A Director can’t hold the office of a Chairman, CEO – According to Section 265 (6), private firms are now restricted from appointing a director to hold the office of the Chairman and Chief Executive Officer.
* Procurement of Common seal not mandatory – Contrary to the previous document that insisted that every company must procure a Common Seal, CAMA 2020, according to Section 98, states that most jurisdictions around the world have expunged the requirement from their laws.
* Concept of Limited Liability Partnership and Limited Partnership – The new act combines the organisational flexibility and tax status of a partnership with the limited liability of members of a company.
* Virtual AGMs – New act made provision for virtual annual general meetings (AGM), provided that such meetings are conducted in accordance with the Articles of Association of the company. This is expected to facilitate participation from any location at minimal costs.
* SMEs exempted from appointing auditors – Small companies or any company with a single shareholder are no longer mandated to appoint auditors at the AGM to audit their financial records.
— Jumoke Oduwole (@joduwole) August 7, 2020
Why it matters:
Nigeria is largely dominated by Medium and Small-Scale Enterprises (MSMEs). Making registration easier for them brings in more businesses into the formal space. This also enhances tax revenue for the government.
The Companies and Allied Matters Act (CAMA) was promulgated in 1990 to regulate the formation and management of companies in Nigeria