As Nigeria sinks deeper into inflation on a virtually daily basis, economists are voicing palpable fears that the insurance industry may be primed to take a hit.
This is due to the fact that the industry thrives on stability and is highly susceptible to nuances such as inflation.
The impact of high inflation on insurance companies is multifaceted, posing significant challenges to their operations, profitability, and long-term sustainability.
As prices rise rapidly and unpredictably across various sectors of the economy, insurance companies face a host of interconnected challenges that require careful navigation and strategic adaptation.
Insurance Claims to rise
An industry watcher and economist, Dr. Simon Ibe, has observed that the industry is already being hounded by the threat of asset replacement value.
- Ibe said asset replacement value or replacement asset valuation is a way of auditing maintenance programs by weighing their annual value against that of a complete asset replacement.
- Citing an example, he said if an insurance company insures a car valued at N5 million in a given year, the insurance company may be faced with the liability of replacing that same car at a value of N7.5 million just after a year or two because of the extra cost owing to rapid inflation in Nigeria.
- He also said Nigeria’s galloping inflation exacerbates underwriting risks for insurance companies, as the value of insured assets and liabilities fluctuates in tandem with inflationary pressures.
- Ibe stated that insurers must accurately assess and price risks to ensure that premiums adequately reflect the increased replacement cost of insured assets and the heightened probability of claims payouts.
However, Ibe noted that rapidly changing economic conditions and inflation dynamics make it challenging for insurers to accurately forecast future losses and set appropriate premium rates, leading to pricing pressures and potential underpricing of risks.
- An Insurance lecturer at Ebonyi State University, Dr. Nelson Nkwo, on the other hand, stated that high inflation introduces volatility and uncertainty into insurance companies’ investment portfolios, as the real value of fixed-income securities and other investment instruments erodes over time.
- He said insurers typically hold a significant portion of their assets in fixed-income securities to match long-term liabilities, such as policyholder claims and benefit payments.
- However, according to Nkwo, high inflation diminishes the purchasing power of these investments, reducing their real returns and jeopardizing insurers’ ability to meet future obligations.
- “As a result, insurers may face challenges in maintaining the solvency and liquidity of their investment portfolios, necessitating adjustments to investment strategies and asset allocations,” he said.
Nkwo further noted that high inflation contributes to an increase in claims inflation, as the cost of goods and services necessary for claims settlement rises.
- “Insurers must adjust their claims reserves and loss reserves to account for higher claims costs and mitigate the impact on their loss ratios. However, accurately quantifying and provisioning for claims inflation can be challenging, particularly in long-tail lines of business such as liability insurance and workers’ compensation, where claims may be filed years after the occurrence of the insured event. Failure to adequately anticipate and provision for claims inflation can lead to adverse loss development, higher loss ratios, and reduced profitability for insurance companies,” he stated.
Professor of Actuaries (Retired), David Igboga, told Nairametrics that inflation may have implications for insurance companies’ regulatory compliance and capital adequacy requirements.
- He said, “Regulatory authorities often require insurers to maintain sufficient capital reserves to cover potential losses and ensure policyholder protection.
- But high inflation can erode the real value of insurers’ capital reserves, potentially compromising their ability to meet regulatory capital requirements.
- Insurers may need to recalibrate their capital management strategies, enhance risk management practices, or seek additional capital injections to maintain compliance with regulatory standards and safeguard their financial stability. In the case of Nigeria, I think such a scenario is long overdue.”
Also speaking, a certified accountant with 17 years of experience, John Aimurie, told Nairametrics that high inflation can impact consumer affordability and purchasing power, influencing demand dynamics for insurance products and services.
- According to Aimurie, “As household budgets come under pressure from rising living costs, individuals may prioritize essential expenses over discretionary purchases, including insurance coverage.
- Insurers may experience a decline in demand for certain insurance products, particularly those perceived as non-essential or discretionary, such as life insurance, annuities, and supplemental health insurance.
- Moreover, affordability concerns may prompt policyholders to seek lower-cost insurance alternatives or reduce coverage levels, further dampening insurers’ revenue growth and profitability prospects.”
He added that high inflation poses significant challenges to insurance companies, affecting their underwriting risks, investment portfolio performance, claims management practices, regulatory compliance, and consumer demand dynamics.
- He urged that insurers must proactively adapt to the evolving inflationary environment, implement robust risk management strategies, and enhance their financial resilience to scale through the complexities and uncertainties associated with high inflation effectively in Nigeria.
By addressing these challenges head-on and embracing innovative approaches to risk mitigation and value creation, Aimurie believes insurance companies can position themselves for long-term success and sustainability in an inflationary environment like Nigeria’s.
