COMPULSORY INSURANCE POLICY: ANOTHER RITUAL OR TURNING POINT?

•Daniel
'If these compulsory insurance policies are properly sold in the society, well publicised, we would get a lot more money that would make us the envy of the banking sector, and we will be in the trillion naira income group.

We have the capacity ….
If we can design micro insurance that is environmental-friendly, meaningful, relevant and affordable for different people, we will get a lot more money and insurance will take its rightful place'.

With the above statement, the Director General of the National Insurance Commission (NAICOM), Mr. Fola Daniel, painted a colourful outlook of a new dawn to be heralded by compulsory insurance regime expected to kick off tomorrow, March 1, 2011.

Already enlightenment across the six geo-political zones of the country had been concluded. The initiative is part of the renewed effort of the regulator to get the sector out of the woods. Most Nigerians are yet to understand the need to get insured in spite of the fact that extant laws stipulate compulsory insurance covers under certain conditions. Take Section 64 of the Insurance Act 2003, for instance. It states: 'no person shall cause to be constructed any building of more than two floors without insuring with a registered insurer his liability in respect of construction risks caused by his negligence or the negligence of his servants, agents or consultants which may result in bodily injury or loss of life to or damage to property of any workman on the site or of any member of the public.'

The law further stipulates that any person who contravenes this section commits an offence, and on conviction shall be liable to a fine of N250, 000 or imprisonment for three years or both.

Section 65 of the Act also states that every public building shall be insured with a registered insurer against the hazards of collapse, fire, earthquake, storm and flood. Public building in this section includes a tenement house, hostel, a building occupied by a tenant, lodger or licensee and any building to which members of the public have ingress and aggress for the purpose of obtaining educational or medical service, or for the purpose of recreation or transaction of business.

In spite of the statutory provisions regarding these insurance policies and many others, insurance experts say that compliance level is below five per cent. Perhaps, it is this apparent apathy towards insurance schemes that compelled NAICOM to inaugurate a programme tagged: 'The Nigeria insurance market development and Restructuring Initiative (MDRI)'. The MDRI is specifically designed to create public awareness on the six compulsory insurance products. These are insurance covers for motor vehicles, buildings under construction, public structures, employer's liability and medical liability, as well as the Group Life for all Employers Insurance.

The nation's Commissioner for Insurance says that the programme is aimed at sensitising the public to the existence of the compulsory insurance products. He explained that some legal provisions back up the compulsory insurance products. 'Between 1987 and 2004, 16 insurance products were directly or indirectly made compulsory in Nigeria, but six of them are very prominent and capable of generating about 55 per cent of the insurance premium income. However, due to the fact that the products were not fully developed, no action was taken for their enforcement', Daniel said.

According to him, current NAICOM management decided to initiate some measures to enforce compliance with relevant aspects of insurance laws, while transforming the industry and addressing the concerns of the major stakeholders.

He said the launch of MDRI project was to facilitate the reduction of the insurance gaps from 95 per cent to 30 per cent. According to him, it is also aimed at protecting policy holders and facilitating growth that will make Nigeria one of the top 15 countries in the world with the highest premium income by 2020.

'It is based on the belief that if the legal provisions for compulsory insurance are rigorously enforced, we will have a focused insurance marketing system. And if the regulation and supervision of the insurance industry is made more effective and operator-friendly, the ideals implicit in relevant Financial System Strategy 2020 (FSS 2020) initiatives and the Federal Government's Seven-Point agenda will be realised,'' he says.

This, probably, is the second chance for the industry to grow after the recapitalization and consolidation of the industry in 2007. Recapitalization and consolidation of the industry presented tremendous growth opportunity. The capital raised during the exercise was expected to spur growth of the industry. And analysts expressed hope that the exercise would mark a turning point in the quest to bring the industry at par with the situation in other climes.

At the capital market, the share price of insurance equities recorded tremendous improvement as investors swooped on the stocks on the expectation that what happened in banking sub-sector was about to replicate itself. It was not surprising that activities in the insurance sub-sector consistently boosted market turnover in 2008. Consistently on bid by investors, insurance equities remained top on activity chart as major volume driver on the Nigerian Stock Exchange (NSE).

But the anticipated growth snapped on the back of global financial crisis in 2008 that crippled economic activities, especially in the financial sector of the economy. The money market and equities market were worse hit resulting in the intervention of the Central Bank of Nigeria(CBN).

Now with the flag-off of the six compulsory insurance products, the question many observers ask whether the new development will really mark a turning point in the industry or eventually amount to another ritual.

To realize the MDRI objectives, the Mr. Daniel said existing laws on compulsory insurance would be enforced and insurance companies effectively supervised. 'Following this programme of sensitisation and awareness creation, the commission shall among others invoke the appropriate sanctions against any individual or organisation that fails to comply with laws on compulsory insurance,' he said.

Daniel also said that the commission would sanction any insurance operator that failed or delayed in payment of claims. The sanctions, he said, include prosecution of the management and board of directors of erring companies and revocation of operating licences. He said that relevance, impact, performance and public opinion of insurance in the country had improved following the restructuring of the industry.

Hopeful that the policy would net over N1 trillion for the industry annually, Daniel said the aim of the compulsory policies was to achieve an insurance industry capable of significant contribution to the nation's Gross Domestic Product (GDP) and the enhancement of confidence in the use of insurance as a risk protection mechanism. Speaking on the new policy, the Managing Director of Niger Insurance Plc, Mr. Justus Uranta, said that it would certainly engender growth if backed by proper legislation, implementation and adequate public awareness.

'In terms of whether it will engender growth, yes, that is the intention. But first and foremost, it will boost our income in the industry. But the problem I foresee is implementation', Uranta said.

Continuing, he said 'Implementation is always a problem in Nigeria. Although the government, through the regulatory authorities, has been able to package compulsory policy, but they still need to go further, perhaps, with the help of law enforcement agents or through an act passed by the National Assembly to give it some teeth.

'So we need this kind of thing because in Nigeria, even things that are legislated are hardly taken seriously, let alone the one that has no legal backing. So it requires some level of legal backing.

'Besides, it also requires serious awareness among the target users of the product. So these are the areas I feel government assistance is needed. The insurance industry is something that has been created to add value to our operations. If we have to ensure that the insuring public embrace it, it requires some legal backing for it to be effective.

'In terms of whether it will rub off positively on equity prices of insurance companies at the Exchange, yes but that can only happen in the long run. In the short term, it does not seem it will do so. But when the public begin to appreciate the impact on income of insurance entities, perhaps in the midterm or long run it will begin to make required impact on share prices of insurance equities on the Exchange.

'In other words, he said that if the new policies boost earnings and net income in the industry, the companies will be in better position to pay good dividends and bonuses. With increased returns on investment, certainly the stocks will experience tremendous improvement in terms of capital appreciation', Uranta noted.

Reminded that similar compulsory policies had been promoted in the past without significant impact, he differed by insisting that the effect in terms of adding value was not quite appreciable. According to him, operators are positioning to tap the growth potentials of the new policy. He disclosed that his company is particularly restructuring to harness growth potentials in some of the recent developments in the industry by creating and developing new products targeted at boosting earnings and returns to all stakeholders. This way, he believed, the policy will impact positively on the bottomline.

'Certainly, there is no way the policy will not impact positively on our bottomline. We will collaborate with law enforcement agents to ensure that people take these policies. I want to remind you that even motoring that has been traditionally compulsory, people find a way to evade it. 'So, this one may not be exception. But I want to believe that if this one has legal backing, and the law enforcement agencies supporting us, there is no way it will not impact positively on our bottomline in terms of increase in our premium income', Uranta concluded.

Also speaking, the Managing Director, Goldlink Insuarnce Plc, Mr. Femi Okunniyi, disclosed that the company had set up in-house committee to develop products in response to the enforcement of compulsory insurance policy. We have set up committee working on it. It is something that we have advocated and welcome. 'Definitely, we are prepared to tap into the development to grow our premium income. The committee will drive the project of product development so that the desired goals will be achieved', Okunniyi told Daily Sun.

He said that setting up inhouse committee was their peculiar initiative and response to achieve more growth and returns to all stakeholders, stressing that there is every possibility that the policy would impact on share prices. 'Share price in the capital market is being driven by the forces of demand and supply. So I cannot say precisely whether it can impact on prices of insurance equities at the stock exchange.

'But one thing I know for sure is that once the premium income improves, definitely that will impact on the quarterly financial report. This will also give hope to the shareholder. There is every possibility therefore that it may impact on share prices but one cannot say as a matter of certainty.

'You know that people respond to buy share depending on what they hear or see. Depending on the purpose for which they buy the stock. Some buy to earn dividend, some for capital appreciation. Specifically our stock has been active as there have always been activities on the stock, which goes to say that our stock is one of the attractive stocks in the market', Okunniyi stated.

Capital market experts said that the development will increase the prospects in that industry. David Adonri of Lambeth Securities and Trust Limited described the policy as the tonic needed to turn around the industry. According to him, the compulsory policies are a new lease of life for the industry but if the development fails to rub off on the industry it will be too bad for the equities.

'It is positive development for our society. Because, all those compulsory policies, if they are actually taken, it is going to mitigate a lot of losses in the society. So I support the policy wholeheartedly', Adonri said.

On how it can impact on insurance stocks, he said that when the companies get a lot of clients who will be paying premium, that will increase the earnings of insurance companies. He reasoned that when earnings are increased, the companies will make higher distributions to their shareholders.

'And when shareholders get higher dividend, the demand for the stocks will increase, and that will in turn push up the share prices. So it is a win – win situation. It is very positive for insurance companies and very positive for society at large. If you look at the compulsory policies they are talking about, these are wonderful policies', said the senior dealing member of the Stock Exchange.

While noting that in the past, some compulsory policies had been initiated without significant impact, Adonri insisted that the current effort to enforce the policies will likely be a tonic that can turn around fortunes of the sector. He pointed out that what happened to the insurance industry in the recent past also affected other sectors of the finance industry. Because of the meltdown which diminished the fortunes of financial stocks in the market, both banks, insurance and others.

Adedotun Sulaiman, Chairman, Cornerstone Insurance Plc, said that the development was welcome as it would help boost insurance market development and contribution to GDP. On what his company would benefit from the development; he said it was trying to bring innovations that would encourage more people to take insurance. He observed that a lot of work needed to be done in terms of product development, channel distribution, and market education. This, according to him, was because many people did not know about insurance and that there was the need to educate them.

However, he emphasized the need to sell insurance based on value proposition, which is the policy offering rather than selling insurance in terms of compulsion.

His words: 'If you observe, most of the products that are selling insurance business in Nigeria today are sold on the basis of compulsion because the law says you must insure and you don't want to be arrested by the police. What happens is that when you buy insurance on the basis of compulsion, you tend to buy the minimum product that you can contend with, but if insurance is sold on the basis of value, it would help greatly.'

The Managing Director Crystal Life Assurance Limited, Mrs. Oluseyi Ifaturoti, also noted that the policy would bring a major turnaround in the fortunes of the insurance industry in the projection to make N1 trillion premium by 2012 and N6 trillion by 2020. She noted that between 1987 and 2004, 16 insurance products were directly or indirectly made compulsory in Nigeria, out of which six were very prominent and capable of generating about 55 per cent of industry premium income.

She disclosed that the products had not been developed as there had not been proper action plan for enforcement or service delivery at the providers end. It is against this background that operators and observers urge for strict implementation of the policy using law enforcement agents if the objective of the policy is to be actualized.

For them, regulators, operators and law enforcement agents must join forces and work towards a common goal of stamping out fake insurance practitioners who have made few insurance conscious individuals disenchanted with taking up policies.