Insurance companies may reject new MPR regime

Governor of the CBN, Chukwuma Soludo, had penultimate week, increased the MPR, due to fears that the country’s inflation rate which stood at 4.8 in June had gone up to 6.5 in November and may peak at 7.5 by December 2007.

Justus Uranta, managing director of Niger Insurance Plc, who spoke on the development to BusinessDay at the weekend, said the insurance market may react negatively to the new MPR regime and likely increase in inflation rate.

He argued that this was because the insured hardly react proportionately to changes resulting from hike in monetary policy rate and inflationary trend as the insured value usually remain static under such circumstances.

Another predicament of the underwriters is that during inflation periods, existing insurances suffer underinsurance and as such, insurers are usually happier with lower inflation.

He explained that for new policies and items, underwriters may not actually get the real value if they are not properly advised and that for market value purposes, new policies should take into consideration the real value of items to be insured.

"For instance, if a car that was sold for N3.5 million now rises to N4.5 million due to inflation, it is only appropriate that insurance companies insure such new policies based on the new value of such a car.

"But if such a car had been insured before its price goes up, then the insurer is going to suffer underinsurance since the premium payable on the insured item was determined earlier, based on its old price," he explained.

Uranta further disclosed that premiums are however reviewed not based on inflationary trend but when the insurer feels it is imperative to do so, having considered market pressure and other business exigencies.

This view was corroborated by Rowland Okoro, managing director of Risk Shield, who submitted that the development may not have very noticeable effects on the running of insurance businesses and premiums payable on policies as underwriters normally review policies and their rates on a yearly basis.

Also speaking on the issue, David Sobanjo, managing director of Aiico Insurance Plc, told BusinessDay that the effect of CBN’s move on insurance cannot be determined until the guidelines of the new MPR are clearly spelt out. He therefore advised that the best approach was to wait and see.