Insurance industry’s low premium to policy ratios signals volatility
Most insurers in Africa’s largest economy are not operating at an efficient capacity level to a given size of capital as their premium to surplus ratio remains low.
Premium to surplus ratio is designed to measure the ability of the insurer to absorb above-average losses and the insurer’s financial strength. The ratio is computed by dividing net premiums written by surplus.
An insurance company’s surplus is the amount by which assets exceed liabilities. The ratio is computed by dividing net premiums written by surplus.
In the insurance parlance, insurers with stable profits are better able to sustain a higher ratio of premiums to shareholders’ surplus without undue risk than insurers with losses or unstable profits.
On the other hand, the more volatile the business of an insurer (e.g. long-tail, liability business), the lower ratio the insurer is likely to maintain.
A ratio below 50 is considered low.
According to the 2016 financial statement of 43 insurance companies posted on the website of the National Insurance Commission (NAICOM), Universal Insurance Plc has a premium to policy ratio of 5 percent, Unity Kapital Assurance Plc; (14 percent), Capital Express Assurance Limited; (14 percent), Guinea Insurance Plc; (22 percent), NSIA; (28 percent), KBL Assurance Limited; (33 percent); Zenith General General Co. Limited, (36 percent).
Goldlink Insurance Plc recorded a nil surplus to policy ratio as its recurring losses resulted in negative accumulated losses of N9.29 billion as at December 15, hence resulting in a negative shareholders’ fund of N4.26 billion.
International Energy Insurance (IEI) premium to surplus ratio of -141 percent largely due to the insurer’s negative retained earnings of N13.51 billion as at December 2015, resulted in a negative total equity, which is eroding shareholder’s value, raising concerns about the insurer’s going concerns.
The company inaugurated an interim board of directors last year after internal dispute between owners nearly crippled its business.
“A very low ratio could mean that shareholders’ fund are lying fallow. It also suggests these firms are not utilizing owners’ resources in underwriting new policies,” said an actuarial scientist who doesn’t want his name mentioned.
“Maybe the capital is not liquid enough and management is not willing to risk shareholders’ money,” said the actuarial scientist.
However, some insurers are more aggressive in terms of using available capital to leverage premium income as evidenced by a high premium to surplus ratio.
African Alliance Plc’s ratio is 5.48 times shareholders fund despite negative retained earnings of N22.15 billion.
“African Alliance’s negative accumulated reserves are a downside risk to business growth, in our view,” said analysts at Chapel Hill Denham Limited in their latest report on the insurance industry.
Aiico Insurance Plc has a ratio of (307 percent); Mutual Benefit Assurance Plc, (146 percent); Royal Exchange Insurance Plc, (128 percent), NEM Insurance Plc; 115 percent and Leadway Assurance (106 percent).
LeadWay Assurance, the largest insurer by market share, has utilized the resources of owners in generating higher profits as return on average equity (ROAE) spiked amid volatile and tough operating environment.
For the year ended December 2016, Leadway’s ROAE increased to 39.30 percent from 14.40 percent as at December 2015.
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