Let’s say 10 million Nigerians, both from the formal and informal sectors, are incentivized to save N10,000 monthly; this would give the economy N100 billion each month and N1.2 trillion in a year. In five years which (in economic terms is a medium-term) this comes to N6trillion. Pretty simple, isn’t it? If the government says to savers in the formal sector, for every minimum N10,000 life insurance savings, you get a 5% tax cut on your yearly income tax. For savers in the informal sector, the government matches similar savings with 10% of their monthly savings paid directly to the saver’s retirement savings account.
In this scenario, these incentives draw a sizable population of the informal sector into the retirement scheme while also boosting the numbers on the insurance savings plan. Not just boosting the numbers but energizing an army of savers that would draw in others the moment it works. The most significant beneficiary of this incentivized savings is government itself, the banking system and the entire financial system. Indeed the economy will reboot faster and create more job opportunities within the first five years of this medium-term national savings plan. Thereafter when trust in the system is established, individuals can confidently take up to 10-year plans or 15 years as the case may be. Trust is the key.
The savings culture has a long time ago been eroded by policy inconsistencies of government. If it wishes to restore confidence in the system, the first step is to give incentives through tax cuts or direct counterpart monetary payments to those who will commit to it. And the 10 million target population is certainly not difficult.
The beauty of saving the insurance way is that it enforces discipline and prevents the saver from taking a little out of his account every now and then. And the most important advantage is the life insurance it provides while you are on it. So, your saving has multiple benefits interest on savings, guaranteed sum assured at maturity, life assurance and opportunity to contribute towards national development while profiting from your participation.
The Critical Currency
The highest currency to achieving this target is the belief system. The value system has to be restored through a governance structure prioritising accountability, transparency and the rule of law. This then is the basis of a productive economy because long-term investable funds would be available for the government and investors at a more profitable lending rate. Incidentally, insurance thrives on the basis of trust. The Nigerian government must then begin to build this most important currency which is actually faith-based. If there is integrity and government is conducted with the utmost respect to citizens and equality to the law, then we can trust the various systems that drive the nation’s activities.
Insurance is a trust instrument and thrives when all other components of equity, social justice and transparency become the mantra of leadership at all levels. Based on the already stated foundation for insurance, we all can save up and trust the system to deliver, in due course, the things that have been entrusted to it. In addition to that, endowments and bequeathals can fill up planning spaces that are lacking today, thereby saving families from poor planning for children’s education, health and asset protection.
Why a national savings policy and incentives?
Fundamentally, it is important to save the insurance way in spite of the inflationary pressures on savings because only insurance has the capacity to pool long-term funds. The national policy perspective to it is that government can guarantee its success by backing the instruments that insurers roll out.
The late 19900s (between 1997 to 2001) shows how difficult insurance savings products could thrive in a low-interest environment. This was for mature markets in Europe. For instance, to prevent absolute failure with increasing insolvency recorded during the period, the Japanese government intervened to guarantee the liabilities of the life insurance market. The Japanese government could act in this way as the ultimate guarantor of the life insurance market in order to shore up confidence in the insurance instruments. If there is any sector where subsidy is most needed, it should be the insurance life products aside from agriculture. Insurance offers the cheapest and most versatile broad-based tool for planning in any given economy. It lets government concentrate on macro-economic policies, infrastructure development and maintenance.
A need for caution and increased disclosure
While it is good news that insurers still find prospects for their life insurance products among the disillusioned population, there is a need for regulatory oversight. It is good that a significant number of Nigerians want to invest their savings in interest-yielding instruments, however, it is incumbent on the sellers to advise carefully on the likely impact of macro-economic variables like inflation on the expected sum insured which, in some cases has a tenure of 5 years or more.
Insurers have come to terms with a low-interest environment, which requires them to offer well-designed interest rate guarantees that is as competitive as it is realistic. Making promises that are not supported by the current economic variables will further corrode the weak reputation of the insurance industry. For instance, there was a report crediting an insurance executive with a statement that promises N1 million life cover for a savings plan of N5,000 minimum monthly contribution with “two years tenure and competitive annual interest rate”!
The conservative nature of insurance makes this offer awesome but at the same defies the prevalent yield in the investment environment as well as the federal rate.
To combat the obvious austerity measures and the high cost of living, companies might make a difference by filling the gaps that the cuts to social welfare systems leave behind. With simple and low-cost health products offering hospital access in worst-case situations or simple-term life products offering protection for dependent family members, the insurance industry can make an essential contribution to address the present and future challenges that our country is already facing today.