Pensions, Social Security, Workmen’s Compensation, cargo insurance and bonds were once the exclusive turf of insurance underwriting. These are now history as the new normal is the insurance of things by subterfuge and undertaking. Underwriting no longer requires a certified professional but the deployment of artificial intelligence known for short as AI. Previously complex underwriting calculations are now made easier through AI. Even the less complex risks have calculators deployed to insurers’ websites for the convenience of buyers as well as proof of transparency in the premium equation.
For the advanced markets, AI and emerging insurance technology or insurtech are seen as gateways for convenience mass selling, cross-selling and the canvass for mass appeal for the technologically-driven world’s markets. And for the less developed markets, it has become the platform for the underserved, unreached and uninsured. In addition, it has also become the window through which many non-professionals wish to enter the hunt for premium, albeit through the backdoor.
Insurance comprises first underwriting the risk, then the investment of the premiums and the paying of claims. This presupposes that the practitioner first sees insurance as asset protection and assessing risk and what is insurable. This has changed! Those challenging the status quo see the premium first and then the risk after a loss crystallizes. Thus, a situation is set where over-regulation may come in as an arbiter for the professionals, who are fast losing grounds, and the army of businesses deploying technology to cultivate and win the mass market.
The Game Changes by leaps and bounds
Although insurance remains relevant since the 2004 Pensions Reform Act that altered the exclusive domicile of pensions in the insurance market, the loss of huge investable funds and accruable revenue therefrom has been a drain on its growing capabilities. The math is simple enough – just add more than N14 trillion in retirement savings and the loss to insurance is clearer. The social security fund, NSITF transformed itself through an enactment that replaced Workmen’s Compensation previously in the insurance domain. It is now known as Employee Compensation Scheme managing over 100,000 employers’ payments into the scheme. Though framed in the mould of insurance service, the establishment does not report to the insurance industry regulator, the National Insurance Commission (NAICOM)
Beyond the loss of market by insurance through altered legislations and the underreported amorphous regulatory controls, the most worrisome dealings is the deliberate balkanization of insurance offerings and the consequent loss of actual revenue. If not curtailed and the risks of the surge properly assessed, more reputational damage may confront the insurance industry.
Import ‘Form M’ filing, insurance bonds and bankers’ conflict of interest
Take, for instance, the opening of Form M, a banking and customs requirement for the importation of goods into Nigeria. The bankers have captured this formal procedure for their own benefit. The importer is forced to insure the imports through a bank-owned insurance company or where it has a revenue-earning interest. The brokers are thereby eliminated and insurers are short-changed. In the long run, after the customer has been forced to take insurance from a predetermined underwriter and claims occur, the whole industry’s reputation takes a hit when a claim is perhaps repudiated.
A cardinal principle of insurance is choice. After taking a decision to transfer risk to insurance, the buyer must also choose which insurance company he prefers when all the facts of the matter have been placed before him. The consumer should not be goaded to make a preference that runs counter to his business interests. The Form M opening is just one of such many cases, where individuals, enterprises and groups use their process points unfairly and, thus creating conflicts of interest that pass through regulatory oversight. In most cases, these imports are not funded through any form of bank loans but simply on account of process compliance for imports, the banks are forced to play an unwritten condition. This is undoubtedly an antitrust situation which may be unknown to CBN.
Various types of risk bonds are issued both by banks and insurers. However, the underwriting of contract surety bonds is done by the insurance market. In terms of revenue, banks rake in more from their financing outlay while transferring the risks for disproportionate premiums paid to underwriters under a deal brokered by bankers themselves. Performance bonds, bids and payments bonds rank among the most popular in the contracting business. In the event of failure, the insurers pay the claims to banks for the failure of a deal they brokered in addition to pocketing part of the premium. Perhaps, I shall devote more space in future to explain bond parties and how this has been taken over by the banking system.
Professional Indemnity (PI) is a requirement for professionals. It indemnifies those who suffer from professional negligence. For instance, if institutions were effective, the builders and other professionals who take on contracts for the planning, costing and erection of buildings must have an indemnity policy such that in the event of an accident, compensations will be paid. That this policy is not demanded to prequalify these professionals despite the frequent building collapse and loss of lives shows the weakness of the governance structure of these institutions. The insurance industry should not wait for a day to come when professional indemnity will be tucked away, like others, as amended legislation into one Act and shipped away from the market.
The medical profession’s mandatory professional indemnity which is enforced indirectly by the National Health Insurance Authority (NHIA) requires that healthcare workers get their PI from only approved insurers, thereby flouting again a major principle of choice-making. This is a situation which should have raised red flags and allowed NAICOM to trigger an inter-regulatory investigation to put a stop to it. The same with the already cited case of Form M opening import procedure. The CBN would have intervened to stop the bank-induced purchase of cargo insurance from preferred insurers. It would have been necessary for the CBN to investigate how this anti-trust transaction is being perpetrated.
The weakening of insurance through a deliberate capture of its role in the economy without at the same time fulfilling the task of insurance is partly to blame for weak infrastructures and efficient funding of growth structures of the economy which is the SMEs. Without low-interest loans accessible to SMEs, the economy will continue to stutter. And while pensions may have large swathes of cash, it may not have the knowledge base to fund these growth sectors because the portfolio mix is haemorrhaging via the different independent establishments and regulators performing supposedly insurance functions. The aggregation of risks from various financial and insurance-linked instruments, which is fundamental to deciding risk vulnerabilities and weighting investment appetite is unavailable to all parties. Neither to insurers, banks, pensions nor any similar organization dealing with these issues.
While the main purpose of this article is to highlight the various anti-insurance schemes in Nigeria’s economy and point to fair reporting of these earnings by the various entities under the heading, “insurance commissions”, it is also intended to alert all stakeholders to the dangers of further weakening of insurance growth. The investor interest should not only focus on making large profits over the short term build on building a revenue base over the long term. The insurance regulator should also do more to interface with other regulators to curb further unfair practices.