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An underdeveloped market rich with potential

Interview - January 10, 2012
Mr. Chike Mokwunye, Group Managing Director of Royal Exchange Plc, discusses opportunities in the Nigerian insurance market

What is your assessment of the current economic and investment climate here in Nigeria?

I would say that the investment climate in the Nigerian economy is very conducive in terms of government policies. However, you may have some structural and institutional constraints that may affect it, like issues relating to infrastructure facilities. For instance, you find some roads that are in very poor conditions. Also, the energy sector is an issue as over time, the Government has not achieved its objectives and this has had serious effects on the production sector of the economy, especially the manufacturing sector. A lot of companies spend a significant proportion of their budget on providing alternative energy sources. If you look at it from that perspective, those would be the constraints. But otherwise, in terms of government policy, I think they have done a lot. Nigeria should actually be a preferred destination for investment, especially if those structural and institutional constraints are properly addressed. 

If you look at the current performance of insurance, it is quite abysmal – because it only accounts for 1% of GDP. If you look at the premiums being produced on the whole continent, Nigeria’s contribution is only 2.3%. How do you see the insurance market? Is it a viable market and is it growing?

When you compare it to development in other parts of the world, the insurance market in Nigeria in highly underdeveloped and small. Apart from low contribution to GDP, insurance penetration as a percentage of GDP, for 2010, non-life insurance is down 0.6% and that of life insurance is about 0.1%. If you compare it to South Africa, which is about 12.9%, you will appreciate the task insurance practitioners have to deepen the market. If you go back to how insurance started in Nigeria, this is a major factor. Unlike what happened in Europe where insurance was developed around a mass retail market, in Nigeria insurance came in just to take care of corporate entities and later on for high-net worth individuals. The first insurance company in Nigeria was Royal Exchange Assurance (my company) and it started operations in 1918 to cater for the economic interests of the British colonial companies. That meant that the mass market was not factored in. You will understand that you have to achieve the critical mass to drive the volume. All of our efforts right now in Nigeria are geared towards corporate entities, the retail market is left unexplored.

The economic meltdown also affected the insurance industry significantly. We said that most insurance businesses come from corporate entities, and banks were not lending. Since they were not lending, the fortunes of the corporate entities went down and this meant that insurable interests went down as well. Related to that is the issue of the meltdown truncating the middle class that was developing before then. In Nigeria, immediately after the consolidation in the banking sector, the banks developed products that they channeled towards the working class like loans for cars, houses and household appliances and they all needed to be insured. But with the meltdown, banks became very stringent when it came to giving out loans, which has adversely affected the insurance industry.

A lot of people lost their jobs, so unemployment was rife as well. With all this, you would expect that there would be issues. But if we go back to where we started from, I would say that the industry is doing well. It grew by 25% in 2008 and by 30% in 2009. In 2010 it is estimated to have grown at about 26%. If you consider that, you would say that the industry is doing well. However if you compare it to what the Government’s policy has envisaged (by 2012 premiums should reach N1 trillion and by 2020 it should be N60 trillion), that is a tall order given that in 2010 premium volumes are estimated at about N300 million. But again, it goes back to the issues I pointed out before with the manufacturing sector and infrastructure facilities being in a very bad state and the challenges in the energy sector as well.

I think that insurance companies should move away from the traditional products that are aimed at corporate clients. They should possibly go into the mass retail market, because it is very important, especially for life insurance. This is an area we have to deal with if we want to expand the volume in a sustainable way. 

Only 6 of the 16 compulsory insurance policies are being catered for in an efficient manner by insurance companies. Why do you think this is?

We, the insurers, have to be a bit more creative. If you look at those 16 policies, the fact is that the insurance companies would have to create products that would enable them to maximize the opportunities created by compulsory insurance. For instance, in Nigeria today I do not think there are products that protect people against inflation, but inflation is an endemic issue in Nigeria. Insurance companies have to be a bit more creative.

Agriculture represents 42% of GDP and employs 60 to 70% of the population indirectly and directly. Do you foresee an opportunity in agro-insurance which, as Fola Daniel, Commissioner of NAICOM explained to us, could be a great vehicle for accessing the market to penetrate with further products?

I would even take it from a wider perspective. It goes back to where I started. I said that the mass market was never factored in, and that is still an issue. If you look at the structure of the Nigerian economy, you will find that the informal sector is very important. Agriculture contributes about 40% of GDP and the informal sector provides about 70% of job opportunities in the country. This means that if we have to drive the volume, we would have to design products that are required by the informal sector. That includes agriculture and micro-insurance. We have to realize that there are peculiarities in that market compared to the corporate entities that we are used to insuring. For instance, you will probably find yourself dealing with customers who do not have bank accounts and are predominantly illiterate, so they will not be able to read or understand policy documents. A lot of them will not be willing to come to your office. They may be located in villages and far from your offices. If you look at life insurance, the cost of the medical examination may be higher than the sum assured. So we have to be creative and find a way to deal with that sector.

This means that we have to design products that cater for their needs in the way they want it and where they want it. That brings another issue into play – the issue of distribution channels. Channels are very important for these people. They may not want to come, so technology will become very important when it comes to distribution channels. If you look at countries like Kenya where they have been able to use mobile phones to do a lot in the finance sector, they are able to reach more people without bricks and mortar. Royal Exchange is doing that right now with third party motor insurance policies – people do not need to come here, they can do it over the phone.

Another peculiarity is that because they are illiterate and they do not understand what your documents are saying and they are not used to insurance, this is when trust is an issue. We would need to gain their trust. In Africa, the extended family system provides some form of insurance. We have to create a reason to make them understand that they have to move away from that traditional perspective to viewing insurance the modern way. Trust is very important.

I seriously think that with insurance products directed towards the informal sector, we can change the industry and we can increase the volume that will drive growth in the industry.

Royal Exchange has changed from being an insurance-centric company to being more of a financial services provider. There are five subsidiaries now in the group. Could you explain to us the growth and changing dynamics of the company?

The history of Royal Exchange is actually the history of Insurance in Nigeria. Most of the Managing Directors of different insurance companies in Nigeria are alumni of Royal Exchange. Royal Exchange has contributed the most to the development of the industry in Nigeria. But the Board felt that we could create some kind of synergy between insurance and other financial services. If you look at our subsidiaries, they are all in the financial service industry. I gave you my view on insuring the informal sector before, and the micro-finance subsidiary was established to cater for the credit needs of that segment and their insurance needs would be taken care of by the insurance subsidiaries. We have micro-insurance products that are linked with our micro-finance bank. If you look at our other subsidiary, Royal Exchange Finance and Investment Limited, it is supposed to take care of the middle class people and the medium-scale businesses. They are linked to insurance as well. We have Royal Exchange Healthcare, which is purely for health insurance, and the customers of our other subsidiaries provide a database for its activities.

The idea is that Royal Exchange should be a one-stop-shop financial services provider that will take care of all your needs. If you want a car, we will lease it to you. If you want to finance your business, you can. If you want to insure your car, your house or business or your life, you can come to us. You can also go to the micro-finance bank. The Board and management were very careful when establishing the subsidiaries. Each one is interrelated and each provides business opportunities for the others. 

There is a lot of trust in Royal Exchange given your heritage and history. You paid the biggest insurance settlement ever in 2009. How important for you is ensuring that there is trust from a local market perspective and an investor perspective?

The issue of trust is very important for the local market. If you go into a business relationship with somebody, you have to be sure that the person is not going to take advantage of you. So in the case of investors, they can have a look into our history and our pedigree. For a company to do business consistently for 90 years is no easy task. We paid the highest claim in the history of insurance in the West African sub-region and this shows that we have the capacity to pay claims; that is what insurance is all about. Trust and confidence are very necessary in insurance because you are selling a service which is not tangible. The buyers just have to believe in you! We are into oil and gas – for some oil companies we are the leading insurers. We are into every sector of insurance. I can assure you that it is because of our ability to meet the needs of our customers by delivering our promises consistently over these years that enabled Royal Exchange build trust and gain the confidence of the customers. 

There are companies in Nigeria today that have insured with Royal Exchange for over 80 years. I met a Managing Director of a company and he told me that his grandfather who started the company was Lebanese, and then he and his father worked for the company as well. He confessed that he couldn’t find a single reason why to stop insuring with Royal Exchange. The relationship between that company and us is such that we do not go to their company for business – any insurable risk gets sent to us. We have that goodwill. Before the crisis in the textile industry, we dealt with a lot of the factories. They had this confidence and there was goodwill among all. There is no major company in Nigeria that we do not have in our books. They have not stayed with us for such a long time simply because we are the oldest – they have stayed with us because we are able to deliver what they want and they have trust in us. If they did not, they would have left already.

What role do you think US companies could play in Royal Exchange?

We have a lot of hidden value because of our history. We have a lot of assets in terms of properties. A lot of the assets are located in prime areas. We have a lot of assets in Lagos and Abuja for example. We could partner with any investor from the US to develop some of those assets. We are thinking about turning one of our properties into a first-class hospital, providing diagnostic and treatment facilities. We know that the issue of medical facilities is a huge problem, so we could partner with companies in the US that may be interested in bringing those facilities to Nigeria. It is beneficial for them because they can earn foreign exchange from it, and it is beneficial for Nigerians because they would receive services that may be cheaper than what they would find abroad, aside from the fact that they would not be faced with the problem of looking for foreign exchange for travel. The cost of airfares has been removed already, so that makes it less expensive. 

We can also think in terms of skills. If you look at the oil and gas sector and the Government’s policy in terms of the Content Development Act, this states that Nigerian insurance companies should retain a minimum of 70% of insured risk locally. It also states that Nigerian registered insurance brokers should conduct such transactions and if you need to cede to a foreign company, it should only be after the local capacity has been exhausted. If you are sending anything abroad to be insured, it must be approved by NAICOM.  That is a very important strategic policy because it will deepen the industry.

But the first challenge for us is to increase our retention capacity locally, followed by the skills required for that segment of the business. We can partner with American companies to develop skills sets. There are many ways we can come together to achieve the objectives.  

The Company aims to be a world-class company by 2012. Would you say you are nearly there or are you there already?

I would not say we are there already; we have a lot more to do. Like I said in the beginning, there have been a lot of challenges. For instance, we did not anticipate the meltdown in the capital markets. Also many insurance companies mainly invest their premiums in the capital market, real estate or the money market, but after the meltdown all insurance companies were affected. Some insurance companies collapsed overseas, and if it were not for government support, I think AIG would have collapsed as well. We are on the right track because the vision is there and we have laid the foundations so that as soon as the company settles down, things will begin to happen.