Insurance Industry: Survive, Thrive By ADEKUNLE ABDULRAZAQ OYINLOYE, MD/CEO, THE INFRASTRUCTURE BANK PLC, Presented at the 2018 Insurance Brokers Conference & Exhibitions

Introduction

On behalf of the Board and Management of The Infrastructure Bank Plc, I thank the Governing Board and the Nigerian Council of Registered Insurance Brokers (the “Council” or “NCRIB”) for inviting me to speak at this year’s Conference& Exhibitions, on the theme paper: “Insurance Industry: Survive, Thrive”. It is indeed delightful to be accorded the honour to lend to the discourse on a sector that has the potential to serve as a catalyst and enabler for unlocking the vast flow of capital and private investmentsthat are sorely needed in practically all facets of the nation’s economy. It is an emerging reality in financial services that the insurance sector is ideally suited to serve as the nexus between capital providers (whether debt, equity or quasi-equity) – on the one hand and the broad range of real asset managers which cut across the real and service sectors – on the other hand.  This is because the investment decision-making process is primarily concerned with identifying, appraising, mitigating and pricing risks associated with such investments; for which the Insurance Sector is best-suited as the Default Manager ofRisks, duly equipped with the tools and techniques to spread and diversify risk portfolios.  As such, it is both my pleasure and also in my enlightened self-interest to partake in this discourse aimed at nurturing and supporting the insurance industry to THRIVE and EVOLVE alongside the financial services sector, which would be vital for instituting necessary protections for capital investments across various sectors of our national economy.

Overview of Insurance in Nigeria

Nigeria’s insurance industry (the “Industry”) was projected to grow at a cumulative average growth rate of 7.5 percent between years 2017 and 2018, according to a recent report by Fast Market Research – an American market research firm – despite the economic slowdown.  This growth trajectory portends several positives namely:  relative stability of financial services, favorability of fiscal policy frameworks and long-term sustainability of the sector.

However, it must be highlighted that despite the growth of the Industry in the country, there still remains huge untapped potential for the sector, evidenced by indices that reveal that large swathes of the Nigerian population remain unbanked; the absence of a national vital registration database continues to constrain efforts to expand the base of the formal sector; tax revenues though rising, are still rife with leakages as many groups of potential tax-payers (such as motorists, leaseholders and employees)are reportedly unlicensed, undocumented or otherwise invisible.  It is thus unsurprising that just about 1 percent of the total Nigerian adult population is insured according to the National Insurance Commission (NAICOM). Harnessing this extra potential is now the imperatives for the next big step and long‐term growth of the sector.

With an estimated insurance penetration rate0.4% and only 1% of the population holding any form of insurance policy, the opportunities in the Nigerian market are enormous. When we compare the country’s insurance penetration to economies like Kenya and South Africa which boast of insurance penetrations of 2.9% and 14% respectively, it is obvious that there is still further room for growth of the Nigerian insurance sector.In the United Kingdom, the insurance industry contributes about 20% of the total GDP of the country. In South Africa, the insurance industry contributes 17% of the total GDP and in Kenya, the insurance industry contributes 3.4% of its nation’s GDP. However, in spite of the astronomical growth of the Insurance companies from just one agency in 1918 – Royal Exchange Assurance Agency to about 56 nos. Insurance companies, the Nigerian Insurance industry contributes a meagre 0.7% of the total GDP of Nigeria, far beneath its capacity.

Crucially, with the emergence and increased integration of the services sectors, which are now mainstay in the nation’s productivity profile, it is clear that the Nigerian economy is expanding and diversifying, as such risks and risk events are evolving, which suggests that there is a growing need for companies and individuals alike to seek protections against unexpected losses – the ability of the Insurance Sector to craft and realign products to the emerging insurance needs of businesses and individuals  alike, will be instrumental to repositioning the sector for rapid growth, unlocking latent potential and sustaining the economic recovery and  long-term growth.

INFRASTRUCTURE AND THE INDUSTRY

I suppose, I would not have done any semblance of justice to this discourse, if I did not highlight the enormous opportunity for the Industry in infrastructure development and finance in Nigeria. With the long-term nature of life insurance, retirement savings and pension annuities, the Industry is well positioned to participate in infrastructure financing of Private-Public Partnership (PPP) projects, given its need to match long-term liabilities with long-term assets. There are unique opportunities for the industry to play a pivotal role in contributing private investment and sector expertise in long-term PPP infrastructure projects.

In today’s low-yield environment, insurers are under increasing pressure to source additional investment return. Infrastructure investments may present an opportunity for insurers to achieve the required yields to cover future liabilities and provide competitively priced products. Infrastructure investments are an interesting option for an insurer’s portfolio, as they provide: Potentially lucrative risk-adjusted return on equity; Long-term risk exposure, which may provide a good match for long-term liabilities; Illiquidity and sector-diversity, which could increase portfolio diversification; and an opportunity to lend money to sectors in need of funding, leading to social and potentially reputational benefits.

There are practical issues, however, which an insurer should consider prior to investment, including: Determining whether margins are sufficient to cover the costs and risks associated with operational complexities, such as sourcing, managing and pricing infrastructure investments; Putting in place suitable processes to assess and manage infrastructure debt investment; Investing in infrastructure that is best suited to their balance sheet and risk profile.

The Industry has made only a marginal investment in the infrastructure sector in recent years. However, there is increasing interest as insurers find that the benefits of infrastructure assets outweigh the apparent costs relative to the low yields available on more traditional investments. Therefore, insurers should understand the requirements of the infrastructure market to suitably influence the availability and attractiveness of investments. In this regard, the Development Finance Institution, like The Infrastructure Bank PLC is the Industry’s partner, as it sits on identified selection of deals and pipeline opportunities which may be well suited to an insurance investor. We explore the operational complexity of such an investment, and analyze the materiality of such risks, including the possible mitigation options available to insurers.

INSURANCE SECTOR AS A COMPONENT OF AN EFFICIENT FINANCIAL ECOSYSTEM

As most of us are aware, the federal government’s infrastructure blueprint – the National Integrated Infrastructure Master Plan (NIIMP) – stipulates that Nigeria will need an average of USD $25billion per annum i.e. (7% of GDP) for the next 5 years, to enable the nation kick-start its infrastructure renaissance.  The NIIMP estimates a total investment of USD $2.9 trillion will be required to build and maintain infrastructure in Nigeria, over the 30 year forecast period.  Presently, annual investments in infrastructure are estimated at about USD $10billion per annum, indicating a significant funding shortfall of up to US$15billion annually.

This sheer size of funding required is indicative of the reality that on-budget Government funding sources are grossly inadequate to bridge the infrastructure deficit, as such, it is estimated that about USD $82billion in investments could be realisable from the private investments and capital providers.  As such, the a key tenet of Nigeria’s infrastructure rebirth is to develop an efficientfinancial ecosystem that will ensure that private investments can be injected into the financing of infrastructure assets, under financing structures that adequately match the investment and cash flow profile of the assets under consideration and to ensure that such funding sources funds are accessible to Project principals involved in the development and implementation of infrastructure projects.

In other words, the availability and accessibility of funds, of the right temperament, is considered to be a national imperative forfinancing infrastructure assets.  This indicates that the presence of an efficient financial ecosystem is necessary for securing funding infrastructure assets.  Such an ecosystem would reflect a balanced risk-apportioning amongst financiers, investors, developers, operators, regulators, and other principal stakeholders.  As such, the Insurance Sector plays a critical role in de-risking such investments to ensure alignment amongst the various project stakeholders, vis-à-vis the risksborne and/or retained by each party.

An efficient financial ecosystem is reflectiveof the following key characteristics:

• The presence and requisite level of participation from all key players required to make infrastructure financing a reality; key players will include banks, development finance institutions (DFIs) and other financial institutions, fund managers and administrators, equity investors, finance organs of the government such as Ministry of Finance and the Central Bank, sector regulators and insurance companies;
• A favourable regulatory environment, which clearly delineates the roles and responsibilities of key players, incorporates global best practice principles that provide comfort of the certainty of returns to financiers, and institutes appropriate mechanisms for monitoring and enforcing compliance;
• An array of market-responsive financial instruments, which instruments are able to tap into the pool of funding sources available whereby these instruments appropriately reflect the dynamics of the market. Such financial instruments will include commercial papers, asset-backed securities, notes, and bonds;
• A reliable securities valuation system where, the pricing of financial securities is determined by market forces such as the riskiness, liquidity and tenorof the security.

The importance of creating an efficient financial ecosystem is predicated on the need to ensure that the financial market is capable of attracting the right temperament of funds required to develop infrastructure.  The phrase ”right temperament”, refers to the ability of the funds available to match the financing needs of infrastructure projects; simply put, we should use long-term, affordable money to finance infrastructure projects, which typically have a long-term repayment period i.e. long-term money for long-term projects and vice versa.  The challenge of securing the right temperament of funds has been one of the most limiting factors that has inhibited the finance-ability of infrastructure projects in Nigeria.  In most cases, there is a mismatch between the facility tenor (typically 3 – 5 years) and the project gestation period, which consists of the construction period (typically 3 – 5 years) and the operation and maintenance period (typically 10 – 30 years).  This mismatch makes the cost of funds (interest and other fees) very expensive and consequently, the Project structure cannot attain viability parameters that will ensure that the Project is bankable.

Giving the foregoing, the situation presents a compelling need for designing and implementing bespoke financing instruments suited to the long-term financing needs of infrastructure projects.  For such instruments to be bankable, insurers would be required to develop matching products that align with the tenor, as well as the risk and returns profile of infrastructure investments. This reality is particularly crucial if the nation is to harness the capacity of private capital to bridge the existing funding gaps in the infrastructure sectors.  Undeniably, the role of insurance sector in back-stopping, de-risking and underwriting infrastructure financing instruments can thus be described as a new frontier that would bridge the misalignment between typical corporate/individual lending facilities and infrastructure project financing facilities.  The question then is: “How do we unlock potential of the insurance sector to effectively support the financial sector provide the requisite quantum of funds required for development and maintenance of infrastructure assets?”

Possible actions to ensure optimal operation of Insurance Industry in Nigeria

Government intervention in the review and strengthening of extant legislations on insurance in Nigeria is one area.  The Insurance Act 2003 and the National Insurance Commission Act 1997 in particular require better implementation and enforcement. For instance, Section 64 of the Insurance Act makes compulsory insurance of building under construction which is more than two floors. The general implementation of the Insurance Act has left more to be desired. The limitation of liability on third party insurance is too small in line with the present day economy. Several sections of the insurance Act have also been badly implemented. We cannot overemphasize the need for an adequate legislation and policy to create operational environment.

The formulation of economic policies which will give room for investment will also help the insurance industry. As earlier stated, where there are investment friendly policies, insurance companies would also be able to make long term investment for better returns on such investments. Also, it is noteworthy of stating that if the economy is in a better shape, the prospective assure will have the liquidity to procure insurance.

Customer services in the Industry can be enhanced. Many companies are constrained by customer-service related issues, typically relating to product offerings, quality of services and sophistication of products offered. Customer service is clearly important for winning new customers and retaining existing ones. The first step of changing the face of the industry is ensuring an exceptional customer experience. Insurance companies must find a way to provide customers with an internet based self-service insurance platform where customers can view policy coverage, pay bills, make changes to policies, submit claims and check the status of claim progress. Brokers should be able to obtain online quotes, proposal and plans, design for their customers.

Employing more adequate staff with related professional background is also key. It is also important that the Chartered institute of Insurance must regularly review and expand their curriculum to meet with the present market need and build the capacity of student members. Insurance companies must also allocate a percentage of its budget to Continuous Professional Development to keep staff abreast of professional standards and practices.

Insurance companies must also find ways to sensitize the populace about the use of insurance. The government also has a role to play in this by making relevant laws that will help make certain insurance policies compulsory and harsh sanctions for non-compliance of same.

Essentially, for the Industry to survive, thrive and attain its potentials, the government must be sincere in promoting a favourable environment that will allow the financial service industries thrive. This will help increase the operational efficiency of the insurance industry. Additionally, the Industry must make concerted effort to play more actively in the real sector of the economy.

THE INFRASTRUCTURE BANK PLC (“TIB”)

TIB plays a multi-faceted role in the development of bankable infrastructure projects. The Bank offers specialist project finance, and transaction advisory services to bridge the gap in a market that has so far been unable to fully realize the benefits of the financial markets reforms which has produced stronger, healthy financial institutions, capable of developing the medium and long-term financing solutions required for infrastructure development.

Our unique Product Offerings include:

Project Finance Arranging and Advisory: We provide bespoke advisory services to our clients to assist them package their projects for attracting required competitive funding globally.

Development Loans: As a fully-fledged Development Finance Institution, the Bank focuses on funding commercially viable and sustainable development projects that make a significant contribution to economic development in Nigeria.

Proprietary Equity Investments: With our deep domain knowledge of the infrastructure development space in Nigeria, the Bank typically invests its own equity to catalyse investments in projects that require risk capital to transform and develop.

Public Private Partnership Transaction Structuring: The recent adoption of the PPP model for all forms of public procurements for infrastructure delivery by the government at all levels in Nigeria, and the commencement of activities of the Infrastructure Concession Regulatory Commission (ICRC), has called for proper guidance in the structuring of these transactions.

Bond Issuance, Underwriting and Market-Making: Our main target clients for these debt securities are the Local and State Governments whose financing capacities are grossly inadequate to address the enormous infrastructure needs in their constituencies. It is hoped the Bank will hit the market for the first municipal bonds shortly.

Project Preparation and/or Development Funding: TIB provides and assists project promoters and sponsors raise necessary but scarce risk capital needed to undertake requisite project preparation activities that will take projects from conceptualization to finance-ability stage.

Capacity Building, Institutional Strengthening & Technical Assistance: The development challenge facing Government MDAs, and also private sector proponents is not only that of finance, but also of their delivery capacities. Capacity constraints are very evident across the country especially in the Public Sector.

IN CONCLUSION

The Infrastructure Bank Plc has painstakingly and deliberately crafted a niche market, within which it is the leading provider of project finance solutions for much-needed infrastructure projects. We have acquired and developed the requisite expertise and technical capacity to ensure we are able to deliver on our mandate, without compromise. We stand ready, willing, and able to support the development and implementation of any viable infrastructure project wherever the need arises in our nation. We implore you to reach out to us as the go to partner to the Industry, with respect to infrastructure projects and we will stand by you, to structure finance-able transactions for the Industry while also creating increased avenues to sell various policy products covering the different phases of infrastructure projects implementation.

On behalf of the Board and Management of The Infrastructure Bank PLC, I warmly thank the organizers of this Forum, which is geared towards transforming the enormous potential of the nation’s insurancesector into a reality. I thank you all for sharing your valuable time with me and hope this would be one of many opportunities to share ideas with you.