Insurance companies doing motor business in Nigeria are feeling the pinch of the country’s rising inflation rate trend
Insurers said inflation had driven up the cost of replacing assets as many auto parts had doubled over the past year, raising the cost of claims for accidents or total loss of vehicles to engine.
They say premium rates are falling as most people focus on meeting basic needs like food, shelter, health and safety and reduce insurance benefits.
Motor insurance is the second largest source of premiums for the general business segment of the insurance industry in Nigeria, after oil and gas risks.
For the financial year 2019, 44 underwriting companies offering general business generated 44.91 billion in motor risk premiums, out of which they paid out 38.16 billion naira in claims, according to data from the Association of Nigerian Insurers. .
Mayowa Adeduro, managing director/CEO of Tangerine Insurance, responding to business day inquiries about the impact of inflation on the auto business, said insurers are the victims of inflation.
“For subscribers, inflation is a destroyer of value. For asset owners, insurance is one cost after other costs like food, housing, school fees, security, etc. Most asset owners will view the upward revaluation of assets as the last thing to do if they still have disposable income after meeting other needs,” he said.
According to him, in the case of partial loss of assets such as a motor vehicle, where the insured insists on the replacement value, it is generally the amount plus inflation.
“The insurance company is at a disadvantage in this case since it cannot apply the damage condition on the replacement of parts. However, if the claim is a total loss or what we call a constructive total loss, the insured will be the beneficiary since he cannot claim more than the insured value, except that the insured has reappraised the asset before the loss,” he added.
Another challenge, Adeduro says, is that during times of inflation, rates go down to encourage people to renew their policies instead of giving up insurance altogether to meet other needs.
He said life insurance also suffers a significant decline in value over time and policy surrender is becoming rampant.
“The elasticity of demand for insurance is very sensitive to prices. Demand falls significantly at the slightest upward adjustment in prices to meet inflation. This is why underwriters will rather encourage asset owners to revalue assets rather than adjust rates,” he said.
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Obasi Ngwuta, executive director of the West African Business School, said inflation has an impact on insurers’ claims and overheads, as well as the value of liabilities.
“Inflation affects life and non-life insurers in different ways. For non-life insurers, unexpected inflation leads to higher claims costs, thereby eroding profitability,” he said.
Ngwuta, an insurance expert and consultant, said the current rise in inflation in the country is a “killer pill” for the property insurance industry due to its negative impact on claims in terms of rising the replacement cost of materials, in particular on automobile insurance and other P&C assets.
He said: ‘When determining premiums, insurance companies look at a variety of factors including industry trends such as the number of claims and the cost of repairing vehicles and homes.
“If these costs increase, insurance premium prices will likely increase as well. Unfortunately, due to inflation, these costs are increasing.
According to him, lowering rates, which is an unhealthy pricing strategy, erodes the value of premiums and causes serious market distortions, which can lead non-life insurers to bankruptcy.