Preparing Nigerian Insurers for the Global Marketplace

1. Preparing Nigerian Insurers for the Global Marketplace Adeniyi Elumaro Abuja, Nigeria April, 2008. Since 1989 Empowering People. Changing lives

2. Opening Thoughts

3. We live in a TINA world

4. TINA • We live in a TINA world. No responsible nation has a choice. Capitalism stands alone as the only feasible way to organise a modern economy. • Hoewever, the hour of capitalism greatest triumph is also its hour of crises • Yet 4 billion out of the world’s 5 billion pple are excluded by the captalist system • Why have third world countries and former communist economies not been able to replicate the success of capitalism in the West?

5. National posterity is created not inherited

6. National posterity is created,not inherited…(Source: Michael Porter) • Capacity of industry to innovate and upgrade • Existence of world class institutions/competition. • Innovation to convert selective disadvantage into competitive advantage • Creation and assimilation of knowledge • Availability of information /Healthy Competition • Proactivity/Adaptability • Access to appropriate skills • Combination of best managerial processes, strategy and systems

7. Insurance is the DNA of capitalism

8. Outline • The Future Insurance/FSI Market • Global Insurance Trends • Aligning Nigerian Market and Coping with the Challenge of Transition • Suggestions for the Future

9. The Future Insurance/FSI Market

10. The future Nigerian financial market will be borderless... • A global market, without frontiers or captive markets: • Geographical, sectoral and regulatory boundaries will be less important • Predominance of global players with global reputation and scale and local players with global alliances • Top 10 financial institutions will control over 90% of industry assets • Customers with more financial sophistication, will demand more ..and will have access to all information and to all products and services • Technology/Cost driven business models and service delivery infrastructures • Value and not transaction providers • In a continuous process of change

11. Forces of Change and the Future Market (Implications for the Insurance Industry) Regulation and New Capital Requirements Financial market Reform/consolidation Continental financial hub aspiration Industry to be dominated by fewer insurance companies with broadband financial services capabilities/alliances to other financial institutions Key differentiators–Talent, Capital, Underwriting Discipline,Branding, Distribution Capacity, Risk Management and Service excellence Corruption/ Transparency Drives Changing customer demographics and behaviour Strong economic growth

12. The Future market will be radically different Improved Competitive Dynamics Fewer, well capitalized operators Insurance hub for Sub Saharan African Technology Driven Strong er and Leaner Regulation Increased Insurance Penetration/Portfolio Consolidated, Sanitized & Refocused Players

13. 14% 12.5% 12% 11% 9% 8.5% 5.3% 4.5% 4% 1.0% 0.7% South Africa Pop: 45m South Korea Pop: m USA Pop: 250m Nigeria Pop:122m Egypt Pop:71m Thailand Malaysia Life Gen Biz Nigeria is a virgin insurance market… Insurance Premium's Contribution to GDP UK Pop:m

14. National Transformation has Predictive patterns--Learning From India, Malaysia Events India, today India (10-20 years ago) • Strong and sustained economic growth • Developing infrastructural base • (technology, power, payment system, • credit bureau, education) • Rapid middle class expansion • Huge retail banking population/ • entrenched consumer banking • practices • Presence of international financial institutions • Large Population (>1Bn) • Multi ethnic/religious • Average Literacy Rate (59%) • Absence of National ID • Emerging middle class? • Inadequate infrastructure • Inequality in living standards • Growing but sluggish economic • growth (4.3%) • Sustained reform • agenda • Increasing • privatisation & • deregulation • Increased • stability • Modernisation of • financial system • Increased flow of • FDI • NRI Nigeria, tomorrow Nigeria Today • Large Population (130million) • Multi ethnic/religious • Average Literacy Rate (68%) • Absence of National ID • Emerging middle class? • Inadequate infrastructure • Inequality in living standards • Growing but sluggish • economic growth (c. 5%) ?

15. A sea change is taking shape in Nigeria…. Banking Pensions Insurance Micro-credit FSI Driven by FGN overall economic reform agenda-- NEEDS Public/ Private Partnerships Privatization /Commercialization Telecoms Petroleum Power NON-FSI Started/incomplete Reform Philosophy Near complete About to Start

16. Socio-Economic and Cultural change is slowly taking roots... Law Enforcement Poverty Alleviation Consumer Credit National Identity Management System This new system seeks to harmonise all existing identity systems into one key, secure national database Building integrity infrastructure I C P C, EFCC Legal & Civil Service Reform National Re-Orientation

17. There is a relationship between insurance penetration and per capital income Premiums per GDP, life and non-life, 2003 Step change in demand function. When GDP per capita gets close to USD 10,000, insurance penetration rises to a level above 4% with a steep slope 12% Most Nigerians cannot buy insurance products because they simply don’t have the cash 10% United States 8% Germany 6% Malaysia Spain Czech Republic 4% China 2% India 0% 0.1 1 10 100 GDP per capita, 1000 USD, 2003 Source: Swiss Re Economic Research & Consulting

18. There is a relationship between insurance penetration and per capital income Example: Life insurance penetration increases with affluence Insurance premium as % GDP Three avenues for growth Threshold for insurance pick-up Addition of new customers Existing customers buy more Extension to new geographies 1 2 INDIA 3 100 1,000 10,000 100,000 GDP per capita in USD (log scale) • PPP adjusted GDP per capita higher by a factor of ~5-6; lower income categories not shown • Source: Swiss Re; NCAER

19. Insurance and Economic Development are linked Ageing population Economic development / increasing income Young population Large conglomerates New start-ups United States Public-Private Partnerships Emergence of a middle-income class FDI/Capital outflow Reform of old (state- owned) companies Singapore Increasing car/home ownership Poland Increasing role of services Rapid industrialisation Corporate (re)insurance Brazil Growth of personal lines Free market systems China Credit & Surety FDI/capital inflow Vietnam Motor/property takes off Increasing liability business Protection of start-ups Wealth management Focus on commercial lines Savings products (with capital guarantee Protection products Insurance market development / increasing penetration

20. Financial market segments compete for PFA’s Non- financial assets Personal financial assets = Cash (local & foreign currency) + Bank deposits + + Stocks & shares (direct ownership) + + Mutual funds/investment certificates + Life insurance (reserves) + Corporate pensions

21. 10 Global Insurance Trends

22. 1 The Golden Opportunity

23. 2. Building the Glass Firm

24. 3 The Human Touch

25. 4. Living the Rules

26. 5. Migration from Grey & Boring to Open and Innovative

27. 6. Dynamic Capital Management

28. 7. A new world of M & A

29. 8. The Growth of Synthetic Products

30. 9. Death of Inflation, falling bond yeild

31. 10. Coping with the Growing size of Risks---Insurance Companies that Aren’t

32. Aligning Nigeria, The Challenge of Transition and Suggestions for the Future

33. Danger Ahead Strong financial markets do not happen by themselves

34. “ We must rebuild the legal and regulatory system for insurance

35. Current market structure can only destroy value… • Cannot deliver the right price • Overstretches regulatory capacity • Entrenches surface underwriting/bad ethics • Cannot develop the untapped retail market • Lack capacity to capture local content of Oil & Gas industry, Carbotage law and other invisibles currently posted offshore • Is competitively disadvantaged

36. Regular insurance market cycles will not play out in Nigeria… • Exit Protection • Weak Property Rights • Weak Judicial institutions/culture • Powerful market institutions Regulatory revolution/correction is the only hope for change

37. Without an appropiate intervention the insurance market may loose out on key growth opportunities… • Pensions now belongs to PFA’s/PFC’s • Health insurance now belongs to HMO’s • Travel insurance taken offshore by Shengen • Banks are leading in bonds • Motor insurance heading for “Captive cells” • Plans underway to encroach into WC/GPA • Deposit insurance belongs to NDIC

38. FSI Market/Regulatory Reform Industry Wide Vision Deposit Insurance 2 Health Insurance 1 Agency Sector 6 Brokers Sector 5 Life Sub Sector 3 Non Life Sub Sector 4 Insurance industry Wide Implementation Plan

39. Industry Wide Vision FS Wide Regulation Sector 1 Sector 5 Sector 2 Sector 3 Sector 4 FS Wide Implementation Plan FSI Market/Regulatory Reform

40. NAICOM must be ready to regulate in a technology driven environment Technology Driven Regulatory Framework NAICOM E-Payment E-Regulation E-Supervision Interactive Website E-Compliance E-Correspon- dence Insurance Industry

41. We must admit new talent and fundamentally reshape the insurance skills development system

42. “ We must grow capacity, broaden the business model and develop better products

43. Estate planning Retirement annuities Risk Management Financial Planning Advice Asset management Asset accumulation Investments & Savings Consumer credit Mortgages Credit cards Life protection Sourced bank products Asset protection Auto, home, property, liability Life Stages We must broaden the business model…into R MgtFinancial protection and wealth management

44. We must overhaul the local insurance value chain distribute more creatively

46. Bancassurance is an avenue for third party distribution and can be approached in three ways Capital intensive Potential conflict of interest (capital allocation) Full Ownership Bancassurance NO • Co-ownership of a • separate entity to • cross sell products: • Alignment of interests • Governance is key Joint Ventures YES • Capital allocation similar to proprietary distribution • Allocation of profits between manufacturer and distributor is key Distribution Agreements YES

47. Distribution Under writing 12 8 4 0 0 1 2 3 100 10,000 1,000 100,000 Operations Investment management WHAT IS REQUIREDAction On Many Fronts By All Stakeholders Players Regulator Customer awareness Regulations • Increase customer awareness • Product design and product coverage • Extend reach • Consistency & stability • Support information • Consumer awareness Government Industry bodies Infrastructure • Property rights • Information • Increase customer awareness • Information