A considerable number of local insurance companies unleashed a resounding performance in 2015 despite operating in a sluggish economy, adverse market conditions, restrictive regulatory environment and an industry where fraud is developing at an accelerating rate. Conversely, profits for commercial banks significantly slumped.
The insurance industry has recovered from a 17 percent profitability decline in 2014, defying all odds to register a 15 percent bottom line growth in 2015. This is a true reflection of a 17 percent industry’s growth in top line performance. Precisely, the industry generated K124.9 billion in gross written premiums compared to K106.8 billion (about $155 million) written in 2014.
The progressive results have hardly affected the profitability ranking in the top seven with Nico Life Insurance Company retaining the first position back-to-back for the past four years of the profitability barometer’s existence. Malawi Stock Exchange (MSE)-listed Britam Insurance Company, formerly Real Insurance Company of Malawi Limited, was relegated to the bottom, anchoring a table of 12 major players in the entire insurance market.
The profitability barometer or profitrometer recognises general insurers, life assurers and reinsurers as major players and basis of financial performance analysis, but the industry’s structural setup also encompasses intermediaries, loss adjusters and/or loss assessors.
General insurers, comprising Nico General Insurance Company, General Alliance, United General Insurance (UGI), Prime Insurance, Charter Insurance and Britam are writers of short-term insurance, such as motor, household, commercial property and liability, just to mention a few.
In 2015, general insurers grossed K31.5 billion in premium revenue (a quarter of the industry’s GWP), 44 percent of which was employed for claims settlement. The sector’s actual loss ratio was 58 percent, three percent points higher than 2014 data, but below the 60 percent benchmark. Loss ratio is a ratio of claims incurred to premium earned.
The worsening claims ratio is attributable to the January 2015 flash floods which claimed scores of lives and severely damaged property, some of which constituted the subject matter of insurance that necessitated claim payment.
Profitability of non-life insurers is based on net earned premium (NEP) which is an insurer’s premium income net of reinsurance cost and adjustments made in unearned premium provision. General insurers earned premium income totalling K24.1 billion in 2015 (K4.2 billion more than earned in 2014) and incurred 29 percent of NEP in management expenses, but claims costs were exactly double as much as management expenses, with acquisition costs as low as 11 percent.
The inference drawn from these statistics is that general insurers recorded a combined operating ratio (COR) of 98 percent. Theoretically, this sector posted a two percent underwriting profit in 2015 against an underwriting loss of the same margin made in 2014.
COR is a sum of claims costs, management expenses and acquisition costs incurred by an insurance company, expressed as a percent of NEP. Insurers make underwriting profit when COR is less than 100 percent, a break even when COR equals 100 percent and underwriting loss when COR overtakes 100 percent.
Nico General and General Alliance are in a “cat and rat” chase for profit leadership in the sector, imagine only K86 million separated the two in 2015 compared to K466 million (about $676 000) difference created in 2014. However, Nico General now doubles as the profit leader and the market leader in the non-life sector since 2012.
Market share, in insurance context, is calculated as an insurer’s gross premium revenue expressed as a percent of the total premium income generated by the sector. During the period under review, Nico General collected K10.1 billion (about $15 million) while General Alliance came second with K5.2 billion, producing 32.1 percent and 16.5 percent respectively in market share. Therefore, these two companies account for almost half of the general insurance market share with the remaining five companies sharing the other half plus.
Prime’s management expenses deteriorated as far as 90 percent, thanks to the company’s robust strategic planning that contributed to a 43 percent spike in net earned premium which contained the combined operating ratio (COR) for the company to achieve a three percent underwriting profit while Britam incurred 123 percent COR of which 79 percent emanated from claims payment, for the benefit of policyholders.
The loss-making trend of Britam has compelled the company to exit the Malawi Stock Exchange (MSE) market that relies on company’s excellent performance to thrive.
The life insurance sector is dominated by Nico Life and Old Mutual whose gross revenue in 2015 account for 97 percent of the sector’s total income, leaving the other two life assurers scrambling for the remaining three percent. Their dominance also dictates other performance metrics in the life insurance sector, in particular, and the industry in general.
Malawi Re is the only locally registered reinsurance company whose main business is to supplement insurers’ financial capacity. In the year under review, Malawi Re raised K2.3 billion as NEP, 47 percent of which supported insurers’ claims settlement functionality. Local insurers also complement Malawi Re’s reinsurance initiatives.
Objectively, insurers can contain management expenses and not claims costs because claims settlement is the insurer’s core obligation. Claims ratio that trends less than 60 percent in four consecutive years is unnatural.
Statistically, natural trend in percent triggers, say: 58, 79, 61 and 106 rather than 56, 58, 59 and 60. Change is inevitable in the wake of the changing regulatory landscape unless the new regulation is not strictly enforced.
Insurers are obliged under the Reserve Bank of Malawi’s (RBM) Insurance (Claims Management) Directive 2014 to issue a discharge certificate within seven days after investigating and assessing a claim’s validity and severity, subsequently, pay the claim within 14 days after the claimant has signed the discharge certificate in compliance with the Insurance Act 2010.
Nico General’s management team made a rare commitment in The Daily Times dated April 26 2016, saying: “We will pay all claims within seven days after signing of discharge voucher.”
A marketing gimmick as it may seem, however, the message that Nico General is putting across the insuring public and the general public is that the company is committed to paying claims ‘promptly’. More importantly, the company is demonstrating its enthusiasm to set the company’s minimum standard and adhere entirely to the insurance regulation which generally protects the interests of policyholders.
Promise is a credit; therefore, all Nico General’s policyholders (including third party claimants) need to take their insurer to task if the promise in ‘black and white’ is violated. Besides that, the grieved claimants can now seek RBM’s redress by personally presenting their grievances to the central bank’s complaints handling department, on condition that the insurer (using its complaints handling procedure) has ultimately failed to address the matter to the claimant’s satisfaction.
In a recent survey commissioned by Senate Insurance Services, policyholders lamented that some insurers treat them unfairly by deliberately delaying to pay their claims while some claims personnel demand a ‘bribe’ for their claims to be processed swiftly.
On a positive note, however, the respondents hailed RBM for reinforcing the insurance regulation through promulgation of new secondary legislations, including the Insurance (Claims Management) Directive 2014. They were optimistic that RBM would effectively enforce this regulation and sanction insurers that contravene it repeatedly.
In the banking sector, National Bank of Malawi’s (NBM) profitability superiority over Standard Bank is at risk, having produced merely a difference of K16 million post-tax profit in 2015, much lower than K2.2 billion achieved the year before. However, in the context of corporate billionaire ranking, these commercial banks are identically K13.4 billion at par. Such identical neck-to-neck performance is a repeat of 2011 results when each bank posted K3.6 billion after-tax profit.
Generally, the profitability of NBM, Standard Bank, FMB and NBS Bank together have slumped by 12 percent from K34.7 billion in 2014 to K30.4 billion in 2015.
Elsewhere in the financial system, FMB Capital Markets Limited posted K19. 7 billion in 2015, K11.6 billion more than recorded in 2014.
However, the highest performing financial institution was African Alliance Securities Limited which registered a whopping K31 billion in 2015 compared to K1.5 billion registered in 2014.
African Alliance’s soaring profit has set a new record, too difficult for NBM and Standard Bank to beat, but achievable in the long term given favourable market conditions.
In terms of wealth creation, the insurance industry contributed K124.9 billion to the Malawi economy in the review period. However, wealth sharing was dependent on a particular sector.
For example, out of K31.5 billion written by non-life insurers (plus investment income), K6.8 billion was ceded to reinsurers, policyholders received K14 billion in claims settlement, K2.6 billion was allocated for brokerage, the sector’s wage bill, suppliers and service providers shared K6.9 billion.
Government pocketed K1.7 billion in tax income. Company’s shareholders (except Britam) would benefit from K3.8 billion after-tax profit in dividends.
Overall, insurance claimants (both policyholders and the public) were the winners for getting a lion’s share, but the best is yet to come once the claims management regulation is strictly applied and enforced by RBM.
As for the wider community, every company rolls out its corporate social responsibility (CSR) activities. CSR in the insurance sector was less tangible than in the banking sector. n
Duncan Bvomerani is a chartered insurance practitioner and also programme director for GISC Insurance Career Centre