The mirage of Nigeria’s insurance industry growth

On the surface, Nigeria’s insurance sector is a picture of robust health. The headquarters of firms like Leadway, AIICO, and Custodian Investment stand as gleaming towers in Lagos, symbols of a post-consolidation era that has created giants.

The industry’s Gross Written Premium (GWP) soared past the N1 trillion mark in 2023, a milestone celebrated by the National Insurance Commission (NAICOM) as proof of a vibrant market.

This growth story is compelling. After the global financial crisis of 2008 eviscerated the Nigerian stock market and exposed deep rot in the banking sector, the insurance industry underwent its own painful but necessary recapitalizations. It survived. It consolidated. It grew. The 2020 pandemic, far from a setback, acted as a grim catalyst, jolting a segment of the population into a new awareness of mortality and risk, further boosting policy uptake.

Today, Nigerians are after capital preservation haven in spite of the never ending Naira devaluation. This is evident in Cornerstone insurance posting 170%% profit margin in Q1 2024. But, can we say this growth is sustainable?

The numbers, when scrutinized, reveal a profound paradox. While the industry’s total assets, according to the latest NAICOM digest, have swelled to over N2.67 trillion, this figure pales in comparison to the pension sector’s N 23 trillion+ asset pool as reported by the National Pension Commission (PenCom). Both sectors, despite their trillion naira valuations, are critically under-utilized.

The most damning statistic is insurance penetration. At less than 0.5% of GDP, Nigeria’s insurance penetration rate is an outlier for the wrong reasons. It lags far behind fellow African economies like Kenya (around 2.8%) and is dwarfed by South Africa (over 12%). This means the industry’s impressive growth is not broad based. It is a market verdict of “no confidence”. The system is large in absolute naira terms but insignificant relative to the national economy it is meant to secure.

The comparison to the 2008 American crisis is a flawed analogy. The danger to Nigerian insurers is not complex derivatives or subprime mortgages. The threat is simpler, more pervasive, and arguably more dangerous because it is officially sanctioned.

The core of the scrutiny lies in the industry’s investment portfolios. According to reports from financial rating agency Agusto & Co., a staggering portion of Nigerian insurance and pension fund assets, often exceeding 60%, is invested in Federal Government of Nigeria (FGN) securities. These bonds and treasury bills are classified as risk free assets. This is a dangerous misnomer in the Nigerian context.

This concentration creates a massive systemic vulnerability. The entire insurance industry is a primary creditor to a government facing significant fiscal pressures and a heavy debt service burden. The industry’s solvency is not tied to its underwriting skill but to the fiscal discipline of the federal government. A sovereign debt crisis, or even a significant downgrade of FGN debt, would trigger a catastrophic collapse in asset values across the entire sector.

Worse still is the erosion of value. While an FGN bond might yield 15%, data from the National Bureau of Statistics (NBS) shows headline inflation running consistently above 30%. This means every naira invested in these “safe” assets is guaranteed to lose purchasing power. The industry is selling a promise of future security while its core investment strategy ensures a future of diminished value.

This leads to the inevitable question: what happens if this concentration risk materializes? In 2008, the U.S. government bailed out insurance giant AIG to the tune of $182 billion, deeming it “too big to fail.” The failure of AIG would have triggered a domino effect across the global financial system.

Could Nigeria’s government afford a similar bailout for its insurance champions? The answer is almost certainly no. A government already spending a disproportionate amount of its revenue on debt service would be in no position to rescue institutions whose failure was triggered by that very same government’s debt. In a Nigerian AIG scenario, there would be no lender of last resort. Depositors and policyholders would face devastating losses, shaking public trust in the financial system for a generation.

There is a final, insidious risk: the widening gap between the industry and its regulator. The largest insurance firms are now sophisticated operations, using advanced actuarial models, data analytics for underwriting, and complex investment strategies. They are attracting top tier talent.

The question must be asked: is NAICOM equipped to effectively supervise this new reality? This is despite NAICOM’s push for AI adoption and real-time supervision. This us of the challenge Lamido Sanusi had when he became Governor of the Central Bank of Nigeria. He famously noted that the CBN staff lacked the skills to regulate the very banks they were overseeing and initiated a massive retraining program which largely failed due to politically exposed children in Abuja.

Is NAICOM in a similar position? Can its auditors truly probe the algorithms and risk models of these firms, or are they limited to checking compliance on paper? Are their computers compatible with the usage of AI tools or Blockchain technologies? If the regulator cannot keep pace with the industry’s innovation and complexity, it creates a void where risks can fester, unseen and unmanaged, until it is too late.

The Nigerian insurance sector is not in a speculative bubble. It is in something far more precarious: a state of deep, structural fragility masked by nominal growth. The danger is not a sudden pop, but a slow, grinding erosion of value and a systemic dependency on a single, vulnerable debtor. The industry is a fortress built on the sand of sovereign risk, and the tide of macroeconomic reality is rising.