Rate Cutting – Group Life Insurers Hope On NAICOM

Jul 21, 2010 (Daily Independent/All Africa Global Media via COMTEX) -- Specialist life insurance companies in Nigeria are banking on the National Insurance Commission (NAICOM) to put an end to unethical practice of rate cutting and unhealthy competition among the companies on the group life assurance business.

Section 9 (3) of the Act states in addition to the rates both the employer and the employee are required to contribute to the scheme, the employers shall maintain life insurance policy in favour of the employee for a minimum of three times the annual total emolument of the employee.

The life insurance policy is to be effected through the purchase of a life policy issued by a Nigerian registered insurance company, licensed and authorised to conduct life insurance business by NAICOM under the Insurance Act 2003.

The Chairperson, Life Offices Committee (LOC) of the Nigerian Insurers Association, Mrs. Yetunde Ilori, in a report to the member companies of the association, stated that the life insurance industry is also facing the challenges of getting companies to patronise the group life scheme made compulsory by the law.

Another issue is the widespread rate cutting and unhealthy competition among the companies on the group life assurance business. NAICOM has now promised to sanction erring companies who cannot pay claims due to this unethical practice. They have threatened to descend on such companies statutory deposits.

Ilori has been raising alarm since 2009 that the insurance companies handling group life assurance scheme were engaging in the unethical practice of rate cutting.

Rate cutting is the habit of not charging adequate premium for the risks an insurance company is providing cover for. Such insurers charge lower premium for risks in order to gain undue advantage over other competitors.

This development is, however, taking place at a time when the nation's insurance companies were said to be recording losses on the group life insurance scheme.

The Daily Independent recalls that the insurance industry within a period of six years beginning from 2002 to 2007 lost a whopping N75.8 billion on the Nigerian National Petroleum Corporation (NNPC) group life insurance account alone. Experts say the trend in loss ratio was an indication of poor risk management by the insurance operators, which has underestimated underwriting principles as a result of unhealthy competition to grab the oil and business account. Insurers were said to be charging premiums far below the official rates because no one wants to let go and this is worsening the claims situation.

It was gathered that for the six year period, the organisation paid out N101 billion as premium on its group life account and made claims worth N176.7 billion, indicating a percentage loss of 75 percent and an average loss ratio of 202.44 percent.

The figure shows that the corporation paid N351.7 million as premium in 2002 and made claims valued at N451.9 million, showing a loss ratio of 128.59 percent. In 2003, the figure worsened with a loss ratio of 206. 34 percent, as N362.6 million premium was paid while claims worth N748.15 million was settled.

The insurance industry in 2005 collected as premium N143 million as against a claims figure of N591.1 million, showing a loss ratio of 413.3 percent.

The last financial year of 2007 was not favourable for the insurers as it paid out N1.1 billion in claims against N995.4 million, indicating a loss ratio of 108.6 percent.

As Section 9(3) of the Pension Act makes it mandatory for employers to maintain life insurance policy in favour of their employees, the Federal Government initiated a two year pilot group life insurance scheme for the generality of its workers anchored by the office of the Head of Service.

When the Federal Government flagged off the scheme last year for civil servants with a fully paid premium of N4 billion, stakeholders commended this gesture as the biggest thing that happened to the insurance industry after the last consolidation exercise.

As more people are benefiting from scheme, stakeholders have emphasised the need to ensure that the required structures to enhance its success are put in place to ensure the longevity of the scheme.