Insurers see rising motor insurance claims on high inflation

Motor insurance is the second-largest source of premium for the general business segment of the insurance industry in Nigeria.
Insurance companies undertaking motor business in Nigeria are feeling the pinch of the upward trend in the country’s inflation rate.

The insurers said inflation had pushed up the cost of assets replacement as many of the auto parts had doubled in the past one year, increasing the cost of claims in the event of an accident or total loss of motor vehicles.

According to them, premium rates are going down as most people are focusing on meeting basic needs like food, shelter, health and security and cutting allocation to insurance.

Motor insurance is the second-largest source of premium for the general business segment of the insurance industry in Nigeria, after oil and gas risks.

For the 2019 business year, 44 underwriting companies offering general business generated N44.91 billion premium in motor risks, out of which they paid out N38.16 billion on claims, according to data from the Nigerian insurers Association.

Mayowa Adeduro, managing director/CEO of Tangerine Insurance, responding to Business Day enquiries on the impact of inflation on motor business, said underwriters are at the receiving end of inflation.

“For underwriters, inflation is a destroyer of value. To the asset owners, insurance is a cost after other costs like food, shelter, school fees, security, etc. Most assets owners will consider upward revaluation of assets as the last thing to do if they still have disposable income left after meeting basic and other needs,” he said.

According to him, in the event of partial loss of assets like a motor vehicle, where the insured insists on replacement value, it is usually the amount plus inflation.

“The insurance company is disadvantaged in this instance since he cannot apply the condition of average on part replacement. However, if the claim is a total loss or what we call constructive total loss, the insured will be at the receiving end since he cannot claim more than the value insured, except the insured has revalued the asset before the loss,” he added.

According to Adeduro, another challenge is that during the period of inflation, rates go down in order to encourage people to renew their policies instead of dropping insurance altogether in order to meet other needs.

He said life insurance also suffers significant diminishing value over time and surrender of policies becomes rampant.

“Elasticity of demand for insurance is highly price-sensitive. Demand drops significantly for the slightest upward adjustment of price to respond to inflation. That is the reason why underwriters will rather encourage asset owners to revalue assets rather than adjust rates,” he said.

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Obasi Ngwuta, executive director at West African Business School, said inflation impacts insurers’ claims and general expenses, and the value of liabilities.

“Inflation affects life and non-life insurers in different ways. For non-life insurers, unanticipated inflation leads to higher claims costs, thereby eroding profitability,” he said.

Ngwuta, who is an insurance expert and consultant, said the current rising inflation in the country is a ‘killer pill’ to the property insurance business due to its negative impact on claims in terms of increases in material replacement cost, particularly on motor insurance and other property and casualty assets.

He said: “When determining premiums, insurance companies look at a variety of factors including industry trends like number of claims and costs to repair vehicles and homes.

“If those costs increase, the prices of insurance premiums will likely increase as well. Unfortunately, due to inflation, these costs are increasing.”

According to him, rate-cutting, which is an unhealthy pricing strategy, erodes premium value and causes serious market distortions, which has the possibility of making non-life insurers go bankrupt.