A.M. Best Company has charged Nigerian insurers that size matters, saying even though the smaller insurers show faster growth of premium, their gross written premium remains comparatively low in most cases.
The rating agency explained in its Special Report, titled, “For Insurers in Emerging Markets, Size Matters”, that it studied more than 1,900 insurers across four geographical groupings, examining results to compare market dynamics, drivers of profitability and balance sheet composition for companies in each region.
The regions studied were: mature markets, represented by France, Germany and the United Kingdom; BRIC (Brazil, Russia, India and China); MENA (the Middle East and North Africa); and MINT (Mexico, Indonesia, Nigeria and Turkey).
The rating agency stated that “the benefits of being larger are not only evident in the economies of scale, which result in lower combined ratios, but also in the dependency on investment yields and reinsurance”.
A.M. Best stressed that in most markets; the market share of smaller companies is in single digits, adding that while most of the small companies in developed markets tend to focus on specific niches, companies in emerging markets, regardless of size, compete in all segments/businesses.
The company added that reinsurance plays a key role in the profitability of insurers in emerging markets, noting that “small companies in these markets tend to retain the least, which helps to improve their technical profitability, given that they operate at a disadvantage in terms of cost efficiencies.
“Unlike their counterparts in developed markets, their broader strategic focus results in higher operating expenses, which given similar claims experience can only be offset by significant reinsurance commissions.”