Analysis by: Olivia Nnorom
Nigeria’s startup scene is growing, with several cutting-edge companies appearing in a variety of industries. As startups expand, having sufficient protection from unforeseen catastrophes becomes essential.
By reducing risk, insurance enables company founders (like startups) to concentrate on their objectives without worrying about potential financial losses.
However, questions are raised about the insurance industry’s capacity to assist entrepreneurs, particularly in light of its limited capacity for recapitalization in comparison to prosperous Nigerian startups like Flutterwave, OPay, amongst others.
Why don’t Startups Trust Insurance Providers?
The questions are not far-fetched; if you recall the issues, accusations and counter-accusations that followed the EndSARS protects in the year 2020, especially in Lagos State were some companies recorded various levels of misfortunes. Some shops and businesses premises were burnt to ashes.
According to the Allianz Risk Barometer 2022, political risks and violence and changes in legislation and regulation are (still) rising concerns for businesses in Nigeria.
Political risks and violence moved from fifth to second following #EndSARS in 2020. Changes in legislation and regulation moved up four places to fourth in the country, according to Allianz.
“Fortunately, large scale terrorism events have declined drastically in the last five years. However, the number, scale and duration of riots and protests in the last two years is staggering and we have seen businesses suffering significant losses,” says Bjoern Reusswig, head of Global Political Violence and Hostile Environment Solutions at AGCS. “Civil unrest has soared, driven by protests on issues ranging from economic hardship to police brutality which have affected citizens around the world. And the impact of the Covid-19 pandemic is making things worse – with little sign of an end to the economic downturn in sight, the number of protests is likely to continue climbing.”
This brings the issue of recapitalization obstacles in the Insurance Sector to the fore. According to the Commissioner for Insurance in 2018, the insurance industry in Nigeria is the weakest link in the country’s economy, principally because of the operators’ poor capital bases.
Despite the Finance Act of 2021 many insurance companies have struggled to fulfil the higher standards due to recapitalization. Comparatively, successful startups like Flutterwave typically have higher capitalization than insurance businesses in Nigeria.
Differences in Capitalization and Reserves: It’s vital to keep in mind that insurance firms are legally required to keep enough reserves on hand to pay the claims of policyholders, even though their capitalization may be smaller than that of some startups. To properly control risk exposure, several insurance companies in Nigeria also create reinsurance agreements with other insurers or reinsurers.
Trust and work ethics issues: Complex policy terms and conditions that may be challenging for startups to understand are the sources of founders’ mistrust of insurance firms. Insurance companies are accused of aiming to avoid paying out claims by taking advantage of loopholes. This mistrust is sometimes influenced by details or technicalities.
Insurance firms frequently charge higher premiums to start-ups and small enterprises, placing a financial burden on organisations that are already battling to survive.
Excessive insurance prices may also dissuade businesses from obtaining coverage and discourage potential investors.
Delays in Claims Processing and Payment: Nigerian insurance firms are notorious for their lengthy claims processing and payment procedures, which can negatively affect a startup’s cash flow and impede its expansion. Startups in industrialised nations, however, may confront comparable difficulties while having more choices, competition, and effective claim-processing systems at their disposal.
It is also important to highlight the events of the 2020 ENDSARS protest in Nigeria where businesses suffered damages, sought insurance claims but couldn’t get coverage.
However, some insurance companies were unable to provide coverage due to underinsurance, lack of documentation, delayed or denied claims and exclusions in insurance policies.
For instance, AIICO insurance stated that its policies did not cover damages caused by civil unrest or riots, strikes, and therefore could not provide coverage for their insured during the protest, while cornerstone insurance provided coverage only for clients who purchased the relevant policy riders.
As a requirement, leadway assurance and many other insurers only provided coverage for policyholders who purchased the SRRC policy (fire and special peril insurance), which had riots, strikes and civil commotion covered, stressing that the normal Personal accident or Group personal accident, Burglary, Motor etc do not have SRCC as a standard cover.
However, there have been recent reforms in the insurance industry that if properly upheld and implemented would boost startups confidence for Insurance.
Recapitalization: NAICOM has mandated that Insurance companies in Nigeria increase their minimum paid-up capital to strengthen their financial base and ensure their ability to meet claims obligations. Although this has not met the financial requirement for prosperous startups, Further reforms would improve the financial stability of insurance companies and increase confidence in the sector.
Digitalization; Some insurance companies now offer online policy purchase, claims processing and other digital tools that would improve efficiency and service delivery. This would facilitate swift Insurance processes, and drive more penetration within startups.
Microinsurance; The insurance sector is exploring microinsurance as a means of providing affordable insurance products to low-income income individuals and small companies. This would drive inclusion and increase confidence among all financial classes.
Increasing Insurance awareness; in the recent past years, the industry has invested heavily on increasing awareness, and sensitising the public about insurance and its products, through seminars, digital marketing, flyers etc.
What Startups Should do
Despite the difficulties, Nigerian startups can have confidence in insurance providers by performing extensive due diligence. It is critical to investigate an insurer’s track record, financial standing, range of customizable policies, and level of customer service. Startups should become acquainted with the insurance industry, assess their needs, and think about hiring knowledgeable insurance advisers or brokers.
Conclusion
Depending on the startup’s size, type, and industry, different types and levels of insurance coverage may be offered by Nigerian insurance firms.
Startups can acquire insurance coverage that satisfies their unique needs and risk profiles by carefully assessing the financial stability and reputation of insurance providers, comprehending the terms and conditions of policies, and seeking professional help.
