“Reflating the global economy through insurance”

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Paper presented at the ncrib 2009 National Insurance Conference .We are experiencing the biggest recession since the Great Depression of the 1930’s. The IMF forecast a drop in GDP and thereafter a very slow recovery. The problems have caused untold hardship to various homes and businesses with businesses going burst and in some extreme cases people taking their lives because of huge debt overhang on family economies.The developed economies like the USA and Europe have attacked the problems head on and printed trillions of Dollars to reflate their economies to get consumer’s confidence back. The strategy is to get people to come out and spend. This of course was only achievable by injecting capital into financial institutions which in turn lowers interest rates to entice consumers to borrow and spend again. Africa has taken a back seat in all these and one wonders if this crisis did not get to Africa or perhaps we are immune to it or have we just decided to sweep issues under the carpet only to be haunted at a later date. Nigeria has responded in its typical style of addressing issues. Better late than never though albeit in a ‘crude’ manner.
The Insurance industry worldwide has been largely insulated from these problems perhaps because of our training of conservatism, or our role of the economic goal keeper.
Having said that, the largest insurer AIG was badly hit in its derivatives arm and has had to receive bailout sums running into Billions of Dollars.
Causes of the global crisis
It all started as a result of the Housing bubble in the USA. Housing prices increased in astronomical proportions and household wealth also inreased with borrowings at very low interest rates.
There was huge speculation on house purchases with the belief that prices of houses only move north. Credits were given with reckless abandon with securitization of complex mortgage instruments with little or no regulatory supervision. The result was banks leveraging on leveraging through securitizations and similar instruments.
Before long it became a global fad and this travelled across to markets with small countries like Iceland buying exotic assets which turned out to be illiquid when the downturn came. Banks continued to buy these assets across the globe. 
Causes of the global crisis contd
The case was further compounded by the low interest rates which was predominantly as a result of China’s excessive savings.
The crisis crystallized in the USA as the housing bubble burst and assets previously seen as liquid became unsellable and the chain effect culminated in the failure of the leading hedge fund Bear Stearns and later in the bankruptcy of Lehman Brothers. The impact was quickly felt across the globe and the damage was much greater than anyone could have ever imagined.
Balance sheets shrank overnight, no thanks to the accounting rules of mark to market. Within a short period what had started as a financial crisis ultimately culminated into an economic crisis 
Causes of the nigerian crisis 
The Banking and Insurance consolidation between 2005 and 2007 brought about unprecedented capital into the financial sector.
Banks needed to sweat equity to get decent returns to shareholders and also boost their loan portfolios. Loans were subsequently given without proper credit analysis in most cases.
The rush to boost revenue through lending saw banks introduce margin facilities to purchase shares. In a lot of cases these shares were their own shares.
The huge credits to the Downstream sector of the Oil & Gas Industry leading in some cases to credits granted against overvalued assets. 
The local problem started when foreign banks called on local banks to repay facilities they were exposed to.
These facilities cumulated to billions of Dollars and ultimately resulted in the illiquidity of some banks.
The CBN had no choice but to open the rediscount window to allow banks borrow money to service these and other obligations.
In the meantime, international hedge funds started exiting the Nigerian Stock Market thereby depressing the stock market.
This led banks and other investors to panic resulting in shares being sold at all cost to increase the cash position of financial institutions albeit at much reduced prices. 
This created heavy losses on their balance sheets. Crude oil prices dropped sharply and the Government had no choice but to deplete the reserves to defend the National currency.
Debt recoveries from the Downstream petroleum companies was more difficult as the assets were in most cases unsellable and in some cases grossly overvalued.
The result was a tightening of liquidity leading to a breakdown in the interbank space with banks refusing to borrow one another money and also being saddled with huge debts from under priced stocks which had largely become illiquid.
The CBN closed the rediscount window and subsequently moved in on the perceived weak banks.
Our version of economic stimulus of =N=420BN was pumped into the five (5) banks and the CBN took over their management. We are yet to feel the impact of Government’s stimuli, as it is still early days and we await the result of the audit exercise of the remaining banks. Banks have closed lending to the economy and there is a general economic slowdown. 
Effects on insurance 
The great depression of 2008 – 20?? has changed the way risk is assessed.
Insurance companies by their very nature must come up with products to support businesses and financial institutions so that they can confidently expand their operations. It is true that in the more developed economies, the role of Insurance in achieving these objectives is being re-examined. A clear example is the Larosiere Report which specifically states that: 
“The crisis originated and developed in the banking sector. But the insurance sector has been far from immune. The largest insurer in the world has had to be bailed out because of its entanglement with the entire financial sector, especially through credit swap activities. In addition the failure of the mousline insurers has created significant market and regulatory concerns. It is therefore important especially at a time where Europe is in the process of overhauling its regulatory framework for the entire insurance sector, to draw the lessons from the crisis in the US insurance sector. Insurance companies can in particular be subject to major markets and concentration risks. 
Compared to Banks, insurance companies tend to be more sensitive to stock market developments (and less to liquidity and credit risks, even if the crisis shown they are not immune to these risks either) Solvency 2 is an important step forward in the effort to improve insurance regulation to foster risk assessments and to rationalize the management of large firms, solvency two should therefore be adopted urgently. The AIG case in the US has illustrated in dramatic terms what happens when there is a lack of supervisory cooperation”. Having said the foregoing, the emphasis in on supervision not on the financial products offered by insurance companies.
The toll on investments with diminution in value of shares and in some cases loss of deposit to distressed banks.
Increase in fraudulent claims.
Examples of insurance bailouts 
United states of America
AIG – $150BN
The Hartford $3.4B
NLincoln- $2.5BN
KBC – €1.25BN
The Hartford -€1.5BN
Lincoln – €3.0BN
YAMATO Life- Insolvent
The way forward
Nigerian insurance companies are yet to come up with any meaningful product that can support the financial system other than the more traditional products like the Money Insurance and Fidelity Guarantee products. It is important to continuously increase the awareness of insurance across board. Campaigns should go to the grassroots, villages, schools, government etc.
Credit Bonds has not been perfected nor Credit Swaps etc.
To be relevant in the financial service sector we must develop actuarially based financial products which will ultimately make banks more dependent on insurance as opposed to the present situation (contrary to what operates elsewhere)
Our traditional Property Insurance products also needs to be more sophisticated and in line with modern developments in this sector. We must build local capacity. Despite our Capital raising efforts, we seem to retain too little in the Nigerian Market in some cases. This is the only way we will be able to contribute to economic growth.
Life insurance products have long assisted Estate planning and mortgages. I see a situation where this would be further developed as there is a rebound in the economy. However, a note of warning about rate cutting in Life business. The trend where Life products are being discounted as in the case of Property insurance is a dangerous trend and must be stopped immediately. Appropriate pricing models must be used in developing Life products along with Mortgage related products. The Annuity business is in its infancy but with huge potentials and huge challenges. The first batch of retirees under the new Pension scheme now need to make a decision between programmed withdrawal and Annuity. 
This is a huge opportunity for the Insurance sector to show the superiority of our products over the other financial products that cannot guarantee annuity for life!
Typical insurance products
The following insurance products need to be in place if we will indeed play our role in reflating the economy:
Credit Swap Insurance Modules
Mortgage Insurance
Professional Indemnity Insurance
Directors & Officers Liability Insurance
Fidelity Guarantee Insurance
Life Insurance
Annuity Insurance
Political Risk Insurance
Underwriting Share Offers
The role of insurance in sustaining and reflating Global economies is not in doubt. However, in achieving these objectives of playing out traditional role, there is a need for caution. The temptation and pressure for Underwriters to write every and any risk to boost turnover and balance sheet size is high.
Training and re-training of professionals to underwrite the exotic risks is paramount.
Underwriting companies now need to be as close to their actuaries as they are to their auditors. Regulatory coordination between NAICOM, CBN, NSEC and PENCOM will be key to achieving these goals.

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