Economic vicissitude typified by high default risks is making Insurance firms to shy away from offering bond guarantees to financial institutions for loans and contracts to customers, Business Day investigations show.
The cautious approach by the firms which has put businesses worth billions of dollars on hold is according to industry watchers is as a result the high default which is threatening the continued survival of some of the firms.
Insurance bond is a product whereby an insurance company guarantees scheduled payments of interest and principal on a bond or other security in the event of a payment default by the issuer of the bond or security.
As at the end of 2014, insurance bond which is classified under miscellaneous portfolio in premium contributed N12.26 billion, about 6.6 percent of N184.97 billion of the industry total revenue from general business.
Revenue from the industry is said to be in the range of N350-N400 billion annually
Funmi Babington-Ashaye, managing director/CEO, Risk Analyst Insurance Brokers Ltd said economic difficulties in the country has raise default risks with negative impact on credibility and trust.
Babington-Ashaye said under the present situations, banks will be unwilling to give out loans because the borrower may not be able to pay back as an when due; the government will not be sure that the contractor will execute a contract in line with the terms of the award if it is mobilized with some funds, while manufacturers will not be certain that their suppliers will deliver raw materials after receiving some advance payments.
According to her, this places greater burden on insurance companies who will have to think outside the box to offer performance bond and advance payment bonds
She stated that this is only what will help the banks, the government and manufacturers with some level of comfort to take risks by releasing moneys for various economic activities.
Tope Smart, managing director/CEO, NEM Insurance plc said bond is not a good business now because trust is an issue and will be dangerous for any insurer to issue performance bond when you are not 100 percent sure of clients integrity.
“You know, it depends largely on integrity and unfortunately integrity is a scares commodity in this part of the world.
Smart said ‘here people collect money to execute a particular contract and at the end of the day the money is diverted. And is not an area you gamble with because you have to be extremely sure, not 99 percent, but 100 percent sure that contract will not be diverted”
Sakiru Oyefeso, managing director, Staco Insurance Plc said you are aware that people are having issues with funding as result of economic crises and so default rate is high.
“When the probability that there will be default is high, why will you as an insurer take accept such contract? You will sink, so we are being cautious in taking part in such business particularly at this time in our economy.
Insurance bond can sink a company if you take such business without caution, said Adeogun Christopher, financial and risk Assurance service officer at SIAO.
Mayowa Adeduro, managing director/CEO, Anchor Insurance Company Limited said “Many of our colleagues are avoiding bond business at this time, but we have build skills and new capacity to do the business and do it well.
“I can confirm to you that we are making a lot of money on bond and we hope to build on what we have as we go forward in the business, Adeduro observed.
Sunday Thomas, director general, Nigerian Insurers Association said the contribution of bond to our portfolio is insignificant because it is still struggling with bank guarantees, so most manufacturers go for bank guarantees, which also underscore the issue of confidence on our industry.
But specifically, the issue of trust in our environment is almost nonexistent, so you find a situation whereby bond is almost like fraud plan on insurance companies, Thomas stated.
According to him, this is why it has never been a good business for the market. For instance, in a period of economic recession like this, claim is almost given, so why will an insurance company want to pile troubles on its head.
“If you must do bond, you must cutinize the borrower because we are not selling to paper, we are looking at the personality.