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Shrinking space, regulation push brokers out of business

By on May 22, 2015

Small scale brokerage firms in Nigeria risk extinction over their inability to generate substantial income to remain in business. They likewise face the hazard of tightening regulatory requirements, BusinessDay investigation reveals.

Their plight becomes more dire, as the business environment gets more sophisticated and competitive, as a result of shrinking opportunities in the commercial insurance space which brokers typically find most profitable.

Analysts who spoke to BusinessDay last night, said small brokerage firms would have to contend with a lot of regulatory requirements, which are not unique to Nigeria, but constitute a demand across the global insurance space, requiring regulatory authorities to institute corporate governance culture to protect consumers.

The analysts say a test cases is compliance with the International Financial Reporting Standard (IFRS), monthly and quarterly returns, which has posed a lot of problems for many brokers, in terms of compliance.

Nicholas Okpara, director, supervision, National Insurance Commission (NAICOM) said most brokers have been unable to comply with the transition to IFRS, blaming it on lack of organisational structure in most firms.

“A large number of the insurance brokers are one-man portfolio offices. The managing director is the CEO, he is the accountant and the secretary and he is also the dispatch rider, how can he understand what we are saying about IFRS?

“At NAICOM, we have organised series of seminars to educate them on IFRS, and we have given them reporting format, but up till now, many of them have not submitted their 2012 IFRS returns,” Okpara disclosed.

He further noted that a situation where the CEO attends IFRS training meant for the accountants and auditors is very disturbing.

One of the brokers who shared his experience with BusinessDay, said the operating environment is tough; “We are finding it difficult to renew our licenses, we can’t meet regulatory requirements and business is not there.”

He added,”the fact that the entire market space is controlled by ten percent of the brokers and government and their agencies, is not helping the rest of us”.

Chris Davies, senior broker and account executive, Afro-Asian Insurance Services Limited, said “these are changing times for the global insurance market”, pointing out that local insurance brokers in Nigeria must begin to acquire new skills to be able to remain relevant.

“If you want to control a reasonable share of the market, you must be ready to provide compelling services that make insurance consumers want to deal with you directly, instead of the underwriters, and you must at the same time be in tune with modern technology because that is the direction of the world today”, Davies stated.

A senior council member of the Nigerian Council of Registered Insurance Brokers (NCRIB) who preferred not to be named, said it’s an acknowledged fact that the insurance industry generally is facing an uphill task in view of the parlous state of the economy, which is taking its toll on the insurance broking practice, in view of the fact that brokers are the professional intermediaries who interface with the clients that feel the pinch of the economy most.

He however observed that the NCRIB is seeking ways to grow the market and the survival of the professionals by encouraging them to embrace the options of mergers or the shared services scheme. “The shared services scheme seems to generate better appeal from the brokers, as it helps them maintain their identity. Under the shared services, the collaborating entities share services at reduced cost, while they have greater opportunities to prospect for clients”.

The greatest challenge the council member observed, is how to grow the market generally in such a way that even with less insurance broking involvement in terms of percentage, the little they get will enable them break even.

Painting a global picture, he said a recent report from the British Insurance Brokers Association (BIBA), indicated that brokers control only about 54 percent of insurance market share, leaving the rest to other distribution channels.

“It is ironic that brokers in Nigeria control up to 75 per cent, yet they are not as solvent as their UK counterparts. This tells us there is a need to grow the market and implore government to revive the economy and promote insurance growth.

According to him, countries such as Australia, are already practicing the variant of mergers, through the shared Brokers Administration Scheme, and it is hoped that this will help brokers stay afloat in Nigeria.

The NCRIB does not subscribe to the view in some quarters, that existing brokers are too many, considering the population of Nigeria and the huge potentials that the industry has.

Nigeria has over 500 registered brokerage firms.

 

[Business Day]