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Protecting Your Insurance Investments

Protecting Your Insurance Investments

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Introduction

The concept of choice will remain relevant in every human activity for as long as the resources with which the myriad of human desires could be met are in short supply. Choices are therefore the preferences expressed to a course of action against various alternatives; the measure of the quality of choice made is the benefit derivable from other alternative courses of action. Similarly, investment is expressed as preference to jettison immediate satisfaction in anticipation of future returns;  future benefits from the investments is measured in comparison to the possible returns derivable from the alternative course(s) of action given the duration of the investment and risks associated with  the investment choice. Consequently, risks attributed to any investment is considered before an investment decision is made.  The investment decision made at a particular point in time is also dependent on the desired returns and the investor’s risk appetite. It is important to note that all investment decisions come with a certain amount of risks; which often times the returns on investment is directly proportional to the inherent risks attributed.

Investment risk assessment and risk appetite analysis are the most potent tools for investments decisions. These measures ensure that the risk of investment failure is removed or in worst case, reduced to the minimum level possible. This may have been the approach of investors, who identified the insurance space as a sector for arguably safe and long-term investments. 

The value of the insurance industry on the Nigerian stock exchange today is estimated to be at N112bn. This may be relatively low when compared to the Banking sector or the Oil & Gas sector, however it still shows that the sector is a destination for safe and secure investments. Also, the recent high-value foreign investments in the top players in the sector also highlights how much potential is seen in the sector. So why is the sector also a destination for investments (both local and foreign)? There are a number of reasons why individuals and organizations invest in stock of insurance companies, some of which may include:

  1. Regulatory Structure and Safety of Investment

An investment opportunity becomes attractive when its proposed returns on investment is relatively high and it comes at minimal to low risk. The strict regulatory oversight on the insurance industry players by its primary regulator, NAICOM, and other regulators like SEC, etc. provides effective framework for ensuring financial safety of the company and also the safety of investor funds. While NAICOM provides guidelines and regulations that drives growth and ensures quality management of insurance companies in the industry, SEC is in place to ensure the safety of all investor funds; ensuring consistent transparency and accountability of capitalized insurance companies to its investors. The impact of this structure is therefore evident in the growth of the insurance industry, financial safety of most of the players and also in the safety of most investors’ funds. 

  1. Investor Confidence 

For investors who invest in equities on a long-term basis, dividend is the investor’s  returns on investment. The frequency of dividend payment however may vary from time to time, depending not only on the financial performance of the insurance companies but also on the policy guiding dividend payment in the companies. While some companies assure their investors of yearly dividends,  companies with flexible dividend payment policies vary dividend payment in accordance with financial performance, re-investment model and other agreed terms. For investors with objective of returns on investment in the short term, they trade stock of insurance companies at the stock market; which may be at the floor of the NSE or other relevant trade terminals. Capital gain is such investor’s returns on investment; which is measured by excess of sales price over purchase price of stock on the market. The performance of short-term investment in insurance stocks however is highly dependent on the daily price of the purchased stock, which is influenced by a wide range of things: including, supply & demand, brand value, company earnings, interest rates, political climate, etc.  Despite the ongoing recapitalization of the insurance industry, the NSE Insurance Index has averaged 115.51 so far in 2019, and in the last five months the value of the insurance sector on the Nigeria Stock Exchange has increased from N107.bn to N112bn; which is about 3.7% growth. This is a positive development, as it is a testament to the growing investor confidence in the sector despite uncertainty following the ongoing recapitalization of the industry. This also shows that there are huge investment opportunities  in the insurance sector which needs to be leveraged and this highlights why investors may be  interested in investing in Insurance. 

Some of the techniques that may be employed to ensure the safety of investments in insurance may include:

  1. Financial Flexibility: Investors need to ensure that any investment in Insurance company can guarantee ease of exit whenever such need arise. Financial flexibility will be adequately guaranteed if the investor base are well diversified. This will enhance its liquidity as investors can sell and buy stocks during the trading days in the secondary market.
  2. Engaging subject matter experts: dealing in stocks generally require a high- level of expertise that may only be provided by relevant professionals who deal in stocks, i.e. stockbrokers. An investor (company) may also engage investment companies to manage all its investment related decisions. This is to ensure an effective management of these funds and other associated risks. It is important to note that these subject matter experts (brokers, investment organizations etc.) understand the industry, macroeconomic indices and how it impacts investments, the capital market, etc. and as a result an investor should never substitute their importance for mere feeling of gut or inadequate information.
  3. Diversified Portfolio: the more profitable an investment, the higher the potential risk associated with such investment. Therefore, investors should build up a portfolio with a mix of distinct types of investment to reduce the unsystematic risk. Unsystematic risk is associated with overconcentration of investment in the Stock of a company. Investors that have identified the insurance industry for the investment of their funds may split their investment funds in suitable percentage split across a few companies. They may also have a mix between long-term investments and short-term (stock market) across industry players to reduce concentration risks and help diversify their investment portfolio. 
  4. Management of Systematic risks: Systemic risks are risks that are associated with an entire financial system or entire market. In relatable terms, they are risks macroeconomic parameters (which includes; inflation, FX, etc.), political climate, government policy, etc. may pose to the success of an investment. government regulation and Interest rate. Management of systemic risks is highly dependent on the expertise of who is managing the investments, usually it is advised to engage professional outfits to manage investments, as they have the requisite skills required to maneuver this risks and still deliver returns to investor(s). In managing this personally, it is important to consistently scan the macroeconomic environment, identifying various risks and developing risk mitigating strategies for each of the identified risks. 

The Insurance sector is proving to be a productive ground for investments (both local and foreign), particularly in light of the recent efforts to recapitalize the industry by NAICOM. It would not be far fetched to expect immediate and successful impact of the recapitalization in the sector to be the same as experienced post-capitalization of the banking industry. To this effect, it is not only important to leverage this projected growth in the industry through investments, but to also ensure that effective and efficient management measures are put in place to drive optimal returns from investments in the insurance sector.

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