Nigeria's startup ecosystem is expanding at an impressive rate, with more innovative businesses that cuts across every sector of the economy. While this is good news, growth increases risk tendencies. This is why Nigerian startups should endeavor to put an adequate protection in place to safeguard their business against unforeseen events, through insurance.
Insurance acts as a risk mitigator that allows startup founders to focus on doing what it takes to achieve their company goals without having to worry about potentially devastating events that are completely out of their control and could be financially crippling. However, it is not sure how much help the sector can render to startups, considering its recapitalisation limitations when compared to Nigerian unicorn startups like Flutterwave.
In 2018, Mohammed Kari, who was the Commissioner for Insurance at that time described the insurance sector as the weakest link in the Nigerian economy due to the low capital base of operators, which has remained relatively low even after the Finance act in 2021 provided new grounds for recapitalization.
Session 33 of Finance Act 2021, which amended section 9 (102) of the Insurance Act 2003, has a clearer definition of the capital increase exercise tagged minimum share capital, mandating life operating firms to upgrade their capital from N2 billion to N8 billion, firms on General business were mandated to upgrade their capital from N5 billion to N10 billion while composite firms were to upgrade from N5 billion to N18 billion. while reinsurance companies operating then with N10 billion were to increase to N12 billion at the first phase and N20 billion in the second phase.
Although some insurance companies in Nigeria have met and surpassed these minimum requirements, it met serious resistance as most firms felt the margin of the increase was too high and beyond their capacity. In general, the capitalization of insurance companies in Nigeria is generally lower than that of unicorns like Flutterwave.
As of February 2023, Flutterwave, one of the most valuable startups in Nigeria was valued at $3 billion after raising $250 million in a Series D funding round in 2022. In contrast, the largest insurance company in Nigeria, AIICO Insurance, had a market capitalization of around $46.9 million as of 2022.
While the capitalization of insurance companies in Nigeria may be lower than that of some unicorns, it is important to note that insurance companies are required by law to maintain adequate reserves to cover their policyholders' claims. In addition, many insurance companies in Nigeria have established reinsurance arrangements with other insurers or reinsurers to help manage their risk exposure.
In addition to the capitalization limitations, the insurance industry has been associated with work ethics that has led to distrust among startup founders, stemming from the fact that many insurance policies may have complex terms and conditions that can be difficult for startups to understand. Also, there are popular accusations that some insurance companies may try to avoid paying out claims by finding loopholes in the policy or using technicalities to deny coverage.
Also, there could be reduced insurance penetration among Insurance companies that often charge higher premiums to startups and small businesses, which can be a significant financial burden for companies that are already struggling to make ends meet. The high cost of insurance can also make it challenging for startups to attract investors, who may be hesitant to invest in a company that has high insurance costs and may discourage Startups from seeking insurance coverage.
Furthermore, it is common knowledge that Nigerian insurance companies are slow in claims processing and payment. Startups that file claims with insurance companies often have to wait for an extended period before their claims are processed and paid. This delay can be detrimental to a startup's cash flow, and it can affect the company's ability to operate and grow.
This is not far from what is obtainable in developed countries where startups face similar challenges when dealing with insurance companies. However, the difference lies in the level of support and resources available to these startups. In developed countries, there are more options for insurance policies and more competition among insurance companies, which can lead to lower premiums and better coverage.
Moreover, insurance companies in developed countries often have better customer service and claims processing systems. Startups that file claims with insurance companies in developed countries can expect faster claims processing and payment, which can help them maintain their cash flow and continue operating.
Despite the factors that may contribute to the lack of trust in insurance companies, startups in Nigeria can still trust insurance companies if they do their due diligence and choose the right insurance provider, by researching the Reputation, Financial Stability, Customizable Policies, Customer Service to determine an insurer that can meet their current needs, as well as getting themselves acquainted with the insurance sector as a whole.
Finally, the availability and quality of insurance coverage from Nigerian insurance companies may vary depending on the size and type of the startup, as well as the industry in which it operates.
Therefore, Nigerian startups should carefully evaluate the financial strength and reputation of any insurance company they are considering working with. They should also make sure they understand the terms and conditions of the insurance coverage being offered, including any exclusions or limitations, to ensure that it meets their specific needs and risk profile. It may also be advisable for startups to work with an experienced insurance broker or consultant who can help them navigate the insurance market and identify the best coverage options for their business.
I already posted this article on my medium page, but I think it is an interesting read for the members of this community.