Attitude of people towards annuity in Nigeria and probably elsewhere

 

The attitude of people towards annuity in Nigeria and probably elsewhere

Despite the economic benefits of annuities, it is a known fact that few people voluntarily annuitize their retirement savings. A risk averse consumer faces uncertainty about his/her remaining years on earth and is not wanting to place a value on annuities that guarantees a stable income till his/her death. In fact many papers have tried to find out the reason why a few individuals purchase annuities despite of the enormous benefits and unfortunately all these papers failed to establish a general explanation on why this is so. Luck befell this quest when Jeffrey R. Brown, Jeffrey R. Kling, Sendhil Mullainathan and Marian V. Wrobel

(2008) in their paper concluded that “the vast majority of individuals prefer annuity over alternative products when presented in a consumption frame whereas majority of individuals prefer non-annuitized products when presented in an investment frame”.

Not until recently, life insurance has not been embraced in Nigeria, attributable to religion and traditional beliefs and this could be pictured through its contribution to the nation’s GDP at the rate of 0.1% while non-life business contributes 0.2% making a total contribution of 0.3% to the nation’s GDP. These rates are as at 2014 research done and reported by datamarket. In my personal opinion, the attitude of people towards the entirety of insurance is not helping the industry to grow due to the history of non-redemption of benefits as at when due. Large proportion of Nigerians with no exception of learned ones believe that insurance is a scam. 

Since the people of Nigerian state do not belief in insurance, hence selling its products to people has been difficult. The decision or idea of not wanting to insure against one’s death is a societal norm, due to culture and religiosity, has eating deep in our nation - is like a taboo to insure against one’s death since this could be likened to paying for one’s death and this has made it difficult for life products to thrive.

On the other hand, insurers do not help matters by low penetration via marketing although some stakeholders believe the real situation is that the industry lost its integrity years ago. The industry should see marketing as a key driver to growing its business. History has it that benefits weren’t redeemed as at when due in the 90’s, when Nigerians started hoping it was going to work for them. Unfortunately, larger percentage of people who bought one or two policies were grossly disappointed. With the intervention of the regulator over the past few years, the industry has undoubtedly received a bit of life unlike the era of no regulation or almost self-regulated market.

 The evolution of the contributory scheme in Nigeria

Not until the Pension Reform Act of 2004, Nigeria had been operating solely an unfunded defined benefit scheme which made payments of pensions reliant on the annual budgetary position. 

On the public sector, the scheme was flawed by inefficiencies and lack of good administrators which was due to financial malpractices whilst their peers in the private arena had situations whereby employees were not protected by the pension schemes placed by their employers or these neglected sufficiently funding the schemes. 

Additionally, problems were attributed to low coverage and non-compliance leaving most employees with no or inadequate retirement benefit arrangements. The government had to find a way to resolute this anomaly in the pension system, and introduced “the contributory scheme” in 2004 by the then government and later retracted by the Pension Reform Act of 2014, which now gives two pay-out options to employees at retirement - programmed withdrawal and life annuity. These two pay-out options are expanded in the subsequent paragraphs.

Under this act, both the employees and their employers are committed to contributing certain percentages monthly to the fund with licensed independent Pension Fund Administrators(PFAs) and Closed Pension Fund Administrators (CPFAs) and managed by Pension Fund Custodians (PFCs). 

The minimum statutory percentage of 7.5% (of employee’s monthly emoluments) is expected from the employer and employee. The emoluments consist of basic salary, housing allowance, transport allowance and others depending on firm’s structure or employee’s grade level. 

The Nigerian Pension Commission (PENCOM). Established under the Nigeria Pension Reform Act No.2 of 2004, licenses, regulates and monitors the Pension Fund Administrators (PFAs) and Pension Fund Custodian (PFCs). It’s worthy to note that an employee has the right to choose his own independent Pension Fund Administrator (PFA) with a unique but constant identification from inception. The Fund Administrators jointly invest the deposits with their respective Custodians (PFCs).

Why PA 90 Standard Life Table?

The implementation of PA 90 as a standard table in the Nigerian insurance space could be linked to the harmonisation regime that kicked off IFRS 4 in the market precisely 2011. Though IFRS 4 is an International Financial Reporting Standard issued in March 2004, it was not implemented in the region until 2011. Prior this time Generally Accepted Accounting Principles (GAAP) was the main standard.

To properly match with IFRS 4 standard, an unpublished study was carried out by a few active Life Actuaries in Nigeria and results at the time exhibited a close experience to that of PA 90 of the UK.

Annuities

Whenever any financial product comes up, the primary focus of every stakeholder is to know the impact on their wealth, socio-economic status of any subscriber and subsequently the overall impact on the nation’s economy. Though there are different shades of annuities such as immediate versus differed, fixed versus variable, and whole life and temporary annuities, etc., but in general annuity is a contract between a buyer usually called a policyholder and the seller known as the insurance company, see Dickson, D., Hardy, M. and Waters, H. (2013). The two main perspectives, insurers and policyholders’ perspectives, will be analysed. The main channel for delivering defined contribution (DC) pensions is via an annuity purchased from a life insurance company.

An annuity could be referred to as “reverse life insurance” since it plays out in opposite direction of a life insurance product. In the case of life insurance, the policyholder pays monthly or annually the insurer until he or she dies, after which the insurer pays a lump sum to the insured’s estate(s). On the contrary in the case of annuities, the annuitant will make a lump sum payment to the insurer, and subsequently receives regular payouts from the latter.

Economists define the value of an annuity as what is called “Money’s Worth”, and this can be valued by juxtaposing the premium to the present value of lifelong future benefits to the policyholder, also known as the purchaser. Take for instance an immediate single life annuity that costs $200,000 would pay an annual benefit of $12,400 for life if the purchaser survives. Olivia S Mitchell (2004) thoroughly worked on valuing annuities.

The need for mortality investigation

At the inception of rolling out the contributory scheme, more retirees settled for Programmed Withdrawal and this was attributed to lack of knowledge or misinformation. Even as at March 2016, 82% of retirees chose Programmed Withdrawal whilst 18% of retirees subscribed to Annuity. Of the total retirees (5630) in Programmed Withdrawal who subscribed during the last quarter, analysis by sector showed that 71.74% were from the public sector while the remainder were from the private sector.

As people are becoming more aware of annuity and its benefits, game has suddenly changed in the recent times as more people are leaving programmed withdrawal for annuity by the day. Also (Aladeloye Oluwaseyi and H. Hasim 2015) concluded that life annuity is better than programmed withdrawal. Now that annuity business is gaining momentum in the Nigerian market, stakeholders are much concerned about its pricing, reserving and the general management of the fund to mitigate against any future risks.

Since every stakeholder now shows interest in knowing what goes on in the background ranging from pricing to writing annuity business, adequate studies of mortality experience need to be done. In the quest of staying in the business using the best practices, concern on how to move away from using UK Mortality experience and come up with the real experience in Nigeria has been the focus and the exercise is termed “Mortality Investigation”.

Investigating mortality rates is a very critical part of life insurance business and entails carrying out a research on mortality and morbidity experience of a defined population. The UK CMI has split this into four major areas namely: annuitant mortality, assurances (critical illness and mortality), income protection, self-administered pension scheme (SAPs) mortality and mortality projections considering future changes in mortality experience. This investigation in general examines and analyses the observed experience in the subsets of the total data and mortality and morbidity tables should be periodically produced.

Reference.

MORTALITY INVESTIGATION – DOES LIFE TABLE

PA90 MODEL ANNUITANTS MORTALITY IN NIGERIA?

PETER DAMILARE OLALEYE