The Effect of Inflation on Insurance Claim Costs and Premium Adequacy in Nigeria

This study examines the effect of Nigeria's persistently elevated inflation on insurance claim costs and the resulting implications for premium adequacy across major insurance lines. Inflation erodes the real purchasing power of fixed premium income while simultaneously increasing the nominal cost of claims settlement, creating profitability pressure for insurers who fail to adjust premiums on a timely basis. Nigeria's annual inflation rate has exceeded 20 percent in recent periods, driven by food price shocks, fuel subsidy removal, and currency depreciation, creating significant actuarial challenges for loss reserving and premium setting. This study uses secondary data from NAICOM, the NBS Consumer Price Index, and claims cost data from the annual returns of 12 general insurance companies for 2019 to 2023. Motor, fire, and engineering claims cost inflation are compared against general CPI and their respective input cost indices. The impact of claims inflation on combined ratios is modeled under different premium adjustment frequency scenarios. Findings reveal that motor claims costs have inflated at an average annual rate of 28 percent over the study period, exceeding both general CPI and average premium rate adjustments. Fire insurance claims show similar trends driven by building material cost inflation. The study concludes that premium inadequacy driven by claims inflation is a growing solvency threat for Nigerian non-life insurers. It recommends that NAICOM introduce mandatory annual premium adequacy certification by actuaries for all major insurance lines.

Keywords: inflation, claims costs, premium adequacy, non-life insurance, actuarial reserving.