September 25, 2018
The Insurance industry is a very important part of any economy as it generally acts as a shock absorber for businesses. Insurance is a key risk management tool which enables businesses hedge against the potential risk of a loss. This helps to reduce uncertainties and improves the chances of survival for businesses. In addition to protecting businesses from risks, the Insurance industry also contributes to the economic development of a country by guarantying stability, generating long-term financial resources for investments and encouraging a savings culture.
Unfortunately, the Nigerian Insurance industry has not performed optimally thereby denying the country the above benefits. The level of investments in the sector is inadequate as the insurance penetration rate is still below 1% compared to the penetration rate of about 16% for South Africa. In terms of GDP contribution, the sector accounts for less than 1% of Nigerian GDP while in South Africa, it accounts for 17% of the GDP. Hence, there is room for substantial growth in the industry and efforts should be made to attract the much-needed investments.
While there are myriads of factors adversely impacting the industry, one of the major challenges is the unfair tax regime under which the Nigerian insurance businesses are taxed. The existing tax framework is discriminatory and non-neutral, thereby making the industry quite uncompetitive compared to their counterparts in their financial services industry and other jurisdictions.
There is a positive correlation between the level of tax neutrality and inflow of investment, as it reflects the level of competitiveness of an economy. If due to distortions in the tax system, economic decision makers view an industry/jurisdiction as tax advantageous compared to another industry/jurisdiction, investments will be directed away from the unfavorable industry/jurisdiction, thereby leading to stunted growth. This explains the current effort by various international organizations to achieve tax neutrality in the taxation of capital, consumption and income in cross border transactions.