Lessons from Liability-Driven Investing in Frontier Markets: The Case of Nigeria

The starting point of any LDI strategy is a thorough understanding of the institution's liability profile. The process is both analytical and strategic. Nigerian insurance liabilities come in several forms: life obligations with actuarially predictable timing, general insurance reserves with higher variance in cashflow timing, and embedded guarantees with interest sensitivity.

Three primary dimensions define the liability structure:

• Timing: Life and annuity obligations often extend across 5–30 years. General insurance liabilities may require settlement within 6–24 months. Cashflow projections must distinguish between these timelines and adjust for reinsurance recoveries and expense provisions.
• Currency: Currency alignment remains a foundational principle. The Central Bank of Nigeria's exchange rate management framework experienced a series of adjustments between 2020 and 2025, including a move from a managed peg to a more market-reflective rate. The naira depreciated from ~₦380/USD in 2020 to above ₦1,500/USD by Q1 2025, a decline of over 290% (source: CBN, 2025). For insurers with foreign-currency liabilities, holding naira assets introduces unrecoverable mismatches.
• Interest Rate Sensitivity: Duration, convexity, and key rate duration (KRD) tools help estimate how liabilities will reprice under shifting yield curves. KRD, in particular, has been instrumental in identifying exposures to specific tenors, such as the 5-year or 10-year points. This granularity is essential in Nigeria, where non-parallel curve shifts are common.

Nigeria’s yield curve is not a smooth continuum of maturities and pricing. Rather, it behaves as a segmented curve, shaped by government borrowing patterns, institutional demand, and central bank policy actions. Federal Government of Nigeria (FGN) bonds, issued by the Debt Management Office (DMO), dominate the fixed-income space. These instruments offer tenors between 2 and 30 years, but issuance is often clustered.

The secondary market is relatively shallow. As of mid-2025, pension funds held over 60% of outstanding FGN bonds, and a substantial portion were marked as “held to maturity” (PenCom, 2025). Insurance companies, facing similar regulatory treatment under NAICOM rules, also maintain low trading activity. This limits portfolio rebalancing flexibility.

Monetary policy changes frequently introduce short-term volatility. Open market operations (OMOs), cash reserve debits, and sudden benchmark interest rate changes have led to yield spikes of 200–300 basis points over a single week. For example, in Q1 2025, the 10-year FGN bond yield rose from 16.8% to 22.6% following a surprise MPR hike and liquidity sterilisation campaign (BusinessDay, 2025).

These dynamics have three implications for LDI strategy:

• Parallel duration matching strategies can produce unintended mismatches during non-parallel curve shifts.
• Active KRD management, even in the absence of derivatives, allows better immunisation.
• Segmenting portfolios between matching and return-seeking buckets improves resilience.

Constructing an LDI-aligned portfolio in Nigeria requires practical creativity. Portfolio architecture depends on instrument availability, regulatory constraints, and realistic trading liquidity.

Duration alignment is most effective when structured around key tenors. In practice, an allocation with similar average duration to liabilities may still result in NAV instability if the asset portfolio is concentrated in short-dated bonds while liabilities peak at the 10-year mark.

Insurers with foreign obligations, such as those paying offshore reinsurers, benefit from maintaining USD reserves or instruments with USD-linked cashflows. Given Nigeria’s limited FX hedging instruments, currency mismatches often introduce unhedgeable downside risks.

Scenario testing has become a core risk management tool in Nigerian insurance ALM practices. Volatility in yields, FX, and inflation is both frequent and severe. Each episode, whether from policy, geopolitical, or supply-side shocks, tests an institution’s positioning.

Professionally, incorporating regular stress testing into investment governance cycles produces tangible advantages. The most effective institutions model quarterly scenarios across:

• Interest Rate Shocks: +300bps parallel and non-parallel shifts, with attention to short-end dislocations.
• FX Devaluations: Simulated 20–30% shifts, benchmarked against historical CBN adjustments.
• Liquidity Events: Disruptions in the repo market or increased capital call requirements.
• Inflation Surprises: Fuel subsidy reforms or FX pass-throughs that affect claim cost models.

Based on current regulatory frameworks, market structure, and operational experience, the following LDI strategy pillars serve as a robust foundation:

• Begin with Actuarial Mapping: Use internal and external actuarial tools to define projected cashflows, claim lag structures, and expense ratios.
• Match Key Rate Durations, Not Averages: Allocate assets with exposures tied to the same tenors where liabilities concentrate. This approach addresses Nigeria's curve segmentation.
• Separate Matching from Yield-Seeking Pools: Designate a portion of AUM as the liability immunisation portfolio and manage return-seeking positions independently.
• Prioritise Currency Alignment: Use USD or FCY-denominated assets only against FCY-denominated liabilities. For naira liabilities, remain hedged through local instruments.
• Run Quarterly Stress Tests: Build resilience by integrating base-case and adverse scenarios into asset allocation reviews.
• Monitor Solvency & Regulatory Compliance: NAICOM and PenCom provide strict guidelines on admissible assets, duration gaps, and credit exposure. Compliance supports operational continuity.

LDI in Nigeria is not a derivative-heavy process or a search for precision across every basis point. It is a discipline of balance, grounded in institutional obligations and executed within a market that rewards patience, positioning, and structural foresight. Where perfect hedges do not exist, partial alignment still brings order. Where instruments are limited, informed segmentation offers flexibility. And where volatility persists, regular recalibration sustains solvency.

From practice, the institutions that thrive under these conditions do not rely on exotic products or timing luck. They commit to alignment, between promises made and capital deployed. That remains the true core of LDI in Nigeria.