Liability-driven investing (LDI) represents a strategy typically associated with well-established financial markets, where investors utilize various derivative instruments to mitigate risks and meet long-term obligations. In these developed markets, tools such as interest rate swaps, corporate bonds with extended durations, and inflation-linked securities facilitate effective portfolio management that aligns with actuarial predictions and compliance standards.
However, this investment strategy faces significant challenges in emerging markets like Nigeria, where market liquidity is often constrained and economic policies can change abruptly.
In these environments, the essence of LDI shifts from relying on complex financial products to adopting a disciplined approach that emphasizes timing, currency management, and interest rate responsiveness to ensure consistent cash flow management.
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Adapting LDI principles to Nigeria’s market
The application of LDI in Nigeria exemplifies how established investment principles must be reinterpreted for a more volatile market landscape. While the overarching goal remains the same—aligning cash flow obligations with asset management—the methods of execution must adapt to a more limited toolkit. Investors must exercise significant judgment, as conventional models and hedging strategies may prove less effective.
Challenges faced by Nigerian insurers
Insurance companies in Nigeria, particularly those managing life insurance and annuities, must maintain a disciplined approach to navigate frequent liquidity challenges, currency fluctuations, and evolving regulations. Here, the focus shifts to managing liabilities rather than solely pursuing returns on investments. Experience in Nigeria’s insurance sector indicates that companies prioritizing liability alignment demonstrate stronger financial stability, even amid limited data systems and shallow market liquidity.
Understanding Nigeria’s liability structures
In Nigeria, insurance liabilities appear in various forms: predictable timing for life obligations, erratic cash flow patterns for general insurance reserves, and embedded guarantees sensitive to interest rate changes. The liability framework in Nigeria can be analyzed through three critical dimensions:
1. Yield curve characteristics: Unlike the continuous yield curve observed in developed markets, Nigeria’s yield curve is fragmented, influenced by factors such as government borrowing, institutional demand, and central bank decisions. Bonds issued by the Federal Government of Nigeria (FGN), primarily managed by the Debt Management Office (DMO), dominate this space. These bonds are typically issued with maturities ranging from two to thirty years, although issuance often clusters around specific tenors.
2. Market liquidity constraints: As of mid-2025, a significant portion of the outstanding FGN bonds—over 60%—is held by pension funds, many of which are classified as ‘held to maturity’ (PenCom, 2025). Insurance firms in Nigeria face similar regulatory limitations under the National Insurance Commission (NAICOM), leading to reduced trading activity and limited flexibility in portfolio rebalancing.
3. Volatility of monetary policy: Frequent shifts in monetary policy can trigger short-term market fluctuations. For instance, a sudden increase in benchmark interest rates in the first quarter of this year caused the yield on a 10-year FGN bond to rise from 16.8% to 22.6%, highlighting the unpredictable nature of the market (BusinessDay, 2025).
Strategizing within constraints
For investors, constructing an LDI portfolio in Nigeria requires a blend of creativity and practicality, given the limited range of available instruments and regulatory constraints. Effective duration alignment should focus on critical maturities; merely matching the average duration of assets to liabilities may not suffice if asset concentration is uneven.
Foreign obligations introduce further challenges; insurers working with offshore reinsurers can benefit from maintaining reserves in US dollars or securing instruments that generate dollar-linked cash flows. Due to the scarcity of foreign exchange hedging tools in Nigeria, this currency mismatch can present significant risks that are challenging to mitigate.
However, this investment strategy faces significant challenges in emerging markets like Nigeria, where market liquidity is often constrained and economic policies can change abruptly. In these environments, the essence of LDI shifts from relying on complex financial products to adopting a disciplined approach that emphasizes timing, currency management, and interest rate responsiveness to ensure consistent cash flow management.0
The essence of LDI in frontier markets
However, this investment strategy faces significant challenges in emerging markets like Nigeria, where market liquidity is often constrained and economic policies can change abruptly. In these environments, the essence of LDI shifts from relying on complex financial products to adopting a disciplined approach that emphasizes timing, currency management, and interest rate responsiveness to ensure consistent cash flow management.1
