Claims Management And Profitability Of Insurance Companies In Nigeria

Project and Seminar Material for Insurance

Claims Management And Profitability Of Insurance Companies In Nigeria


Abstract


The main objective of this study is to analyse the effects of claims settlement on the profitability of Nigeria Insurance industry. The study adopts descriptive and analytical method of historical and time series data. The study was conducted to cover the period from 1986 to 2011 (twenty-five years). The secondary data used for the study was obtained from the Central Bank of Nigeria (CBN) Statistical Bulletin, 2014. The secondary data were presented in tables and multiple regression method was adopted to assess the relationship between the variables employed. T-statistics and F-statistics were used to test the hypotheses formulated in the study.

The result from the analysis revealed that there is a significant relationship between claims settlement and profitability of the Nigerian insurance industry. Also, there is a significant relationship between claims settlement and premium received by insurance industry in Nigeria. It is therefore, recommended that insurance firms need to emphasize prompt payment of adequate claims for increased patronage, which is always reflected in payment of premium and profitability.

 


Table of Contents


Chapter One

Introduction

  • 1.1 Background of the Study
  • 1.2 Problem Statement
  • 1.3 Study Objectives
  • 1.4 Significance of the Study
  • 1.5 Study Questions / Hypotheses
  • 1.6 Scope and Limitation of the Study
  • 1.7 Definition of Terms

Chapter Two

Review of Related and Relevant Literature

  • 2.1 Introduction
  • 2.2 Conceptual Clarifications
  • 2.3 Theoretical Studies
  • 2.4 Empirical Studies
  • 2.5 Related Literatures

Chapter Three

Research Methodology

  • 3.1 Research Design
  • 3.2 Study Area
  • 3.3 Sources Of Data
  • 3.4 Population Of The Study
  • 3.5 Sample Size Determination
  • 3.6 Instrumentation
  • 3.7 Reliability And Validity Of Instrument
  • 3.8 Method of Data Analysis

Chapter Four

Data Presentation, Analysis and Interpretation

  • 4.1 Data Presentation
  • 4.2 Data Analysis
  • 4.3 Data Interpretation

Chapter Five

Summary, Conclusion and Recommendation

  • 5.1 Summary
  • 5.2 Conclusion
  • 5.3 Recommendation
  • References
  • Appendix

Chapter One


Introduction

Background of the Study

Recent years have seen a significant increase in the awareness level of insurance in the economy of Nigeria, and West Africa as a whole. Even though not encouraging, the latest observations indicate that insurance awareness is increasing but rather at a slow pace, (National insurance commission annual report, 2009).

Unlike in developed countries like the United State of America (U.S.A) and United Kingdom (U.K) where insurance awareness is deemed to have reached its peak and is now concerned with the awareness of insurance operations on the Internet, Nigeria may be said to be at its very elementary stage.

A survey conducted and published in the 24th September, 2000 edition of a leading U.K research organisation, Marketing & Opinion Research International (MORI) Financial Services, concluded that even though the awareness of insurance is at its peak, 56% of people have no insurance cover at all that will cover their financial interest should the worst happen . The research also stated that few people have adequate insurance cover due to misconceptions and slow claim processes of insurers.

The economy of Nigeria has been marked for growth and it is expected that this growth would be faster than it has done over the past three decades.

The current growth statistics as reported in the publication of the African Economic Outlook and in the 3rd August, 2010 edition states that after about a decade of relatively strong economic performance with real gross domestic product (GDP) growing at an average of about 6% annually over the last five years, there was greater uncertainty about Nigeria‟s economic growth prospects at the beginning of 2009.

Unsurprisingly, economic growth slowed in 2009, to a mere 4.7% – the lowest since 2002 – after rising to a two-decade high of 7.3% in 2008.

Economic growth is expected to recover modestly to 6.4% in 2010 and accelerate to 8.3% in 2011 on the back of global recovery, exceptional public investment in the rising oil sector, and revenues from anticipated new oil discoveries.

According to Aryeetey et al (2000), the performance of Nigeria‟s economy and economic growth has been characterized by the non- attainment of macroeconomic targets. In particular, whereas the Gross Domestic Product (GDP) was expected to grow between 7.1% and 8.3% in the period 1996-2000, actual growth was between 4.2% and 5.0%. The significant deviation between targets and the actual was interpreted into low per capita GDP growth and poor growth of the economy.

The argument on slow growth of the Nigeria economy cannot be exhausted without linking it to the worrying rate of growth in the service market especially the insurance industry.

Over the past years the insurance service sector has contributed immensely to the economy of Nigeria. The industry can contribute even more if proper and better attention is given to the delivery of this sector.

“Clearly, if some measures are taken to decrease the financial losses and partly relieve the burden of losses associated with risks, it will facilitate the conduct of business and more people will be willing to do it” (Siddiqi, 1994).

The rising intricacy of the world economic system in today‟s industrial age has increased the importance of insurance in the process of manufacturing and profit-making dealings. The absence of insurance will constantly subject the individual/organization to the fear of a huge financial loss in the event of a tragedy and so will affect their decision making course of action in diverse ways. It is therefore apparent that a viable economy is dependent on insurance companies being swift in compensating victims of an insurance claim.

One of the principal functions of insurance is the settlement of claims. It is in fact the worry that a loss might occur that persuades individuals and economic institutions to take up insurance policies. Claims settlement is the monetary compensation that is paid to the policyholder in the event of a loss. (Parsons, 2005).

It used to be said that insurers would do anything possible to squirm out of paying claims. Insurers have been criticized for their marketing methods, based on cloudiness, twisting and mis-selling. If a company does not effectively handle its claims service, it can tarnish its image hence affect the profitability of their insurance products. Insurance company‟s attitude to claims settlement has in the past provoked a lot of public criticism and even attracted the attention of governments.

In the past majority of insurers have persistently failed to recognize the need for qualified staff or claims specialists to enhance their claims service.

The typical claims department always seemed to be an afterthought, the last to get new equipment or staff. The focus was on sales, winning new business and retaining accounts. As the years passed there have been very few changes in the perception of claims (Burley, 2008)

It is in this light that most insurance regulatory bodies now seek to recognize the need for a thorough review of the role of the claims professionals in the insurance industry (Kelly, 2008).

Recently, however, in developed countries, the true value of the claims professional has come to the fore and now the claims operation is recognized as being the point where “Treating Customers Fairly” is tested and where the customer experience is molded. This increased focus on claims operation has brought its own benefits to claims professionals. Not only has their individual value enhanced but claim operation is now valued: it is the shop window of the insurance industry and has never been more tested (Burley, 2008).


Statement of the Problem

In Nigeria, the insurance companies, just like other insurance companies in other parts of the world, do pay claims, yet they have a dented image in the eyes of the insuring public (Lijadu, 2002). The problem of running an effective claims administration that would satisfy the customers and earn their confidence as well as cause them to repurchase insurance products has remained too long in the insurance industry in the sub-region and the world at large.

Claims settlement is like a mirror through which the members of the public see an Insurance Company. A Company, which fails to settle claims to the satisfaction of customers, would definitely attract less business, as it is likely to discourage such clients to continue to insure with the company. Such clients might even advise their friends, colleagues and relations not to patronize such a company.

Prudent claims administration strategy promotes customer loyalty as it helps to develop a perception of „membership‟ or belonging within a particular group of customers, thereby providing the company with opportunities to retain existing customers while attracting new ones and profitable ones (Braers, 2004)
The consequent effects of the above problem could lead to downward trends in profitability figure, low premium income, low capital formation (savings and loans) and minimal contribution of an insurance company to the gross domestic product (GDP) of a country.

This project is therefore to look at the effects of slow insurance claims settlement on the profitability of insurance products: situational analysis of Leadway Assuance Company Ltd.plc . –Nigeria


Research Aims & Objectives

The objective of this study therefore was to critically examine the effect of efficient and prudent claim settlement procedures on the profitability of insurance products in the company; Leadway Assuance Company Ltd.plc -Nigeria.

More specifically, the study:

  1. Reviewed current literature on service marketing vis-à-vis literature on claims settlement.
  2. Established the relationship between the claims settlement and customer repurchase of insurance.
  3. Examined the customer‟s perception of existing trend of claims settlement system in the company through questionnaire and interviews to both the company‟s staff and their clientele.
  4. Finally, gave recommendations on the best way to settle claims that would ensure customer satisfaction and increase premium growth.

Research Questions

The research exercise is set out to answer the following questions:

  1. Does the payment or non-payment of insured‟s expected claim amount have any effect on the profitability of insurance products?
  2. Does prompt claims settlement have any effect on the profitability of insurance products?
  3. Does the settlement or non-settlement of claims have any effect on the profitability of insurance products?
  4. Are consumers‟ decisions and choices influenced by the company‟s claims handling process?
  5. Does the Company have any structure in place to ensure customer satisfaction and to cater for customer complaints?

Scope of the Study

The study is based on the Nigerian insurance market using Leadway Assurance as a scenario for the study. The research specifically investigated the company’s claims service delivery vis-à-vis their customer services and corresponding effects on profitability figures. It examined the effects of efficient and prudent claim settlement procedures on the profitability of insurance products in the company.


Significance of the Study

The payment of claims is not only a legal obligation but also a strong public relations instrument and a marketing strategy that has a lot of bearing on the sale of insurance products. This study aimed at identifying whether claims settlement affect the demand for the company’s insurance products and customers choices.

This study will help Leadway Assurance identify and adopt the best ways to settle claims that will ensure customer satisfaction, which will have the positive effect of improving the image of the insurance company in the sub-region. This improved image will, in turn, increase demand for their insurance products and increase premium income generation/profitability figures, capital formation and contribution to the economy of the country in the sub-region.


Limitation of the Study

A major constraint was imposed by the time available for the study, which was limiting. This therefore forced the researcher to limit the study to just only one insurance company in the Ibadan only, notably the Branch Office.


Chapter Five


Conclusions and Recommendations

Introduction

Claims management is considered to be one of the most valuable possessions of any insurer. It is one aspect of insurance practice, the handling, which can make or mar the image of Insurance Company. In fact, one of the principal functions of Insurance is the settlement of claims because it is the fear that a loss might occur that induces individuals and economic institutions to take out Insurance policies.

The problem of running an effective claims administration that would satisfy the customers, thereby earning the confidence of the customers and consequently inducing repurchase

There was therefore a need to carry out a research with a view to finding out a more efficient and effective method of handling claims that will meet customers‟ satisfaction and in turn, redeem the sinking image of the insurance companies in the eyes of the insuring public, pave way for better performance and hence contribute to the economic development of Nigeria.

The emphasis here was to investigate the relationship between fast claims settlement and the profitability of insurance products.

Due to the constraints of time, the inability to measure the level of demand using the total profitability figures of the selected company and the fact that the total amount of claims settled as reflected on their financial statements is not a true reflection of the extent of customer satisfaction in the claims service provided by the insurers, the researcher relied more heavily on the responses from the insured who were randomly picked from the company‟s clientele.

In order to chart a trend of thought for the research effort, there was the need to have a good understanding of the history of claims and insurance.

There was also the need to review the current literature on service marketing and claims administration to enable the researcher see how other researchers who worked on similar problems went about their study. Some of the important current issues reviewed included the unique features of service marketing, challenges of service marketing, on-line claims tracking and rapid communications, automated claims processing that eliminates lengthy delays and reduces cost and claims services outsourcing.

The efficient and effective conduct of the entire research work required a description of the approaches to be used in the study. This was done by carrying out a description of the research design, the identification of the data gathering techniques and data processing methods to be adopted in order to extract meaning from the data gathered in the course of the research work. Structured questionnaire was randomly administered in the study area to gather the required data from the insuring public and the insurance company. The data gathered were thereafter screened and analysed to answer the research questions based on the processed data.


Conclusions

Even though the demand for certain insurance policies might have been affected by contractual and legal requirements such as Bond, Motor, Workmen‟s Compensation Insurances etc, the results of the analysis of data as presented in chapter four showed that prompt and satisfactory claims settlement has positive effects on the profitability of insurance products and vice versa. This confirmed the supposition by the researcher that the dented image of the insurance industry in the West African sub-region and the consequent effects on the economies of Nigeria may not be unconnected with the poor claims administration. This inference drawn from the results of the analysis of the study data is supported by opinions strongly held by some authorities;

In a paper presented before the Image Committee of the Chartered Insurance Institute of Nigeria (CIIN), Irukwu (2000) concluded that, “claim settlement must be done promptly and equitably because the best form of advertisement for insurance companies is prompt claims settlement.” Several years earlier, Green (2000) in his write up in Annals of the Society of Chartered Property and Casualty Underwriters stated that, “Public perception of the industry (Insurance) is bound to affect the attitudes of the insuring public”. According to him, “Any industry, whose market is affected by public opinions as insurance, certainly must learn, as much as it can, about the forces affecting public opinions if it is to operate successfully.”

“To all intents and purposes, the claim department can be seen as the „shop window‟ of the insurance company. It does not matter how cheap an insurance company‟s premium is, or how efficiently they conduct their underwriting administration if a claim is not properly and fairly dealt with. This is where an insurer will be judged.” (Roff, 2004)
From the foregoing therefore, it follows that prompt claims settlement has a significant influence on the purchase and repurchase of insurance products in Leadway Assuance and Nigeria on the whole.


Recommendations

The problem of claim settlement has plagued the Insurance industry in Nigeria for a long time giving it a poor image. This poor image is due to the complex and peculiar nature of the insurance business.

However, there is the need to improve on the image of Insurance Company, which will lead to the growth of the company and the insurance industry as a whole.

From this research findings and conclusions, it has been established that claims administration affects the profitability of insurance products. Consequently, measures directed at running efficient and effective claims administration would go a long way in addressing the image problem of the industry.

It is in line with this that the following recommendations are made:

Claims must be settled promptly and equitably in order to earn the confidence of customers and to retain their loyalty. Reducing documents required to process a claim and minimize correspondence and claims communication and reporting could do this.

Where ex-gratia payments are made, Leadway Assurance should use it as a launch pad for an effective public relations campaign through publication in the mass media.

The underwriting and claims personnel in Leadway Assurance should be properly trained in order to appreciate the sensitive nature and the role claims play in the insurance industry.

Leadway Assurance should create and improve on their Customer Service Units so that complaints and suggestions could be addressed promptly.

Leadway Assurance should undertake claims satisfaction research regularly. This would keep them abreast of the extent of customers‟ satisfaction, which will enable them to adopt better approach to claims settlement.


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