Effect Of Insurance Penetration On The Economic Growth Of Nigeria (A Study Of Selected Insurance Companies)

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Effect Of Insurance Penetration On The Economic Growth Of Nigeria (A Study Of Selected Insurance Companies)


This study examined the effect of insurance penetration on the economic growth of Nigeria using a case study of selected insurance companies between 1983 and 2019. The insurance markets globally have witnessed tremendous growth in the last decade with the world insurance premium in US dollars increased by 175% between the year 20002and 2012. How has the Nigerian insurance industry contributed to this growth and insurance penetration in particular? The work proposed that the insurance penetration rate has no significant relationship with the economic growth of Nigeria. Data were sourced from the Central Bank of Nigeria statistical bulletin and using regression techniques the work established that there a no significant relationship between insurance penetration rate and economic growth of Nigeria; and that the insurance industry in Nigeria did not respond favourably to government financial systems reforms and policies. The government economic policies have not been sustainable and transformational as expected and the insurance industry seemed battling to regain the trust of the insuring public. Therefore, the industry is expected to explore packaging group insurances, creating risk awareness and streamline effective and efficient prompt claims administration.

Table of Content

Chapter One

1.0 Introduction

  • 1.1 Background to the Study
  • 1.2 Statement of the Problem
  • 1.3 Objectives of the Study
  • 1.4 Research Question
  • 1.5 Research Hypothesis
  • 1.6 Significance of the Study
  • 1.7 Scope of Study
  • 1.8 Limitation of the Study
  • 1.9 Definition of Terms
  • 1.10 Organisation of the Study

Chapter Two

2.0 Literature Review

  • 2.1 Conceptual Framework
  • 2.2 Review of the Nigerian Insurance Industry
  • 2.3 Classifications of Insurance Business in Nigeria
  • 2.4 Overview of Economic Growth
  • 2.5 Theoretical Framework
  • 2.6 Empirical Literature Review

Chapter Three

3.0 Research Methodology

  • 3.1 Research Design
  • 3.2 Model Specification
  • 3.3 Definition of Variables
  • 3.3.1 Insurance Penetration Rate
  • 3.3.2 Total Premium Income
  • 3.3.3 Gross Domestic Product
  • 3.4 Method of Data Analysis
  • 3.5 Sources of Data

Chapter Four

4.0 Results and Discussion

  • 4.1 Result
  • 4.2 Discussion of Results

Chapter Five

5.0 Summary, Conclusion and Recommendation

  • 5.1 Summary
  • 5.2 Conclusion
  • 5.3 Recommendation
  • References

Chapter One

1.0 Introduction

1.1 Background to the Study

Insurance is one of the cornerstones of modern-day financial services sector. In addition to its traditional role of managing risk, insurance market activity, both as intermediary and as provider of risk transfer and indemnification, may promote growth by allowing different risks to be managed more efficiently, promoting long term savings and encouraging the accumulation of capital, serving as a conduit pipe to channeling funds from policy holders to investment opportunities, thereby mobilizing domestic savings into productive investment (Skipper, 1997; Arena, 1998).

Insurance is often defined as the act of pooling funds from many insured entities in order to pay for relatively uncommon but severely devastating losses which can occur to these entities (Omoke, 2012). The insured entities are therefore protected from risk for a fee, with the fee being dependent upon the frequency and severity of the event occurring (Encarta dictionary, 2009) hence, it is a commercial enterprise and a major part of the financial services industry. Adebisi (2006) argues that insurance is an intricate economic and social device for the handling of risks to life and property. It is social in nature because it represents the cooperation of various individuals for mutual benefits by combining together to reduce the consequence of similar risks. As every new area of risks, and since with every passing day, a new insurance package amount to take care of more and more areas of risks and this increases insurance booms consequently, Vaughan (1997) expresses insurance as an arrangement with a company in which you pay them regular amounts of money and they agree to pay the costs if it occurs.

Agbaje (2005) defines insurance as the business of pooling resources together to pay compensation to the insured or assured on the happening of a specified event in return for a periodic consideration known as premium, therefore, an insurance contract is usually evidenced by a document called the insurance policy which is usually signed at the foot by the insurer or assurer or his agent. Gollier (2003) argues that insurance involved the transfer of risk from an individual to a group, sharing losses on an equitable basis by all members of the group.

As opined by Dickson (1960), insurance is designed to protect the financial wellbeing of an individual, company or other entity in case of unexpected loss. According to him, some forms of insurance are required by law; while others are optional agreeing to the terms of an insurance policy creates a contract between the insurer and the insured. Thus, insurance acts as a promise of reimbursement in the case of loss, paid to people or company so concerned about hazards they have prepayments to an insurance company (Ajayi, 2002). According to Osoka (1999), the insurance industry is vital to the wellbeing and smooth functioning of a modern economy and as such for developing country like Nigeria; it can also act as a catalyst of economic growth by helping to accelerate the process of qualitative structural transformation. Bowers et al. (1997) views insurance system as a mechanism for reducing the adverse financial impact of random events that prevent fulfillment of reasonable expectations and Osipitan (2009) argues that the insurance business is vital to the financial system due to its role in helping people and businesses to manage their resources and mitigate risk efficiently.

Agbakoba (2010) states that insurance practice has come a long way since the time when Lloyd’s sent runners to the water front to pick up news of ship movements and later would send policy around London for subscription by anyone with sufficient means. The origins of modern insurance are intertwined with the advent of British trading companies in the region and the subsequent increased inter-regional trade. Increased trade and commerce led to increased activities in shipping and banking, and it soon became necessary for some of the foreign firms to handle some of their risks locally (Uche and Chikeleze, 2001). This origin was influenced according to Ujunwa and Modebe (2011), by two factors; first, the expansion of cash crop production for exports, and the upward surge in economic activities in the 1890s; second, the British desire to protect its interest and properties in the protectorate of West Coast of Africa.

This view of origin of the Nigerian Insurance industry was supported by Badejo (1998) who confirmed origin of insurance in its modern form was introduced into Nigeria by the British in the closing years of the 19th century with the establishment of trading posts in what is now known as Nigeria towards the end of the 19th century by European trading companies mostly British. These foreign companies started effecting their insurance with established insurers in the London insurance market. However, as time went on, some British insurers appointed Nigerian agents to represent their interest in the country. These agents later grew into full branch offices of their parent companies in Britain. Osunkunle (2002) opines that the first branch office in Nigeria was the Royal Exchange Assurance in 1921, later followed by other British companies.

Hausell (1990) submits that historically, only one insurance company operated in the country between 1914 and 1948. This was the overseas branch office of the Royal exchange assurance company operating from its head office in the United Kingdom. The first indigenous company to be established in Nigeria was African insurance company in 1950 by Dr. Kingsley O. Mbadiwe; this was to be followed by the Nigerian general insurance company in 1951 and the lion of Africa insurance company in 1952. Since then, the Nigerian Insurance industry has continued to grow, both in number as well as in business.

Insurance is an indispensable aspect of a nation’s financial system and theoretical conceptions explain that financial systems influence savings and investment decisions and hence long-run growth rates through the following functions; lowering the costs of researching potential investments; exerting corporate governance; trading, diversification, and management of risk; mobilization and pooling of savings; conducting exchanges of goods and services, and mitigating the negative consequences that random shocks can have on capital investment (Levine, 2004). Financial intermediaries support development through the improvement of these functions (i.e., the amelioration of market frictions such as the costs of acquiring information, making transactions, and enforcing contracts and allowing economies to more efficiently allocate resources (savings) across investments). However, the positive effects of financial development are tailored by the macro policies, laws, regulations, financial infrastructures and enforcement norms applied across countries and time.

The importance of the insurance industry as an aspect of the financial system has been neglected over the years as most studies on the interaction between the financial sector and economic growth has focused mainly on the banks and the stock market. However, recently, growing attention has shifted to the interaction between the non-bank financial intermediaries such as the insurance companies because of the work of King and Levine (1993a, b) where it was revealed that non-bank financial intermediaries such as the insurance companies have over the years played important roles in enhancing the efficient functioning of the financial system through its intermediation function.

The world of the living is characterized by numerous events that cause losses of lives and property. Many of the events are man-made and others are by nature: God made. Increasing quests to improve the quality of living through varied technological developments and innovations have aggravated the situations of unwanted events happening. Human peoples devised means of mitigating the adverse effects of the loss-producing events. These ranges from crude to scientific methods including insurance. Insurance is an arrangement made to provide a financial guarantee to persons that may suffer from the happening of specified events. In its modern scientific perspective, it is a contract between two persons namely the insured and the insurer, whereby the insured pays a relatively small amount of money known as premium to the insurer who undertakes to pay the sum insured or its equivalent if the insured events happen within the contractual period and in accordance to the terms of the contract.

Akinlo (2012) stated that insurance is critical to financial and economic development because it pools risks and reduces the impact of large losses, thereby encouraging new investment, innovation and competition. The insurance industry also plays a critical role in promoting economic growth and development by ensuring the efficient allocation of financial resources from the surplus unit to the deficit unit. However, the insurance penetration rate is one of the measures to determine how well this crucial function is performed.

Modern governments have registered insurance firms to provide this all-important guarantee that will not only stabilize social life but also promote enterprisingly. In Nigeria, modern insurance business was introduced by the British trading companies in 1879. These traders brought finished goods to Nigeria and in exchange took away raw materials such as cocoa, groundnuts, tins, coals, palm kernels, cashew, nuts, and so on for which they require some form of insurance against the peril of the sea, and other fortuitous events (Okonkwo, 2012). Agency arrangements were the practice until 1921 when a fully-fledged insurance company was established: The Royal Exchange Insurance Company. Many foreign and indigenous insurance companies were subsequently established. However, it was in 1958 that the first indigenous insurance company was established in Nigeria(Okonkwo, 2012).

Ever since the establishment of the insurance business in Nigeria, the industry has continued to improve on its relevance and delivery capacity of protecting the patrimony of the nation and her citizens. Capacity building has been promoted by the National Insurance Commission (NAICOM), Chartered Insurance Institute of Nigeria and some tertiary institutions in Nigeria. Regular conferences have been organized by various insurance market associations such as Nigerian Insurers’ Association. A number of insurance laws and regulations have been enacted, amended and updated; the regulatory body has consistently championed innovations to deepen the activities of the industry through yearly directives and reorganization of her structure to ensure supervision and regulatory performance in line with the global best practices.

1.2 Statement of the Problem

The Nigerian insurance industry has achieved a lot in its human capital development, while insurance penetration rate seems growing deeper every day. Many persons are taking insurance covers to protect their insurable interests, and with the current level of public awareness about insurance, insurance will soon become a household name in Nigeria. The challenge is that the older generation of Nigerians is more honest than the citizens of nowadays who are obviously more desperate to make money by hook or by crook (Adeda, 2014). Can it affirm that the insurance sector in Nigeria has actually grown significantly over the years?

Oba (2003) asserted that insurance remains one of the major indices for the level of development of a nation’s wealth and plays a very significant role in the mobilization of the investable resource of an economy. He observed that the performance of the insurance subsector is a function of the social economic and political environment in which it operates. In fact, the state of the insurance industry of a country is a reflection of the economy. Can it further be affirmed that the governments’ economic policies over the years have facilitated the growth of the insurance industry in Nigeria? How has the insurance penetration rate related to economic growth in Nigeria?
Insurance penetration rate is the amount of insurance premium in a country expressed as a percentage of the Gross Domestic Product (GDP). The insurance penetration rate is expressed as the ratio between insurance premium volume and GDP. The higher the penetration rate, the more developed the insurance market(Alhassan, &Fiador, 2014). In other words, insurance penetration rate measures the growth of insurance premium vis-à-vis the growth in the GDP.

The insurance markets globally have witnessed tremendous growth in the last decade with the world insurance premium in US dollars increased by 175% between the year 2000 and 2010. This statistics significantly outpaced worldwide economic growth (Outreville, 2011). The worldwide insurance premium volume in 2009 was US$4.06 trillion equivalent to 7% of the global GDP. World insurance premiums rose by 6 per cent from $4.3 trillion in 2010 to $4.57 trillion in 2011 (Swiss Reinsurance Company, 2015). It rose by 2.4 per cent from $4.57 trillion in 2011 to $4.61 trillion in 2012; and it rose by 1.4 per cent to the tune of $4.64 trillion by 2013 (Alhassan & Fiador, 2014). These developments led scholars to begin to focus on the link between insurance and economic growth. Indeed, several studies have found evidence that the development of insurance sector is related to economic growth and the key elements in the economic development of a country (Ezema & Ibeabuchi, 2018; Alhassan & Fiador, 2014; Eze & Okoye, 2013; Horng, Chaung & Wu, 2012; Akinlo, 2012; Ilhan & Taha, 2011; Avram, Nguyen, & Skully, 2010; Ward & Zurbruegg, 2000; Curak, Loncar, & Poposki, 2009; Arena, 2008). In Nigeria, the total gross premiums amounted to US$1.83 billion in 2012, according to Swiss Report. Although this makes Nigeria the third largest insurance market in Africa, the penetration ratio is stillonly0.68%.Furthermore, the volume of premiums per capital isomer US$10.8, which is among the lowest in the world (KPMG, 2014). The particular query is, how has the Nigerian Insurance industry grown over the years? It is against this background that this work examined the relationship between Insurance penetration rate and economic growth in Nigeria.

1.3 Objectives of the Study

The aim of this study is to examine the effect of insurance penetration on the economic growth of Nigeria using a case study of selected insurance companies.

Specifically, the objectives of the study include to;

  1. To determine the relationship between insurance penetration rate and economic growth in Nigeria
  2. To determine the impact of total premium income on economic growth in Nigeria
  3. To examine the long-run relationship between insurance penetration rate and economic growth in Nigeria

1.4 Research Question

The following research questions are formulated to guide this research:

  1. What is the relationship between insurance penetration rate and economic growth in Nigeria?
  2. What is the impact of total premium income on economic growth in Nigeria?
  3. What is the long-run relationship between insurance penetration rate and economic growth in Nigeria?

1.5 Research Hypothesis

  • HO1: Insurance penetration has no significant relationship with the economic growth in Nigeria.
  • HA1: Insurance penetration has a significant relationship with the economic growth in Nigeria.

1.6 Significance of the Study

The outcome of this study would contribute to the existing body of knowledge. This study is very significant first because of its expected usefulness to formulators of insurance policy in Nigeria. Since the enactment of the first insurance legislation in 1961, several insurance policies and guidelines have been formulated, and new insurance regulations enacted to encourage the development and sustenance of insurance consciousness and awareness and ensure the penetration of insurance in Nigeria. Most of these policies and laws have failed to achieve the desired objectives. This study will serve as an eye opener to policy makers by revealing the current level of insurance awareness and factors influencing or militating against the cultivation of insurance awareness/habit in Nigeria. It will also guide them in the formulation and implementation of appropriate insurance policies and enactment of insurance laws that will bring insurance services nearer to the people at the grassroots and inculcate good insurance consciousness and habit into the Nigeria populace. Thus, this study will assist policy makers in formulating policies that conforms to the objectives of enhanced growth and productivity of the Nigerian economy.

This study will also be of much use to students and lecturers of insurance, actuarial science, banking, finance and economics, and other researchers who may wish to carry out further studies on impact of insurance or investment of insurance funds or other related topics. The study will serve as a ready-made database for them to begin with. The study will also serve as a further contribution to knowledge in the areas of insurance, banking, finance and national economic development. It will be particularly useful to foreigners who may need to study the development of insurance business in Nigeria as one of the leading developing countries of Africa and the investment opportunities available.

1.7 Scope of Study

The study is designed to examine the effect of insurance penetration on the economic growth of Nigeria using a case study of selected insurance companies. The study covers the period from 1983 to 2019. The variables used were Gross Domestic Product (GDP), insurance penetration rate (IPR), and total premium income (TPI).

1.8 Limitation of the Study

In the course of this study, the researcher encountered some limitations. There was paucity of data relevant to the completion of this work, hence, the researcher had to make use of secondary data sources that were verified and approved for use such as the National Bulleting of Statistics, the Central Bank of Nigeria and the selected insurance companies. Also, the researcher faced time constraints and had to combine the research with other academic activities and coursework. Also, the study considered four independent variables without considering other proxies that determine insurance penetration, hence, the result may be different if other variables were to be added.

1.9 Definition of Terms

Insurance Penetration:

Refers to the most conventional tool used to gauge the development of a country’s insurance market is the insurance penetration rate. The penetration rate is defined as a country’s total insurance premiums as a percentage of its gross domestic product (GDP) and indicates how much the insurance sector contributes to the national economy.

Economic Growth:

Can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy over time. Statisticians conventionally measure such growth as the percent rate of increase in the real gross domestic product, or real GDP.

1.10 Organisation of the Study

This study is organized into five chapters. Chapter one included the background of the study, research problem, research objectives and questions as well as limitation of the study. Chapter two contains the literature review. Chapter three includes the methodology. Chapter Four contains the results and discussion of key findings of the study. Chapter Five finally looks at the summary, conclusions, and recommendations based on the findings.

Chapter Five

5.0 Summary, Conclusion and Recommendation

5.1 Summary

This study was conducted to examine the effect of insurance penetration on the economic growth of Nigeria using a case study of selected insurance companies. This study showed that

  1. The insurance sector has not shown remarkable growth over the years. The nominal premium seems growing in recent years and increases by 37% with every increase in the Gross Domestic Product;
  2. The insurance industry in Nigeria are struggling to gain the confidence and trust of the insuring public especially individual potential insured;
  3. Economic growth has not significantly related to insurance penetration rate in Nigeria; and
  4. Economic growth has significantly related to Total Insurance Premium in Nigeria.

5.2 Conclusion

Insurance is a business of trust and without responsible insurance practices, insurance policyholders may not be satisfied with or trust insurance services and this has dire consequences for the insurance industry in Nigeria. The Nigerian economy needs strong institutional framework that will entrench respect for the rule of law, enhancing patriotic behaviours which trigger entrepreneurial character and innovations. The insurance sub-sector seems the least in the lack of trust on the financial sector by the general public. The insuring public are more likely to be satisfied and tend to trust insurance more if the insurers deliver their promises promptly.

5.3 Recommendation

Based on the findings of this study, the following are recommended;

  1. Given that individual persons distrust modern insurance practice in Nigeria, the industry should work indirectly to regain trust by promote group insurance schemes especially among the rural populace and market associations. The takaful insurance should be promoted to address the phobia of Muslims in modern insurance. Of course, claims management must be sustainable and prompt.
  2. Microinsurance products designed to meet needs of the insuring public should be powered and boasted via electronic means and telecoms operators in Nigeria.
  3. The Nigerian government should seek talented and patriotic Nigerians to assist in economic management of the nations. Enough of sectionalism and sacrifice of merits in the name of federal character.
  4. The insurance market associations should continue to promote professionalism and sponsor career development in insurance and related disciplines.

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