Effect Of Nigeria Reinsurance Companies On The Growth Of Insurance Business In Nigeria
The Study is carried out to examine the effect of Nigeria reinsurance companies on the growth of insurance business in Nigeria (2000-2020). Using expo-facto research design and inferential statistical analysis; the study tested the sign of the significant relationship between dependent variable (profitability (ROA)) and set of independent variable (Net Retention ratio, Net Claim ratio, Net Commission ratio, and Ratio of Ceded Reinsurance). The study used secondary data obtained from financial report of the insurance companies considered for the study, covering a period from 2000 to 2020. Linear regression analysis was used to find out the extent to which independent variable impacted the set of dependent Variables. Correlation was used to find out whether the relationship among the variables to be measured was significant or not. The findings of the study reveal that Net Retention ratio, Net Claim ratio, Net Commission ratio, and Ratio of Ceded Reinsurance are correlated with insurance profitability (ROA), and administrative expenses. The study recommends that that insurance companies in Nigeria should put proper reinsurance programs into priority, taking into consideration characteristics of their underwriting documents and consideration factors such as past loss experience, size of risks and frequency of losses. It is important for insurance companies to have optimal retention levels in their risk diversification management basically to ensure favorable financial performance.
Table of Content
- 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
2.0 Literature Review
- 2.1 Conceptual Framework
- 2.2 The Concept of Insurance
- 2.3 Historical Background of Modern Insurance Business in Nigeria
- 2.4 Insurance Companies and the Nigerian Economy
- 2.5 Impact of Reinsurance on Insurance Company Performance
- 2.6 Reasons for the Use of Reinsurance by Insurance Companies
- 2.7 Theoretical Framework
- 2.8 Empirical Review
3.0 Research Methodology
- 3.1 Research Design
- 3.2 Model Specification
- 3.3 Definition of Variables
- 3.4 Method of Data Analysis
- 3.5 Nature and Source of Data
4.0 Results and Discussion
- 4.1 Result
- 4.2 Discussion of Results
5.0 Summary, Conclusion and Recommendation
- 5.1 Summary
- 5.2 Conclusion
- 5.3 Recommendation
1.1 Background to the Study
Generally, in developed economies, insurance business contributes significantly to the Gross Domestic Product (GDP). Insurance business is also seen as the backbone of any country‘s risk management system, since it ensures financial security, serves as an important component in the financial intermediation chain, and offers a ready source of long term capital for infrastructural projects in Nigeria (Augustine &Nwanneka, 2011). Similarly, insurance business plays a vital role in the Nigerian economy through risk bearing, employment of labour, payment of tax, providing vehicle for investors and other financial investment services, (Hamadu & Mojekwu, 2010). Therefore, it is important to ensure that insurance companies‘ in Nigeria are performing efficiently and significantly.
Insurance companies are the sellers and suppliers of insurance product in Nigeria. According to the Nigerian Insurance Act 2003, there are two broad categories of insurance business in Nigeria: life insurance business; and non-life (General) insurance business. It is permitted under the Nigerian laws for an insurance company to engage in both, life insurance and non-life insurance activities. Furthermore, insurance companies in Nigerian were established to provide insurance cover for life insurance and non-life insurance. The life insurance companies provide cover for individual life, group life, pension and health risks, while non-life insurance activities include those in respect to fire, general accident, motor vehicle, marine and aviation, oil and gas, engineering, bond credit, guarantee and surety ship and miscellaneous insurance.
Moreover, reinsurance companies in Nigeria were established to provide cover for insurance companies in Nigeria. The re-insurers also provide technical security and capacity for the insurance companies and do not supply insurance directly to the consumers (Hamadu & Majekwu, 2010). Moreover, in Nigeria, there are many international as well as indigenous insurance companies. Therefore, the formation of Insurance and re-insurance companies has to be with the approval of the Corporate Affairs Commission under conditions stipulated in Companies and Allied Matters Act, No. 1 of 1990 which was amended 2004. In addition, registration has to be made with the National Insurance Commission (NAICOM).
Globally, the performance of insurance companies is an important indicator of a thriving economy that could lead to an increase in Gross Domestic Product (GDP) of a nation, more specifically non-banking sector like insurance companies (USAID, 2012). Furthermore, the world economy has become more integrated; firms have been facing more and more pressure to disclose their business performance. In this view, regulators all over the world are negotiating and harmonizing global insurance regulations which could lead to greater standardization of insurance policies and promote globalization of the insurance value chain. So, a better understanding of the determinants of insurance companies‘ performance in Nigeria through an empirical study is of the interest of regulators and other market participants such as financial institutions that are eager to provide financing for insurance companies in order to enhance their performance.
Furthermore, for the past decade, measurement of companies‘ performance continues to be a critical area of social science research. Many authors paid more attention on modifying the traditional financial measures in developing models for performance measurement, while others have suggested non-financial measures (Irala, 2007). Moreover, the performance of a company can also be measured in the form of qualitative features like market position, quality of product, and goodwill of the customers (Kruger 2004). Some of the models used in assessing and measuring the performance of organizations include economic profit, residual income, economic value added, balanced score card, activity based costing, cash value added, shareholder value added, total shareholder return, cash flow, and return on investment.
Additionally, some shareholders, regulators and other stakeholders adopt several ways to compare organizations‘ performance. Lalith (2011) concentrated on variables like turnover, total earnings, profit before interest and taxes, earnings per share, total assets and share price in the measurement of companies‘ performance. However, the application of these variables varies from one industry to another. Therefore, this study utilizes companies‘ age, firm size, leverage, asset tangibility, liquidity, growth rate, solvency ratio, premium growth, equity as independent variables, while earnings per share, return on equity and return on assets were used as surrogate for performance. The choice of these variables has been motivated by numerous accounting and finance literatures reviewed in this study. Researchers use these internal environmental variables to measure the corporate performance as observed in the work of Irala (2007).
In the past decade, attention of regulators all over the world has largely concentrated on internal factors that affect performance of business firms. But since the signing of World Trade Organization (WTO) Agreement in Marrakesh City of Morocco in 1994, global competition and fast-changing of international policies has put great pressure on firms to give more concern on external environmental factors as one of the critical factors in strategic business planning and also as a factor that determine their performance (Azizi & Sidin, 2008). External determinants are the macroeconomic factors that influence the business decision of a company which are not within the control of the management. In the literature of external environmental factors, a number of checklists have been developed as ways of cataloguing the vast number of possible issues that might affect the performance of an industry. The political, economic, social, technological and environmental (PESTE) factors are the external environmental influences and factors that surround and affect business organizations. Kotler (1998) claims that PESTE analysis is a useful strategic tool for understanding market growth or decline, business position, potential and direction for operations. This means that business organizations must interact with those factors that influence their decisions, size, profitability and performance.
In order to get accurate results in this research work and to arrive at valid conclusion, the study implemented consistent methods that help in assessing the determinants of insurance companies’ performance in Nigeria. The researcher has chosen the variables of this study among many other variables that determine the firms’ performance based on the literature reviewed in this study. The variables used can be measured easily by using the data afforded by Nigerian insurance companies. It is against this background that this study has gained the importance in the corporate finance literature to assess and identify the determinant of performance of insurance companies in Nigeria. Since insurance companies in Nigeria are seen as intermediaries that would help to channel the funds in an appropriate way to enhance social welfare and overall economic development in Nigeria.
1.2 Statement of the Problem
The insurance companies are machinery to reduce the financial cost to individuals, corporate organizations, and other entities arising from the potential occurrence of specified contingent events in any economy. The production of insurance policies and its distribution often involve the creation of some sizable firm-specific assets, usually called franchise value, which could automatically reduce if the insurance companies experience severe financial constraint that will automatically leads to low profitability. Protection of those assets from loss due to financial difficulty therefore provides a significant incentive for adequate reinsurance and other forms of risk management tools.
Reinsurance is an integral part of the insurance market and plays the vital role regarding the financial stability of the global insurance markets (International Association of Insurance Supervisors, 2012). Therefore, the concept of sustainability and financial performance in Nigeria insurance industry has received significant attention from scholars in the various areas of financial institutions. It is imperative for all business stakeholders in any sector since financial performance is a major ingredient to organizational survival and ultimately its existence. High performance reflects management effectiveness and efficiency in making the use of a company’s resources and this contributes to the economy at large (Ansah-Adu, Andoh, &Abor, 2012). The insurance industry in Nigeria is a vital part of the entire financial system. Apart from banking business, insurance industry contributes significantly to financial intermediation of the Nigeria economy. As such, their success means the success of the economy; their failure means failure to the economy (Agiobenebo and Ezirim, 2002).
Measuring financial performance would be important in order to ensure long term sustainability of the life insurance companies and by extension the sustainability and vibrancy of the stakeholders (Onsongo, 2013). Measuring financial performance in the insurance industry is important in determining the stand and achievement of the industry. The sustainability of the insurance companies is important because of its key role on any economy. Therefore, the major aim of this study is to investigate the impact of reinsurance mechanism on the sustainability insurance companies in Nigeria.
1.3 Objectives of the Study
The aim of this study is to examine the effect of Nigeria reinsurance companies on the growth of insurance business in Nigeria (2000-2020). Specifically, the objectives of the study include to;
- To determine the effect of ratio of ceded reinsurance on the profitability of insurance companies in Nigeria;
- To determine the significant impact of net retention ratio on the profitability of insurance companies in Nigeria;
- To investigate the significant impact of net claim ratio on the profitability of insurance companies in Nigeria.
- To examine the significant impact of net commission ratio on the profitability of insurance companies in Nigeria;
- To ascertain the relationship between profitability, net retention ratio, net claim ratio, net commission ratio, and ratio of ceded reinsurance.
1.4 Research Question
The following research questions are formulated to guide this research:
- What is the effect of ratio of ceded reinsurance on the profitability of insurance companies in Nigeria?
- What is the significant impact of net retention ratio on the profitability of insurance companies in Nigeria?
- What is the significant impact of net claim ratio on the profitability of insurance companies in Nigeria?
- What is the significant impact of net commission ratio on the profitability of insurance companies in Nigeria?
- What is the relationship between profitability, net retention ratio, net claim ratio, net commission ratio, and ratio of ceded reinsurance?
1.5 Research Hypothesis
- HO1: There is no significant effect of Nigeria reinsurance companies on the growth of insurance business in Nigeria.
- HA1: There is a significant effect of Nigeria reinsurance companies on the growth of insurance business in Nigeria.
1.6 Significance of the Study
In the past years, reinsurance companies in Nigeria have undergone several reforms and transformations in order to enhance the performance of the insurance companies in Nigeria. But available statistics revealed that the performance of the companies is still below average. It is believed that this study would be informative to stakeholders and prospective investors by clearly revealing the current position of the performance of insurance companies in Nigeria. In addition, stakeholders of the insurance companies in Nigeria would be guided by this information to design a plan that would be used to improve upon the short-comings from reforms and other regulations in insurance business in Nigeria.
The results generated from this study would provide decisions on qualitative and quantitative measures to be used in selecting the real determinants of the performance of insurance companies in Nigeria. This in turn, would allow managers, owners, and outside investors to be better informed about the determinants of the performance of the carriers and how stakeholders may use these determinants to allocate their resources so that the carriers in this sector could become more profitable when alternatives are available to them.
This study was designed to benefit students and other researchers that might venture into future researches in this area. The study provides reference material for them since to the best of our knowledge no empirical research has been conducted on the effect of Nigeria reinsurance companies on the growth of insurance business in Nigeria using this methodological background.
1.7 Scope of Study
The study is designed to examine the effect of Nigeria reinsurance companies on the growth of insurance business in Nigeria. The study covers the period from 2000 to 2020. The variables used were ratio of ceded reinsurance, net retention ratio, net claim ratio, and net commission ratio.
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, and the Central Bank of Nigeria. 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 influence growth of insurance businesses in Nigeria, hence, the result may be different if other variables were to be added.
1.9 Definition of Terms
Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss. An entity which provides insurance is known as an insurer, an insurance company, an insurance carrier or an underwriter.
Reinsurance is insurance that an insurance company purchases from another insurance company to insulate itself from the risk of a major claims event. With reinsurance, the company passes on some part of its own insurance liabilities to the other insurance company.
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.
5.0 Summary, Conclusion and Recommendation
This study was conducted to examine the effect of Nigeria reinsurance companies on the growth of insurance business in Nigeria (2000-2020). From the results, there is a positive relationship between ROA and Net Retention ratio of insurance companies in Nigeria where (r=0. 447, n=7, p=0.315). This indicates that significant relationship does not exists between ROA and Net Retention ratio of insurance companies in Nigeria, since their p-value is greater than 0.05 (level of significant).The study also shows a positive relationship between ROA and Net Claim ratio in the Nigerian insurance companies where (r=0.467, n=7, p=0.290). This indicates that the two variables do not significant to each other, since their p-value is greater than 0.05 (level of significant).
Furthermore, the correlation analysis shows positive relationship between ROA and Net Commission ratio in Nigeria where (r=0.363, n=7, p=0.424). This indicates that significant relationship does not exist between ROA and Net Commission ratio in the Nigerian insurance companies, since their p-value is greater than 0.05 (level of significant). And finally, the table reveals that there is positive relationship between ROA and Ratio of Ceded Reinsurance in Nigeria where (r=0.516, n=7, p=0.326). This indicates that significant relationship does not exist between ROA and Ratio of Ceded Reinsurance in Nigeria, since their p-value is greater than 0.05 (level of significant).
For Net Retention ratio (NRR), the study concludes that it has positive impact on ROA, and is positively correlated with ROA of insurance companies. This study also concludes that Net Claim ratio (NCR) has positive impact on ROA, and is positively correlated with ROA of insurance companies. The study further establishes that Net Commission ratio has negative impact on ROA of insurance companies. Finally, the study averred that Ratio of Ceded Reinsurance has positive impact on ROA of insurance companies, and also is positively correlated with ROA of insurance companies. Therefore, the study concludes that reinsurance proxy by: Net Retention ratio, Net Claim ratio, Net Commission ratio, and Ratio of Ceded Reinsurance.
Based on the findings of this study, the following are recommended;
- Insurance companies diversify their investment portfolios and embrace effectively, reinsurance cover for their businesses in order to diversity their risks.
- Insurance companies in Nigeria should put proper reinsurance programs into priority, taking into consideration characteristics of their underwriting documents and consideration factors such as past loss experience, size of risks and frequency of losses. It is important for insurance companies to have optimal retention levels in their risk diversification management basically to ensure favorable financial performance.
- Appropriate effort on the part of the regulatory bodies and stakeholders in the industry should be put in place that will ensure effective underwriting and claims management practices within the industry. As effective underwriting will result to quality business being written at appropriate premiums, which directly affects performance of insurance companies.
- Appropriate effort on the part of the insurance companies and their stakeholders in the industry to properly manage their claims. This will ensure the genuine claims payment, and reduced better loss ratios and ultimately increase underwriting profits
- Insurance companies in Nigeria should ensure that reinsurance commissions earned from reinsurance contracts cover acquisition costs.
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