The Growth Role And Performance Of Insurance Industry In Developing Country

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The Growth Role And Performance Of Insurance Industry In Developing Country


Abstract


The main purpose of this research work is to examine the historical background of the Nigerian insurance industry with emphasis on the development of modern insurance industry in Nigeria, the role and performances of the insurance industry as well as the clarification of insurance business in Nigeria and to ascertain whether the growth of insurance industry has been consistent with the social economic development of the country. Examination of the scope and structure of the insurance industry as it may effect the growth and development of the country. The study adopted the ex-post facto research design and annualized cross sectional data for 26-year period 1987-2012 were collated from the Central Bank of Nigeria statistical Bulletin, National Insurance Commission and Nigerian Insurers Association. Four hypotheses were proposed and tested using the Ordinary Least Square (OLS) regression model. Descriptive statistics and graphs were also used to complement the regression results. The results emanating from this study indicate that while life insurance penetration and insurance density had positive and significant impact on economic growth in Nigeria, both total insurance penetration and non-life insurance penetration had positive but insignificant impact on economic growth in Nigeria under the period of this study. The study therefore recommends among others, that for the insurance industry in Nigeria to exert more positive impact on the Nigerian economy, government policies concerning insurance should focus more on attracting rural communities into the insurance bracket. This will assist at enhancing savings therefore providing funds for investment into the Nigerian real sector.


Chapter One


Introductions

1.1 Background of the Study

British merchants introduced insurance business in Nigeria. Before then there were some existing traditional systems of risk sharing which is known as primitive terms of natural and social insurance schemes. The age grade associations, claim union were some mutual insurance like schemes for showing benevolence to their members who had suffered some misfortune, such as death, ill-health, fire ravages. In 19th century the British merchant introduced insurance business in Nigeria. The modern insurance structures developed with a lot of legal implications resulting in expressly and documented legal relationship which turned out to be control of insurance. Falegae J.I. (1991) described insurance as a contract between two parties where one of the parties called the insurer undertakes to indemnity the other party called the insured after payment of consideration called premium. Insurance deals with risk which is a probability that an event will turnout to be unfavorable. More importantly, the contract of insurance are governed by the general principles of contract. But on the other account of their special nature, all contract of insurance are in addition governed by fundamental principles of utmost good faith, subrogation and proximate cause. It was in these fundamental principles that the validity of insurance contract depends. Firstly, insurance was affected on adhoc bases usually through mutual or friendly help with the only objective of protecting their members against the insured risk. Under these, the terms, conditions and premiums were fixed in such a way that the insurance funds merely paid its way.

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.

From the foregoing, it could be observed that the number of empirical studies is relatively small, especially in relation to those on banking contribution to economic growth. In order to contribute to filling the gap, the study focused on examining the insurance-growth nexus using Nigerian data from 1987 to 2012.


1.2 Statement of the Problems

The problems that led to this research work include the following:-

  1. The image at insurance industry over the years has been shattered as a result of poor claim settlement.
  2. The role of the insurance industry in Nigeria capital market as a capitalist in the Nigerian economic development still has not been felt much after decades of its operations.
  3. The level of competition in the insurance industry is still very low.

1.3 Objectives of the Study

The general objective of this study is to examine the impact of insurance on economic growth in Nigeria. However, to achieve this, the specific objectives are:

  1. To assess the impact of life-insurance penetration on economic growth in Nigeria,
  2. To assess the impact of non-life insurance penetration on economic growth in Nigeria,
  3. To evaluate the impact of total insurance penetration on economic growth in Nigeria and
  4. To investigate the impact of insurance density on economic growth in Nigeria.

1.4 Research Questions

As a follow-up to the specific objectives of this study, the following research questions emanated. These are:

  1. To what extent does life insurance penetration have positive and significant impact on economic growth in Nigeria?
  2. To what extent does non-life insurance penetration have positive and significant impact on economic growth in Nigeria?
  3. How far does total insurance penetration have positive and significant impact on economic growth in Nigeria?
  4. To what extent does insurance density have positive and significant impact on economic growth in Nigeria?

1.5 Research Hypotheses

Based on the research questions raised above, the following hypotheses were formulated. These are:

  1. Ho1: Life insurance penetration does not exert positive and significant impact on economic growth in Nigeria.
    Ha1: Life insurance penetration exerts positive and significant impact on economic growth in Nigeria.
  2. Ho1: Non-Life Insurance penetration does not exert positive and significant impact on economic growth in Nigeria.
    Ha1: Non-Life Insurance penetration exerts positive and significant impact on economic growth in Nigeria.
  3. Ho1: Insurance penetration does not exert positive and significant impact on economic growth in Nigeria.
    Ha1: Insurance penetration exerts positive and significant impact on economic growth in Nigeria.
  4. Ho1: Insurance density does not exert positive and significant impact on economic growth in Nigeria.
    Ha1: Insurance density does exert positive and significant impact on economic growth in Nigeria.

1.5 Significance of the Study

This research work will be of importance to the following:

Students:

The project work will provide a source of reference to current and future students that may carry out further research on the related topic.

The Stake Holders:

The stakeholders will benefits from this work in the sense that if the recommendation made at the end of this research are carried out, every one involve will be happy.

Insurance Companies:

The analysis will also be valuable in interpreting the insurance performances as well as its roles and growth in the country Nigeria.

Government:

It will serve as a means of producing future experience to expose areas in the insurance industry where collective actions are necessary either for the country as a whole or to salvage a particular insurance company.


1.6 Scope of the Study

This research work covers on a general basis, the roles, performances and growth of insurance industry in the economic development of the country (Nigeria).


1.7 Significance of Study

This research work will be of importance to the following:

Students:

The project work will provide a source of reference to current and future students that may carry out further research on the related topic.

The Stake Holders:

The stakeholders will benefits from this work in the sense that if the recommendation made at the end of this research are carried out, every one involve will be happy.

Insurance Companies:

The analysis will also be valuable in interpreting the insurance performances as well as its roles and growth in the country Nigeria.

Government:

It will serve as a means of producing future experience to expose areas in the insurance industry where collective actions are necessary either for the country as a whole or to salvage a particular insurance company.


1.7 Definition of Operational Terms

1. Capacity to Contract:

This means that both parties must have capacity or power to contract.

2. Claims:

This refers the payment made by the insurance company to the policy holder that has suffered loss.

3. Economic Growth:

This means increase overtime in a country’s real output of goods and services.

4. Investment:

This means putting the insured in the same financing position he was before the loss.

5. Indemnity:

This means putting the insured in the same financial position he was before the loss.

6. Intermediary:

This refers to the middlemen that bring people who want to obtain insurance cover to insurers for business.

7. Material Fact:

It is an information that may influence the mind of a prudent underwriter in assessing a risk.

8. Peril:

The risk insured against.

9. Rating:

This is the unit cost of insurance.

10. Risk:

The refers to the chances of loss or probabilities of an economic loss.


Chapter Five


Summary of Findings, Conclusion and Recommendations

5.1 Summary of Findings

Based on the specific objectives and hypotheses tested, the findings emanating from the study are summarized as follows:

  1. Life insurance penetration exerts positive and significant impact on economic growth in Nigeria (LP coefficient = 145.70, p = 0.012 < 0.05, t-value = 2.75). The coefficient of determination (R-square), which measures the goodness of fit of the model, indicates that 88.8% of the variations observed in the dependent variable were explained by the independent variables.
  2. Non-life insurance penetration had positive impact on economic growth in Nigeria although it was not significant (NLP coefficient = 9.11, p = 0.347 > 0.05, t-value = 0.96). The coefficient of determination (R-square), which measures the goodness of fit of the model, indicates that 85.4% of the variations observed in the dependent variable were explained by the independent variables.
  3. Total insurance penetration had positive impact on economic growth in Nigeria although it was not significant (TIP coefficient = 12.42, p = 0.19 > 0.05, t-value = 1.36). The coefficient of determination (R-square), which measures the goodness of fit of the model, indicates that 86.01% of the variations observed in the dependent variable were explained by the independent variables.
  4. Insurance Density had positive and significant impact on the economic growth in Nigerian (ID coefficient = 0.19, p = 0.00 < 0.05, t-value = 10.20). The coefficient of determination (R-square), which measures the goodness of fit of the model, indicates that 97.4% of the variations observed in the dependent variable were explained by the independent variables.

5.2 Conclusion

Insurance is one of the cornerstones of modern day financial services sector. In addition to its traditional role of managing risk, insurance industry performance, both as intermediary and as provider of risk transfer and indemnification, may promote growth by allowing different risks to be managed more efficiently through promoting long term savings, encouraging the accumulation of capital, serving as a conduit pipe to channelling funds from policy holders to investment opportunities as well as mobilizing domestic savings into productive investment. Insurance is an indispensable aspect of a nation’s financial system and theoretical conceptions explain that financial systems influence savings and investment decisions through lowering the costs of researching potential investments, exerting corporate governance, trading, diversification and management of risk, mobilization and pooling of savings, conducting exchange of goods and services and mitigating the negative consequences that random shocks can have on the economy.

However, the level of insurance industry performance which should be commensurate with Nigeria’s huge potentials has not been attained. Insurance by reducing uncertainty and volatility smoothen the economic cycle and reduce the impact of crisis situations on the micro and macro level. But, the demand for protection against losses of life, property caused by natural disaster, crime, violence, accidents, fire etc are not so demanded in Nigeria. It is against the foregoing that this study was undertaken to explore the growth role and performance of insurance industry in Nigeria.

The result emanating from the hypotheses tested indicates that insurance industry performance had positive impact on economic growth in Nigeria, implying that the insurance sector of Nigeria has assisted in influencing savings and investment decisions and hence long-run growth rates through 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 thereby enhancing the growth of the Nigerian economy.


5.3 Recommendations

This study recommends amongst others that:

  1. Life insurance is a way of dealing with risk and a saving medium for consumers. It also plays important psychological and social roles. The major function of life insurance is to protect against financial loss from loss of human life. Life insurance is therefore developed on the concept of human life value as well as a means of savings for the policyholder. Thus, we recommend stronger government policies. Government agencies like National Insurance Commission (NAICOM) and National Pension Commission (PENCOM) should strictly enforce the implementation of compulsory group life insurance cover under the Pension Reform Act, 2004. Also life insurance companies should introduce life products particularly within the low income earners as the target which will enhance penetration and deepen the market. It will also be necessary to develop products that will optimize both investment returns to policy holders and financial protection to their dependants. This will assist in enhancing savings habit of Nigerians thereby increasing the quantum of funds available for investment into the real sectors of the Nigerian economy.
  2. The availability of insurance services is essential for the stability of the economy and can make the business participants accept aggravated risks. By accepting claims, insurance companies also have to pool premiums and form reserve funds. Thus, this study recommends an increased diversification of insurance products especially in the non-life business. The insurers should come up with new non-life products and a modification of existing insurance products, thus availing customers the opportunity of choosing from a variety of products. There is also need for the insurance companies to take advantage of the non-life insurance products made compulsory by law to substantially increase their premium income and deepen insurance penetration.
  3. Insurances are similar to banks and capital markets as they serve the needs of business units and private households in financial intermediation. The availability of insurance services is essential for the stability of the economy and can make the business participants accept aggravated risks. Hence, this study recommends a facilitation of linkages between various financial institutions in the country that will lead to greater penetration in the Nigerian insurance industry. This will include the healthy application of banc assurance which is mutually beneficial for insurance companies and banks, mortgage protection, leasing, risk management services, among others. Also, NAICOM and the insurance industry should leverage on the micro-insurance programme to ensure that insurance is entrenched among the grass roots to increase insurance awareness, volume of business, and invariably increased premium income. Insurers should further engage in building and strengthening customer relationships to keep them coming back, provide value added services that are difficult for competitors to duplicate, improve their product development and service delivery processes, settle genuine claims promptly, increase their staff awareness of customer needs, train and effectively maintain an effective sales and marketing force. Moreover, there should be cooperation of the industry operators and regulatory authorities to strictly enforce the implementation of the compulsory insurance products being driven under the auspices of Market Development and Restructuring Initiatives (MDRI) by NAICOM. This will no doubt generate billions of naira annually as premium income if effectively implemented.
  4. The Insurance industry in Nigeria has recorded some reasonable growth since the consolidation exercise in 2007. This phenomenon would be expected to increase in the future under a stable political and macroeconomic environment as insurance fund could provide a veritable source of the much desired in enhancing the growth of the Nigerian economy. Thus this study recommends that National Insurance Commission should strengthen regulation in order to promote the listing of all insurance firms in the country. This will enhance insurance density in the country.

5.4 Recommendations for Further Studies

For further studies, this study recommends as follows:

  1. The interest in this study was to examine the growth role and performance of insurance industry in Nigeria. However, there are other savings institutions such as the pension subsector, mortgage subsector etc. The investment of funds from this subsector could go a long way to growing the Nigerian economy. Thus this study recommends an inclusion of these sectors in determining their impact on economic growth in Nigeria.
  2. This study also recommends for further studies, the use of total insurance assets as a measure of insurance industry performance. This measure will ensure that investments by insurance businesses are captured.

5.5 Contribution to Knowledge

This study contributed to knowledge by geographically testing the growth role and performance of insurance industry in Nigeria. It has also modified model of the pioneering works of Catalan, Impavido and Musalem (2000), Ward and Zurbruegg (2000) and Davis and Hu (2004) and applied them to the Nigerian situation.


The Growth Role And Performance Of Insurance Industry In Developing Country


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