The Impact Of The Government Policies In Regulating The Activities Of Insurance Companies In Nigeria
Regulation of Nigeria’s insurance industry has become substantially intensified in the last two decades. This paper critically evaluates the philosophy and challenges of insurance regulation in the context of post-authoritarian governance and increasing economic liberalization in Africa’s potential largest insurance market. The last two decades has witnessed among others, government regulatory intervention through the establishment of a regulator and mandatory recapitalization. This study assesses the regulatory experience of the Nigerian insurance industry prior to and after the capitalization era; spanning 1999 to 2009. Temporally, the trajectory of developments in the last decade which coincides with post-authoritarian military rule in the country is significant. As a developing economy, the Nigerian insurance industry presents an example of untapped and gross under-utilization of its boundless potentials.
1.1 Background of the Study
“Risk is a phenomenon which has been in existence since the beginning of the world. Risk exists whenever the future is unknown” (Lemon 1989: 17). This means that the word implies some element of doubt about the future and the outcome may be worse than what it had been at the moment. This man in his daily operations could be viewed as a risk manager, in that man does his best possible to reduce, eliminate, avoid, retain or share risk where they are present.
Though there were some forms of risk management before the advent of insurance companies in Nigeria such as the extended family system, age grade association and others. Insurance in its modern form was introduced into Nigeria by British.
In 1921, the Royal Exchange Assurance Company was established and it was the first insurance company to open full branch in Nigeria. In 1949, three other companies emerged. In 1958, Africa insurance company. By 1965, the number of insurance companies rose to 70. In 1977, the Nigeria Re- insurance company was established as a federal government owned insurance company. Nigeria was however under the British colonial rule up to 1960 when she gained her political independence and as a developing country. From 1960 to date a lot of insurance companies came into operation. Insurance is a modern method of sharing loss or spreading risk lightly over a great number of people so that the few unfortunate ones or persons who sustain or suffer loss do not heavy financial loss as a result of their misfortune to the community. The insured pay premium into a common pool outcome of which the unfortunate few who suffer loss are compensated.
The secondary function of insurance companies includes:
- Provision of loans for building on the security of a life policy.
- Encourage and promote commercial enterprise men and industrialist
- The accumulated sum of money by insurer reinvested to state approved securities and this helps to provide the state with a steady flow investment funds with which the state can provide development and promotions to the local industries which will be of benefit to the community.
Insurance is a contract whereby a person called the insurer or assurer agrees in consideration of money paid to him or her known as premium by another person called the insured or assured to indemnify him against loss resulting to him on the happening of certain events. However, it was known that risk exist whenever the future is unknown and therefore insurance exist primarily to combat the adverse effect of risk.
The purpose of insurance is to compensate or indemnify the victim for his financial loss. It should be noted here that the insurance neither eliminate the loss nor stops the disaster from happening, what insurance does is to soften the blow in a purely financial sence by offering monetary compensation to the victim whereby placing him in the same financial position after loss as he was before though within the terms of the policy.
Re- insurance is the transfer of insurance business from one insurance company to another. The original insurer who obtain the insurance contract from the insured or assured is called the direct insurer or the ceding company. Re- insurance arose form the need of the original insurer to spread the risk he has undertaken. Under re- insurance contract is between the ceding company policies. Therefore in the event of a loss, the insured cannot enforce the re- insurance contract.
However, the effect of re- insurance contract on the ceding company includes:
- Re- insurance reduces the probability of the ceding company’s ruin by assuming his catastrophe risk.
- Re- insurance stabilizes the ceding company’s balance sheet by taking on apart of his risk of random fluctuation risk of change and risk error.
- Re- insurance increases the amount of capital effectively available to the ceding company by freeing equity that was tied up to cover risk.
- Re- insurance enlarges the ceding company’s underwriting capacity by accepting a proportional share of risks and by providing part of the necessary reserves.
The insurance sector is made up of a large number of companies with varying sizes, among which the NAICOM was established. The government uses this commission to regulate the insurance industry. The government uses this commission to regulate the insurance industry. It was established in 1997 by NAICOM decree N0. 1 of 1997. Prior to the establishment of National insurance commission, the insurance business regulation and supervision were done by the insurance department of the Ministry of finance.
The national insurance supervisory board (NISB) was established in 1991 to take over the supervision of insurance from the director of insurance. National Insurance Commission (NAICOM) is the head by the commission finance and administration and deputy director for insurance technical.
NAICOM Decree 1 of 1997 stated the functions of NAICOM as follows:
- To ensure the effective administration, supervision regulation and control of insurance business in Nigeria.
- Establishment of standards of the conduct of insurance business in Nigeria.
- Approval of rate insurance premium to be paid of all classes of insurance business.
- Regulation of transactions between insurers and re- insurance in Nigeria and those outside Nigeria.
- Ensuring adequate protection of strategic government assets and other properties.
- To act as adviser to the federal government on all insurance related matters.
- 7. Approve standards, conditions and warranties applicable to all classes of insurance business.
- To protect insurance policy holders and beneficiaries and third parties to insurance contract
- To publish for sale and distribution to the public, annual reports and statistics on the re- insurance industry.
- To liaise with and advise federal ministries, extra ministerial departments, statutory bodies and other government agencies on all matters relating to insurance contained in annual technical agreements to which Nigeria is signatory.
- To contribute to the educational program of the chartered institute of Nigeriaand the West African insurance institute.
- To carry out such other activities connected or incidental to its other functions under the decrees.
1.2 Statement of the Problem
The insurance industry in Nigeria has acute shortage of high level manpower for most classes of insurance and re- insurance business. The Nigeria insurance industry does not enjoy the required public goodwill and reason for this has to do with the damage done to practice of the profession by the get rich entrepreneur who goes about the business of insurance with the little regard to the principle of the profession. As a result of this, the government has come up with so many policies aimed at the study though will save the insurance industry. The extent to which all those government policies affect insurance companies and provides solution to ensure the survival of these insurance companies is another thing. The research therefore, is indicated to examine the impact of various control measures as promulgated by government to regulate the activities of the insurance industry.
1.3 Purpose of the Study
The purpose of this research is essential in a direct investigation on the impact of government policies on the insurance industry in Nigeria.
- To look into the factors hindering the performance of insurance companies through the various government regulatory policies.
- To determine the impact of those government policies on the insurance companies and the insuring public.
- Since the insurance industry is the second largest deposit mobilization institution in the country, it therefore encourages saving which plays an important role in the social and economic well being of the country.
- To evaluate the performance of the industry therefore, is necessary for the growth of the economy.
1.4 Research Hypotheses
The following hypothesis were formed to achieve the objectives of the research.
- H0: The regulatory authorities are unable to carry out their roles and functions in the Nigerian insurance industry.
H1: The regulatory authorities are able to carry out their roles and function in the Nigeria insurance industry.
- H0: The regulatory authorities did not contribute substantially to the manpower development in the insurance industry.
H1: The regulatory authorities have contributed to the manpower development in the insurance industry.
- H0: The regulatory authorities did not make the desired impact on the Nigeria Insurance Industry.
H1: The activities of the regulatory authorities have made the desired impact on the Nigeria Insurance Industry.
- H0: The activities of the regulatory authorities will not have future prospects in the Nigerian Insurance Industry.
H1: The activities of the regulatory authorities will not have future prospects in the Nigerian Insurance Industry.
1.5 Significance of the Study
- To enlighten the Nigerian populace about the benefit that they could drive by taken up insurance cover.
- To guide the policy makers when they are enacting laws concerning insurance.
- Ascertain the need or otherwise for government intervention through regulatory body in the insurance industry.
1.6 Scope of the Study
- To determine the impact of government policies in regulating the activities of the Nigerian insurance industry.
- The study therefore will concentrate on the Nigeria insurance industry.
1.7 Definition of the Term
i Insurer / Assurer:
This is the insurance or assurance company that issue out policy to the policy holder.
ii Insured / Assured:
This are policy holders in the insurance business
This is known as a prime cause or what gives rise to the loss.
This is periodic consideration payment by the policy holder to the insurance company which will necessitate compensation by the insurer to the insured.
This is a written contract of insurance which is issued to the policy holder.
vi Re- Insurance:
This is an insurance company re-insuring again a risk that had already been insured to another insurance company.
vii Ceding Company:
This is the direct insurer or the original insurer who is re-insuring the risk to another insurer.
This is a process by which an insurance company determine weather or not on the basis it will accept an application for insurance.
1.8 Organization of the Study
This research work is organized in five chapters, for easy understanding, as follows
- Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
- Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
- Chapter three deals on the research design and methodology adopted in the study.
- Chapter four concentrate on the data collection and analysis and presentation of finding.
- Chapter five gives summary, conclusion, and recommendations made of the study
Summary, Conclusion and Recommendation
It is important to ascertain that the objective of this study was to examine the impact of the government policies in regulating the activities of insurance companies in Nigeria.
In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of regulatory bodies in regulating insurance industries in Nigeria
The importance of insurance to society and economic growth has been well acknowledged348 and the necessity of regulating the industry has been highlighted. As a prelude, the context of regulation was discussed with an illumination of the theories that underpin the exercise such as the public interest theory. Regulation was identified as relating to both the institutions and normative rules applying to the industry. The characteristics for quality insurance regulation as enunciated by the International Association of Insurance Supervisors (IAIS)349 were identified together with the principles of adequacy, impartiality, minimal intrusiveness, and transparency as advanced by Skipper and Klein. The work identified the questions for research as an exploration of the legal regime and framework for insurance regulation in Nigeria and the challenges incidental thereto with the objective of widening the horizon for the regulatory activity by the regulators.
The institutions for regulation of insurance were established by statute. The constitutional basis for a centralized insurance regulation was established as a basis for the validity of the Insurance Act, the NAICOM Act and other similar statutes. 352 The history of the NAICOM and the functions vested on it by section 7 of the enabling Act were identified but more importantly, the functions of the Supervision, Inspectorate and the Authorization and Policy directorates were closely examined. The Complaints Bureau, the Insurance Guidelines of 2011 and the Insurance Code of Corporate Governance were also discussed. Also as part of the institutions involved in the regulation of insurance, the roles of the Corporate Affairs Commission (CAC), the Securities and Exchange Commission (SEC) and the National Pensions Commission were examined with the conclusion that they share an inter-agency synergy with NAICOM for a holistic regulation of the industry. Similarly, the role of the Chartered Insurance Institute of Nigeria (CIIN), the Nigerian Insurers Association (NIA), theNigerian Council of Registered Insurance Brokers (NCRIB) and the Institute of Loss Adjusters of Nigeria (ILAN) in ensuring discipline in the industry especially among practitioners is beyond dispute. However, the regulatory template established by the Insurance Act and the NAICOM Act did not include in its purview cooperatives and friendly societies involved in the business of insurance. Thus an appraisal was made of the concept of cooperatives and friendly societies and the extant laws applicable to them examined with the conclusion that the statutes and the regulations by the National Cooperative Insurance Society of Nigeria Limited (NCIS) are insufficient and do not meet the index for quality insurance supervision as advanced by the IAIS, with a suggestion that a similar institutional framework as applicable in the United Kingdom be adopted. Similarly, incipient kinds of insurance practices such as insurance captives and microinsurance, and issues on competition and anti-trust, and investment regulation were analysed with the conclusion that existing insurance regulatory framework should factor their existence into their scheme
With the reality that insurance goes beyond the traditional insurance providers, a tiered integrated regulatory framework is necessary for the insurance industry. Integration may be with respect to the law and or the regulatory institution but capital requirements, approval of personnel of insurance entities to meet fit and proper criteria, products, accounting standards and returns, solvency margins, provisions and reserves for unexpired risks and claims, and actuarial valuations etc may be tiered such that what is required of a mainstream insurance company need not be what is required of a microinsurer or a cooperative insurance society. To achieve this, the Insurance Act should become applicable to all insurance institutions, thereby making them liable to control by NAICOM though in the case of cooperative insurance societies this will not preclude an initial registration as a cooperative society under the relevant law, applicability of the insurance law only arising when the cooperative chooses to engage in insurance business for its members. There is need for an enhanced policy-holders protection system. The current system is reliant basically on the security and insurance development fund maintained by NAICOM, constituted by the one per cent levy imposed on insurance operators and other sources of fund of the Commission. In the event of a winding up, policy holders rank after the fees for liquidation and secured creditors. However, an insurer may in fact become insolvent with neither of the above provisions been sufficient to meet commitments to policyholders.
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