Life Assurance Fund And Its Impact On The Growth Of Insurance Business In Nigeria
Insurance is one of the cornerstones of modern day financial service sector that aid in reducing uncertainty and volatility, smoothen the economic cycle and reduce the impact of crisis situations on the micro and macro level. It is against this background that this study examined life assurance fund and its impact on the growth of insurance business in Nigeria. The study adopted the ex-post facto research design, and annualized time series data for the 11-year period 2009 to 2019 were collated from the Central Bank of Nigeria Statistical Bulletin, and National Insurance Commission. Two hypotheses were proposed and tested using the Ordinary Least Square (OLS) regression model and Granger causality test. The results indicates that non-life assurance business had a uni-directional causal relationship with economic growth in Nigeria while insurance investment had a positive and non-significant impact on economic growth in Nigeria. The study therefore recommends among others, that for the insurance industry in Nigeria to have more positive impact on the Nigerian economy, the government should work to see that some of the premiums collected and other income generated by the industry are being invested to ensure diversification of insurance industry to boost the economy. This will assist at enhancing savings therefore providing funds for investment into the Nigerian real sector.
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 Nature and Concept of Insurance
- 2.3 Government Legislation on Insurance Development
- 2.4 General or Non-Life Business
- 2.4.1 Life Assurance Business
- 2.5 Insurance Development and Economic Growth
- 2.5.1 Other Channels of Influence on Economic Growth
- 2.6 Concept Of Economy Growth
- 2.7 Resources Accumulation and Allocation on Economic Growth
- 2.8 Theoretical Review
- 2.8.1 The Growth Theory
- 2.8.2 Markowitz Portfolio Theory
- 2.8.3 Efficient Market Theory
- 2.8.4 Modern Theory of Financial Intermediation
- 2.8.5 The Growth Theory
- 2.9 Empirical Review
3.0 Research Methodology
- 3.1 Research Design
- 3.2 Nature And Sources of Data
- 3.3 Model Specification
- 3.4 Description of Variables
- 3.4.1 Dependent Variable
- 3.4.2 Independent Variables
- 3.5 Techniques of Data Analysis
4.0 Results and Discussion
- 4.1 Result
- 4.2 Test Of Hypotheses
- 4.3 Discussion of Results
5.0 Summary, Conclusion and Recommendation
- 5.1 Summary
- 5.2 Conclusion
- 5.3 Recommendation
1.1 Background to the Study
The Insurance Sector represents the backbone of Nigeria’s risk management system. 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, (Taiwo,2013).
Prior to the advent of insurance business in Nigeria, some organizations known as traditional social insurance scheme (for insurance, Isusu, social clubs and Age grade) similar in purpose to insurance company were in existence ,According to Okonkwo (1998), the first insurance company to register its presence in Nigeria was Royal Exchange Assurance with its office in Lagos in 1921. The enactment of workman compensation ordinance in 1942 and the Road traffic Act of 1945 both contributed to the meaningful takeoff of insurance industry in Nigeria. The need for control and timely intervention of government led to the formation of the National Insurance Corporation of Nigeria (NICON ,2007). In 1986, the Structural Adjustment Programme (SAP) brought about the emergence and proliferation of financial institutions especially deposit taking institutions and insurance companies. Consequently, the insurance capital base was raised from N-1 million to – N 2million. A fallout from this action was that only 57 out of the existing 152 insurance companies qualified for registration (Omoke,2012).
According to Adesun , (2008), the role of insurance sector in mitigating sudden and devastating occurrences thereby stimulating economic growth cannot be over emphasized. Both in developed and developing countries, the insurance sector contributes to economic growth in various sectors .Since the insurance sector has links to sectors such as industrial, transportation, agriculture, mining, petroleum and trade both locally and internationally , its relevance to general human activities has continued to grow as all categories of risk increase.
Life assurance is a social security scheme that provides benefits when certain events occur, or certain conditions exist, that may adversely affect the welfare of the households concerned. It is a scheme that retards the adverse effect of economic insecurity, which arises as a result of the disability or death of a breadwinner in a household. Modern life assurance policies were established in the early 18th century. The first company to offer life assurance was the Amicable Society for a Perpetual Assurance Office, founded in London in 1706 by William Talbot and Sir Thomas Allen (Oviatt, 1905). Life assurance is a contract between an insured (insurance policy holder) and an insurer, where the insurer promises to pay a designated beneficiary a sum of money (the “benefits”) in exchange for a premium, upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger payment. The policy holder typically pays a premium, either regularly or as a lump sum. Other expenses (such as funeral expenses) are also sometimes included in the benefits. Life assurance companies are financial intermediaries that bring together the surplus spending unit and the deficit spending unit for the purpose of the insurer protecting the financial interest of the beneficiary in the event of the demise of the insured (Catalan, Impavido and Musalem, 2000; Impavido and Musalem, 2000).
Life assurance companies play an increasingly important role within the financial sector. While during the period 1980-85 total assets of life assurance companies constituted only 11% of GDP for a sample of 13 countries, for which data were available, they constituted 28% for the period 1995-97 in the same countries. This increased importance was also reflected in the business volume of life insurers. Whereas life assurance penetration – the ratio of premium volume to GDP – was at 1.2% during the period 1961-65, it reached 4.2% in the period 1996-2000 for a sample of 19 countries, for which data were available (Beck and Webb, 2002). While this increased importance of life assurance both as provider of financial services and of investment funds on the capital markets is especially pronounced for developed countries, many developing countries still experience very low levels of life assurance consumption, which affects the contribution of life assurance business to economic growth. Beck and Webb (2002) however, stated that even within the group of developing countries, there are striking differences. While South Africa’s penetration ratio was 12.7% over the period 1996-2000, Syria’s was less than 0.01%. Given the large variation in the use of life assurance across countries, the question of the causes of this variation and therefore the effect of life assurance business on economic growth arises.
Life assurance is one of the cornerstones of modern-day financial services sector. In addition to its traditional role of managing risk, life assurance market activity, both as intermediary and as provider of benefit to the insured or its beneficiary in the case of death, may promote growth by allowing different life assurance risks to be managed more efficiently, promoting long term savings and encouraging the accumulation of capital, serving as a conduit pipe to channel funds from policy holders to investment opportunities, thereby mobilizing domestic savings into productive investment (Skipper, 2001 and Arena, 2008). Life assurance companies act as a vehicle for the mobilization of savings for long term investment purpose, leading to economic growth and development. Through financial intermediation, life assurance product has become a key source of long term finance, encouraging the development of capital markets (Catalan, Impavido and Musalem, 2000; Impavido and Musalem, 2000). A thriving life and non-life assurance business is not only evidence of an efficient financial service sector, but it is also a key barometer for measuring a healthy economy (Omoke, 2012).
Indeed several studies have found evidence that the development of the life and non life assurance sector is related to economic growth and key elements in the economic development of a country (Arena, 2008; Webb, Grace and Skipper, 2002; Ward and Zurbruegg 2000; Webb, 2000 and Soo, 1996). Kumar and Prakash (2012) states that some research suggests that the positive contribution of life assurance to growth is primarily through the channel of financial intermediation and long term investments. It is thus expedient for a country like Nigeria that has witnessed a prolonged period of recession and macro-economic instability to initiate a strong financial market via life assurance companies for economic recovery.
1.2 Statement of the Problem
The level of growth and development which should be commensurate with Nigeria’s huge potentials has not been attained may never be attained since independence , several factors have been advocated for this lack of growth of the Nigerian economy and among such notable factors in inadequate funding for investment purposes which have been limited insurance penetration in the economy (Oluoma,2010).
The major role of an economy’s financial sector is helping to channel resources from surplus unit to the deficit units for investment. Therefore, the financial sector thus improving resource allocation, mobilizes savings, lowers cost of capital via economies of scale and specialization, provides risk management and liquidity. Insurance companies could play a major role in these functions if properly managed thus, supporting economic growth. However, in Nigeria, based on the nation’s experience of stunted growth; the insurance sector has not actually contributed meaningfully in its role of effectively mobilizing funds for productive investment which could lead to growth.
Carlos and Echika (2007) in their research showed that total Nigeria share of the world’s market is only 0.01% compared to South Africa with 0.86% (U.S Commercial Service 2006) and Nigeria has the largest insurance market in Africa with a population of approximately one hundred and fifty million according to World Fact Book by CIA, July 2009 est. (Central Intelligence Agency).It is in the light of this background that the study seeks to investigate the contribution of the insurance sector to Nigeria’s economic growth.
1.3 Objectives of the Study
The aim of this study is to examine life assurance fund and its impact on the growth of insurance business in Nigeria.
Specifically, the objectives of the study include to;
- To determine the degree and direction of causality between economic growth in Nigeria and life assurance business in Nigeria.
- To assess the impact of life assurance investment on economic growth in Nigeria.
- To determine the long run relationship between life assurance fund and growth of insurance business in Nigeria
1.4 Research Question
The following research questions are formulated to guide this research:
- What is the degree and direction of causality between economic growth in Nigeria and life assurance business in Nigeria?
- What is the impact of life assurance investment on economic growth in Nigeria?
- What is the long run relationship between life assurance fund and growth of insurance business in Nigeria?
1.5 Research Hypothesis
- HO1: There is no causal relationship between economic growth in Nigeria and life assurance business
- HA1: Life assurance investment does not have a positive and significant impact on economic growth in Nigeria.
1.6 Significance of the Study
The study will be beneficial to researchers who may wish to carry out further studies on insurance. The study will equally contribute to improving the knowledge and idea in the areas of insurance, banking, finance and national economic development.
This study is expected to be useful to formulators of insurance policy in Nigeria and equally enhance their awareness and need for formulating accessible insurance policy
General and Interested Public:
By stimulating the confidence of average on the benefit of insurance and encouraging the development of good insurance culture and penetration of insurance in the rural and urban sectors, it will help increase patronage of insurance business in Nigeria.
1.7 Scope of Study
The study covers the period 2009 to 2019, and is limited to life assurance fund and its impact on the growth of insurance business in Nigeria. The choice of 2009 as the base year is due to the aftermath of the global financial crisis of 2007/2008 that posed a threat also to Nigeria.
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.
1.9 Definition of Terms
Life assurance is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of an insured person. Depending on the contract, other events such as terminal illness or critical illness can also trigger payment.
Life Assurance Fund:
An agreement between a life assurance company and a policyholder; in return for a payment (premium) from the policyholder, the company commits to pay someone or something (the beneficiary) upon the death of the person whose life is being covered (the life assured).
The insurance sector is made up of companies that offer risk management in the form of insurance contracts. The basic concept of insurance is that one party, the insurer, will guarantee payment for an uncertain future event. Meanwhile, another party, the insured or the policyholder, pays a smaller premium to the insurer in exchange for that protection on that uncertain future occurrence.
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 life assurance fund and its impact on the growth of insurance business in Nigeria.
This study showed that
- Non-life assurance business had a uni-directional causal relationship with economic growth in Nigeria.
- Insurance investment had a positive and non-significant impact on economic growth in Nigeria.
Findings from the study indicate that the insurance industry activity had a positive impacton economic growth in Nigeria. Thus, the insurance sector assisted in savings mobilization and investment decisions, and hence, enhancing the growth of the Nigerian economy.
In view of the present realization of the importance of insurance as a means for achieving economic independence and development, there is need for concerted efforts aimed at ensuring that insurance in Nigeria align with current developments in the global economy. Therefore, the industry operators need to constantly work hand in hand to ensure a healthy mutual beneficial self-regulation.
Based on the findings of this study, the following are recommended;
- The National Insurance Commission (NAICOM) in collaboration with the Federal Government should enforce laws on insurance practice in Nigeria. This is necessary because a huge amount of capital can be generated if insurance habit is encouraged in every aspect of the economy. The revenue injection will help galvanize the insurance sector and ensure that more buildings are ensured against collapse, and this will aid economy growth.
- The insurance industry should render prompt account and insurance returns (income) as well as quick settlement of claims so as to grow the industry and upscale the insurance patronage in the country. It is an opportunity cost that will benefit the industry in the long run.
- The National Insurance Commission (NAICOM) in conjunction with the government should work to see that some of the premiums collected and other income generated by the industry are being invested to ensure diversification of insurance industry to boost the economy.
Life Assurance Fund And Its Impact On The Growth Of Insurance Business In Nigeria
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