The Role Of National Insurance Commission (NAICOM) In The Promotion Of Nigeria Insurance Market Opportunity
Insurance companies in Nigeria remain one of the important components of financial services in Nigeria. Their role in enhancing economic development and stimulating economic growth cannot be over emphasized. Since 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 for all ages as all categories of risks increase. Based on that, in the past years Nigerian Government in collaboration with NAICOM introduced several reforms in order to enhance the operating performance of the companies. Besides, official reports reveal that the Nigerian insurance companies contribute only 0.3% of overall GDP in 2014 in terms of the value of gross premiums written. This brought the attention of the scholars and other practitioners on the need to investigate the determinants of insurance companies in Nigeria as well as the role of NAICOM in the promotion of Nigeria insurance market opportunity and it is the objective of this study. This study investigated the significant contribution of some internal and external determinants of insurance companies‘ performance in Nigeria. The study also investigated the level of contribution made by each of the determinants on return on assets, return on equity and earnings per share. The internal determinants include company‘s age, company‘s size, leverage, assets tangibility, liquidity, growth written premium, growth rate, solvency and equity. The study also collected information from respective staff of insurance companies and analyzed the information in order assess the external determinants of insurance companies‘ performance in Nigeria. The external determinants this study aimed to investigate include political, economical, social, technological and environmental factors.
1.1 Background of the Study
The contribution of insurance to economic growth is huge and unlimited. Insurance is of great importance to a modern society and in fact, economic growth is characterized by the soundness of a nations insurance market. Insurance promotes financial stability and reduces anxiety; it can substitute for government security programmes, facilitates trade and commerce; mobilizes saves; enables risk to be managed more efficiently; encourages loss mitigation and fosters a more efficient capital allocation.
The Nigerian insurance market presents vast opportunities for citizens, the industry, the financial services sector and the economy. But the market is not efficient, lacks capacity of consumers trust, expert say the net effect is that it does not grow and no meaningful contribution to the macro-economic indicators.
The insurance gap in Nigeria is presently put at 94 percent which implies that less tham 10 percent of Nigerians have any forms of insurance. The wide gap is attributable to public inertia and apathy. The insurance density on the other hand is put at N875,00, this means that Nigerians on the average spend les spend less than N1,000 annul on insurance presently, the total industry income is about N170 billion.
According to NAICOM, for the set target to be achieved, the insurance gap must be lowered to a minimum of 70 percent, with 2012 as the target data. Globally, the world insured premium income from 2006-2008 as presented by sigma publication shows that life insurance has contributed more premiums, an average of 58.86 percent than non-life business an average of 41.14%. However the reverse is the case in Nigeria which contributes 17.90 percent for life as against 82.10 percent for non-life.
Nevertheless conscious efforts were made by successive government and the regulation to improve the insurance market over the years “one of such effect was the market consolidation exercise that started in 2005 culminating in increase of industry’s minimum capital requirements.
With this the research focused on the insurance industry market the problems prospect and the role of the national insurance commission in promoting insurance market in Nigeria.
1.2 Statement of Problem
- Low level of regulatory compliance by the insurance practitioners and the insuring public.
- Absence of new products and poor image of the industry.
- Government policy inconsistency and weak regulatory measures.
- Delayed settlement of genuine claims and delays remittance of premium by intermediaries.
1.3 Objectives of the Study
- To ascertain the role of the national insurance commission ion promoting insurance market in Nigeria.
- To identify the problem and challenges hindering effective and efficient marketing of insurance product in Nigeria.
- To examine the impact of recapitalization on the insurance industry with regard to market expansion and penetration.
- To find out the contribution of the insurance industry to the growth and development to the growth and development of the Nigerian economy.
1.4 Research Questions
- What is the functions of NAICOM in the insurance industry?
- What percent share have the insurance industry in the marketing environment?
- What are the challenges facing the insurance industry in the marketing of their product?
1.5 Significance of the Study
The significance of this study is bedded on the stated objective. The research work is aimed at encouraging the insurance industry on engaging in professional practice and also ensure that the national insurance commission identify their roles as stated in the decree 997 which established the commission.
The research work is also of important to the students as it will serve as a point of reference to those of them who want/desire that to carry out research on similar topic also the government and its agencies will be a benefactor of this research work as the outcome of it will expose the opportunities that are yet untapped by the insurance industry in the economy because of government policy in consistency.
1.6 Scope and Limitations of the Study
The research work covered the role of National Insurance Commission (NAICON) in the promotion of Nigeria insurance market opportunities. The research examines the functions of the national insurance commission the power of the commission, organizational structure and the programmes put in place by the commission to ensure the actualization of the federal government vision 20:2020.
In the course of carrying out this research work, the researcher encounter some challenges ranging from paucity of funds, to denial of access to confidential information and data
Also, time inadequacy was also one of the constraints encountered by the researcher in the course of carrying out the research work.
1.7 Definition of Terms
A situation that arises when a party (called the principal) appoints another (called the agent) to act for him (the principal) in doing a thing or things which the principal should do, but which he may not, by reason of circumstance be disposed to do them.
A right of way over another’s property.
An agreement by one party to make good the losses suffering by another, usefully by payment of money, repair, replacement or reinstatement in an insurance contract.
A form of selling in which unrequested goods are sent to a potential customers on a sale-or-return basis.
A legal contract in which an insurer promises to pay a specified amount to another party, the insured, if a particular even happens and the insured financial loss as a result.
The demand for a particular product or services often measured by sales during a specified period.
The consideration payable for a contract of insurance.
An activity designed to boost the sales of a product or service. It includes, advertising, personal selling, sale promotion and publicity.
A discount offered on the price of a good service, often one that is paid back to the payer.
The financial states of a person or company that is able to pay all debts as they fall due.
An insurance policy for property that has a sum insured shown for each item although the insurers do not acknowledge that this figure is actual value.
Summary, Conclusion and Recommendations
In this study, panel data was used in an attempt to assess the determinants of insurance companies‘ performance in Nigeria. The study also used regression equations to predict and explain negative or positive significant effect of independent variables on the dependent variables. Based on that, four regression equations were formulated for the purpose of testing first, second, third and forth null hypotheses in respect of ROA, ROE, EPS and PER respectively. Regression equations for hypotheses one, two and three hypothesis utilized the data obtained from financial annual report of the companies published in the Nigerian Stock Exchange Fact Book from 2009 to 2016, while the forth hypothesis utilized the primary data collected from respective staff of insurance companies in Nigeria through structured questionnaire.
In an attempt to test the multiple regression assumptions, robustness and validity tests were conducted. The result of stationarity tests shows that the unit root tests of the series conducted found the variables non-stationary on the basis of the ADF statistic at 1%, 5% and 10% level of confidence. During the data analysis we found high level of correlation in company size and growth rate, meaning that multicollinearity exists. With high correlation, there is large standard error which leads to rejection of relationships which may be true. So, we dropped company size and growth rate since the first reaction to multicollinearity is to drop predictors that have high level of correlation values. Finally, the result from correlation matrix analysis shows the absence of multicollinearity, therefore, all the remaining seven variables were retained. Normality tests were also conducted in order to determine whether the regression equations can be adequately modeled by normal distribution. From the findings of the study, we found graphically and mathematically that the independent variables appear to be normally distributed.
The result also shows that the problem of Heteroscedasticity has been solved by the GLS analysis. In the case of serial correlation, the result indicated an absence of serial correlation or autocorrelation, meaning that the residuals are constant and normally distributed as required by the multiple regression assumption. Factor analysis and reliability tests were also conducted in order to simply measure the reliability of the questionnaire. Both KMO and Bartlett‘s test were statistically significant at 5%, meaning that the factor analysis is appropriate. The Cronbach‘s alpha ranges within 0.70 – 0.99, meaning that as far as internal consistency is concerned the instruments are reliable.
From the result of hypothesis one, the coefficients indicated that only LEV, GWP and EQT are statistically significant, while CAG, ATG, LIQ and SLV are not significant at 5% significance level. The result further shows that LEV and EQT were negatively related to ROA while GWP was positively related to ROA. In the case of the result of hypothesis two, the p-values obtained shows that GWP, SLV and EQT are statistically significant at 5% significance level while CAG, LEV, ATG and LIQ are not significant. When looking at coefficient estimate we can understand that GWP and EQT are positively related to ROE while SLV is negatively related to ROE.
The result of hypothesis three shows that, ATG, GWP and EQT of insurance companies in Nigeria are statistically significant at significant at 5% significance level, while CAG, LEV, LIQ and SLV are not statistically significant. The result also shows that GWP and EQT are positively related to EPS while ATG is negatively related to EPS during the period of investigation. Finally, hypothesis four indicated that ECO, ENV and TEC are positively related to PER and they are statistically significant.
The overall result of this study improves the understanding of determinants of insurance companies in Nigeria by providing useful information to insurance companies, investors, regulators and supervisory authorities. The findings of this study revealed that the variables used in this study to investigate the determinants of insurance companies‘ performance in Nigeria are similar to those used in other developing and developed countries as predicted by existing theories of performance. The findings of the study established the statistical significant relationship between three independent variables (ROA, ROE and EPS) and seven independents variables (CAG, LEV, ATG, LIQ, GWP, SLV and EQT) respectively. Since the p-values in the ANOVA tables are less than 0.05 the study therefore, suggested the rejection of null hypotheses one, two and three. In the case of hypothesis four the study also established a significant relationship between PER as dependent variable and three independent variables (EOC, ENV and TEC). The study therefore, accepted the rejection of null hypothesis four since the p-value in the ANOVA table is less than 0.05 during investigation.
The variables used in testing hypothesis one, two and three and considered most important are; equity (β=10.23), growth written premium (β=4.91), liquidity (β=0.26), leverage (β=0.04), company‘s age (β=0.02), solvency (β=-0.89) and assets tangibility (β=-24.03). In the case of variables used to test the hypothesis four and rated according to their contributions are; economical factors (β=0.53), technological factors (β=0.29) and environmental factors (β=0.11). Based on the findings of the study, it can be concluded that all the variables that have been considered during the analysis are important but they have been rated differently based on their aggregate contribution. In this case equity make strongest contribution which contradicted the general opinion that Gross written premium is the major determinant of insurance companies‘ performance.
In order to ensure that the insurance companies in Nigeria will continue to perform significantly in promotion of market opportunity, the following recommendations are proffered based on the findings of the study.
- From the findings of the study equity capital has the highest value in terms of aggregate contribution to the performance of insurance companies in Nigeria. It is therefore, recommended that stakeholders in the Nigerian insurance industry in collaboration with their regulatory body; National Insurance Commission (NAICOM) should consider further consolidation in the Nigerian insurance industry. This is because if Nigerian insurance companies merge or recapitalize, they will be big enough to underwrite big businesses and also to have the requisite capacity to deepen insurance across the country.
- Insurance companies in Nigeria in collaboration with the Federal Government of Nigeria should employ appropriate strategies aimed at increasing their investment and revenue base. This will be achieved by implementing/enforcing the compulsory insurance of all public buildings as well as those under construction; and compulsory insurance of all states and local governments to enroll their employees in the National Health Insurance Scheme. By doing this, equity capital and growth written premiums of the insurance companies will be increased, since equity capital can improve through investment and profits.
- National Insurance Commission, insurance brokers and underwriters should try as much as possible to develop retail insurance, micro insurance and ethical insurance. By doing this, it will provide room for raising funds that will be used for operation and settlement of claims. Provided that the claims have been established, the procedure of settlement should be simple, prompt and readily accessible. This will attract more people to insure their properties and lives, which would increase the premium income and general earnings of the insurance companies.
- From the findings of the study assets tangibility contributed negatively to the performance of insurance companies in Nigeria. This finding validated the fact that insurance companies do not require large volume of fixed assets which is contrary to manufacturing companies. What they need is to make sure that they have available funds in the event of loss suffered by anyone under their insurance policy. This will increase the number of insurance policy holders and at the same time enhance the performance of insurance companies in Nigeria.
- The insurance companies should try as much as possible to forecast their liquidity requirements and maintain emergency standby in order to meet their customers‘ needs and minimize the risk associated with their investments. This does not mean to leave excess funds idle or to invest in less profitable ventures. By doing this, their liquidity will be safe and the net assets value of the companies would be improved.
- National Insurance Commission should make sure that operators of insurance companies with solvency issues have take appropriate measures and meet the regulatory prescription.
- Insurance and reinsurance companies should obtain more favorable terms and conditions in their relationship with investors, creditors, insured‘s, reinsurers and other counter parties which should lead to a wider market for the industry. In collecting relative small premiums from many individuals, insurers would be able to pull together and have a large pool of funds that could be invested for long term periods so as to generate more premium income for the companies.
- Insurance companies in collaboration with the regulators in Nigeria should look in to economical, environmental and technological factors. By improving in recent technological shift (i.e. interacting with customers electronically) it will enhance the general performance of insurance companies in Nigeria.
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