2.1
INSURANCE BUSINESS CONCEPTUAL ISSUES
This section deals with conceptual issues relating to
the margin estimate through the cost of capital approach. The main points that
emerge are briefly summarized here under.
Either an indirect approach based on observable
insurance equity price and shareholders expected rate of return or a direct
approach based on insurance contract characteristics are both consistent with financial economics and are perfectly equivalent theoretically. However, only by
using a direct approach does the risk margin estimations seen practically
implement able.
The solvency II specification of the methodology is
also consistent with financial economics.
However, the theoretical frame work required (a frictionless and normally
distributed world) is too far-fetched to be acceptable. In addition, even if
these conditions were satisfied, a variable unitary cost of capital would be
needed.
A consistent risk margin estimate requires the identification
of priced risk in insurance contract, i.e. the
risks which affect the expected return of insurance, contracts, non-hedge able
systematic risks seem to be the most relevant, however non-hedge able and non
systematic price risks could also be important, but it should be treated
separately from systematic risks. The risk margin could also consider expected
frictional costs, if there are not explicitly computed in the best estimate. In
this frame work more than one risk could be used to measure the risk margin
estimation. Under no condition does the value at risk measure seem to be a
viable condition.
2.2
HISTORICAL DEVELOPMENT OF INSURANCE BUSINESS
This refers to the development of a modern business in
insurance against risks, especially regarding ships, cargo and buildings property
and firs death (life insurance), automobile accidents (auto) and the cost of
medical treatment (health insurance). The industry has been profitable and has
provided attractive employment opportunities for white
collar workers. It helps eliminate risk as when fir insurance companies demand
safe practices and the availability of fire stations and hydrants. Spreads
risks from the individual or single company to the larger community, and
provides an important source of long-term finance for both the public and
private sector of the economy.
However,
the Greeks and Romans introduce the origins of health and life insurance, 600BC
when they created guilds called “benevolent societies” which cared for the
families of deceased members, as well as paying funeral expenses of members.
Guilds in the middle ages served a similar purpose, the Talmud deals with
several aspects of insuring goods. Before insurance was establish in the late
17th century, “friendly societies” existed in England, in
which people donated amounts of money to a general sum that could be used for
emergencies.
2.3
HISTORICAL DEVELOPMENT OF INSURANCE BUSINESS IN NIGERIA
Years back around 1912 the existence of insurance
business was unsophisticated in Nigeria.
This is because of the low level of economic activities at the period, like the use of mechanical propelled vehicle such as
motor car, this were very rare and compulsory legislature on motor insurance
with an outbreak of the second world war in 1939 the situation became more
critical.
The road traffic act of 1950 and some into fore in 1st
April 1950 and work man’s compensation Act of 1940 lead the organization of
insurance companies properly in Nigeria.
But most of those companies were owned by foreigners.
Therefore, after attainment of political independence
in Nigeria,
a large number of indigenous companies commenced their insurance business. The
style of ownership rapidly change from foreign owned companies to indigenous companies
the increament in the numbers of insurance companies was due to the fact, that
there was no frame work and control of registration of these companies.
But this situation was control on 1st
October 1966 when Dr. K Rachael a United state expert was appointed as adviser
as on insurance matter. This appointment was focus in recognition to insurance
company regulation which formulated in 1968 this lead to the corporation of
Nigeria (NICON) on 1st July 1969, NICON has been in existence since
around 1969 and today is recognized as the best among other insurance companies
in Nigeria.
2.4
CLASSIFICATION OF INSURANCE
Insurance generally is divided into classes according
to class or business into (17 groups) some of them are:
a.
Money insurance
b.
Accordant insurance
c.
Marine insurance
d.
Engineering insurance
e.
Life insurance
f.
Non-life insurance
g.
Burglary insurance
h.
Theft insurance
Insurance can also be defined for the purpose of
academic work into the following uses.
a.
Introduction to insurance
b.
Insurance of ability, property
and insurance and so on.
Classification according to business:
MONEY INSURANCE:
Money like other property is subjected to theft,
money is given a wide meaning in this form of policy, it comprises of the following.
a.
Bank and currency note
b.
Cheques
c.
Postal order
d.
Money order e.t.c.
MOTOR
INSURANCE: This type of insurance provide cooler
against any risk of loses on hazard which may arise from the use of motor by motorist
on the high ways, the risk which motorist are exposed to, can be classified in
the following ways.
a.
The risk of damages or loss of
vehicle itself.
b.
The risk of legal liability
for damages to the property or third party or for injury or death of such
third.
Motorist insurance policy is divided into four types
namely.
a.
Comprehensive policy
b.
Third party theft fire policy
c.
Third policy
d.
Act policy
Comprehensive policy has the widest cover with the
biggest premium. Motor insurance is among the basic condition to be fulfilled
by the motorist before he can be allowed to use the high way.
ACCIDENT
INSURANCE: This type of insurance is a cover for
any personal accident including sickness. This type of policy is usually taken
by employees of companies who work with huge machine so that if nay accident
occurred in the process of using the machine he can be compensated by the
insurance company.
MARINE
INSURANCE: This type of insurance is the oldest
type, it gives cover against any less of damages which may arise on seas by the
use of vessels. The risk of this type of policy is usually large for only one
insurance company undertaken in such contract, many insurance companies come
together as under writers to share the risk together according to the
proportion of premium to each under writer.
ENGINEERING
INSURANCE: This policy is granted to any loss
which may arise from engineering. It is very technical class of business which
also involves large risks. The policy is taken against preventive work of
survey, inspection of boiler, cranes, electric plants e.t.c. and other vice
fidelity and goods in transit.
LIFE
INSURANCE: This type of policy is taken against
human life. It is very significant because it involves life i.e. the one taken
against the whole life of the assured so that the claims would be given to his
next of kin after death or endowment, which is taken for a fixed period of life
span. The claim would be taken at the end of that period by that assured, it
alive or by the next of kin the assured is no alive.
BURGLARY
INSURANCE: This is a dishonest appropriation
of property belonging to another by a trespass with the intension of
permanently depriving the others of it. This is usually involves damages and
forceful entry to a house. The business person who has many goods in their
store or warehouse usually take this type of insurance policy.
CLASSIFICATIONS
ACCORDING TO ACADEMIC PURPOSE ARE AS FOLLOWS:
-
INTRODUCTION OF INSURANCE: This is the
elementary aspect of insurance. This aspect covers the definition, purpose,
objective of insurance mostly.
This introduction of insurance is usually for those
who are new on insurance as a course. It also covers origin and development of
insurance.
-
INSURANCE LIABILITY: This aspect
of policy deals with types of insurance in viable and monetary term principles
of insurance and few others
2.5
RISK OF INSURANCE
The basic insurance risk, without risk there would be
no insurance. This is found in every aspect of human endeavours,
in general risk has to do with uncertainty of losing or not gaining.
PURE AND SPECULATIVE RISK
Happening to pure risk always resulting into loss e.g. fire
damage to properties, pure risk are insurable their capital of scientific
measurement speculative risk happening to speculative risk are all uninsurable
because the probability of this occurrence can not easily be measure for
insurance purpose.
STATIC AND DYNAMIC RISK
Static risk involves a loss of the society and commend with
the losses caused by irregular action of the force of nature or the mistake of
human being while dynamic risk not involves loss to the society it is
associated with change especially in human and improvement in technology and organization.
FUNDAMENTAL AND PARTICULAR RISK
Fundamental
risk are group of risk that is personal in nature and origin and affect at
least for the individual unpreventable such risk are present in the force of nature in the
economy. Since the outcome of inflation or mass unemployment beyond individual influence particular risk
are personal in nature, origin and affect. Examples are risk of property
losses, such as theft, fire and explosion e.t.c
CHARACTERISTIC OF INSURANCE RISK
For risk to be
involves the following condition must be presented:
1.
Any risk must be measurable in monetary terms.
2.
risk of loss must be reasonable unexpected
3.
The risk must be accidental and not deliberately caused by
the insured.
4.
Risk must be nature that permits in reasonable statistical
estimate.
The degree of
loss must be sufficiently large to make the cost element a minor factor in the
premium.
2.6
CLAIMS AND SETTLEMENT PRACTICE
Claims according to Charles E.D (1969) is accounting for
the assurance companies is described as benefit amount payable in accordance
with insuring desires in life and health. Insurance policies each claims must
be examined carefully and approved by a qualified person before money is paid
because the amount of these payment often are quite large.
The responsibility of claims assigned to a claim approver.
He is a specialist in investigating and in thoroughly familiar with various policies
and contract provision. He may also have legal training point participation by
this he approves and accounts in making settlement, he provides element of
security to the company. Account control and record are required for
calculating claims liability amount at the end of each year controlling claims
the payment made in installments.
The control varies according to the classification the
two principles of claims are classified as:
1.
Life insurance claim (which
include matured endowment)
2.
Health insurance claim life
cover the following
a.
Death claim
b.
Surrender claim
c.
Maturity
d.
Bonus surrender
To prove the claim will submit required document for
proper office protocol. By Ogunride P.S (1990)
2.7
INSURANCE AND ECONOMIC DEVELOPMENT: AN EMPIRICAL REVIEW
This section of this research work evaluates the
long-run relationship between insurance development and economic
growth. In doing so it will differentiate between developed and developing
economies and the roles that life and non-life. Insurance development could
play economic growth. This research work uses a panel data set of 77 economies
over the period of 1994-2005. Table 1 in the appendix lists the names of
economics used in this study. Table 1 reports summary statistics for 77
economies used in this study by referring to the information on economic growth,
insurance density, life and non-life insurance density. As can be seen from
table 1 the development of insurance is largely different in life and non-life
insurance lines and across different economies
SUMMARY STATISTICS: 1994 –
2005 FIGURE AND TABLE INDEX
|
||||
DESCRIPTIVE STATISTICS
|
ECONOMIC GROWTH
|
INSURANCE DENSITY
|
||
TOTAL BIZ
|
LIFE BIZ
|
NON-LIFE BIZ
|
||
Mean
|
3.480
|
4.982
|
3.747
|
4.428
|
Median
|
3.700
|
4.808
|
3.507
|
4.433
|
Maximum
|
31.100
|
8.534
|
8.313
|
7.660
|
Minimum
|
-22.900
|
0.182
|
-2.302
|
-0.511
|
Std. Dev.
|
3.459
|
2.001
|
2.504
|
1.823
|
Sewness
|
0.825
|
-0.096
|
0.001
|
-0.388
|
Kurtosis
|
3.545
|
2.005
|
1.920
|
2.340
|
Jague-Bera
|
4348.392
|
37.427
|
42.103
|
32.468
|
Profitability
|
0.000
|
0.000
|
0.000
|
0.000
|
Observations
|
916
|
875
|
866
|
874
|
Cross-sections
|
77
|
77
|
77
|
77
|
From figure 1 it can be seen that the growth pattern between 1994 and
2005 for life and non-life insurance differ from each other. For instance,
there was a large in fluctuation for life insurance while the in fluctuation in
non-life insurance is relatively small.
P O Akingobi (1997), Fundamental
of Insurance
Sogress M.S (2001), The role
of Insurance company in National Growth and Development
Charles E.D (1969), Accounting
for life Assurance Company
Ogurinde P.S (1990),
Agricultural Insurance Theory and practices
Akindele (2012), Nigerian
Vanguard
Prudential Inssurance Company America ed The
Documentary History of Insurance, 1000BC – 1875 A.D (1915).
Alborn Timothy Regulated
Lives: Life Insurance and British Society, 1800 – 1914 (U of Toronto Press, 2009)
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