THE RELEVANCE OF INSURANCE BUSINESS IN NIGERIA

THE RELEVANCE OF INSURANCE BUSINESS IN NIGERIA

CHAPTER ONE

1.0     INTRODUCTION

1.1            BACKGROUND OF THE STUDY

Insurance is a form of risk management primarily used to hedge against the risk of a contingent uncertain loss. According to Adebisi, (2006) Insurance is an intricate economic and social device for the handling of risks of life and property. It is social in nature because it represents the cooperation of various individuals for mutual benefits by combining together to reduce the consequence of similar risks. As new area of risks emerges with every passing day a new insurance package is introduced to take care of risks associated with it.

Agbaje (2005) defined insurance as the business of pooling resources together to pay compensations to the insured or assured (i.e. the policy holder) on the happening of a specified event in return for a periodic consideration known as premium. An insurance contract is usually evidenced by a document called the insurance policy which is usually signed at the foot by the insurer or assurer or his agent. Gollier (2003) argued that insurance involved the transfer of risk from an individual to a group sharing losses on an equitable basis by all members of the group. By the end of the 19^th Century by  European trading companies mostly British.

These companies  started effecting their insurance with established insurers in the London Insurance market.  As time went on, some British insurers appointed Nigeria Agents to represents their interest in the country.

These agents later metamorphosed into full branch offices of their parent companies in Britain. Osun Kunle (2002) opined that the first branch office in Nigeria was the Royal Exchange Assurance in 1921, later followed by other British companies, indigenous Nigeria Insurers and re-insurers later followed such as National Insurance Corporation of Nigeria (NICON) Established in 1969 and Nigeria reinsurance companies operating in Nigeria today.

Lynch (1992) Opined that insurance companies have continued to be on the increase since early sixties. This has been due to liberal financial legal requirements. With the increase in insurance business in Nigeria, it is anticipated that it should be able to contribute to the growth of the economy. More so, as insurance provides a hedge against loss, it is supposed to increase enterprise, thereby increasing national productivity.

1.2            STATEMENT OF THE PROBLEM

There is no doubt that insurance industry have developed from stage to another and have contributed immensely to the economic development of Nigeria but not without problems with which it have and is contending with. Among this problems are:

          i            Ignorance: The problem of ignorance as regards the benefit of insurance products. Many do not know what insurance is all about even the educated ones.

       ii            Unskilled Insurance Practitioners: The presence of unqualified staff and firm have created a great problems as some dubious practitioners goes around collecting premium without remitting same to the appropriate quarters.

     iii            Lack favourable Government Policy: Over the time past there has been little or no effort by the government to enact favourable policies and enabling environment for insurance business to strive.

    iv            Political challenges: with a more proactive and visible industry approach to public policy than previously

In view of the above problems it is becomes important to research into the contribution of insurance business to the Nigeria economy, so as proffer possible recommendations that could remedy the challenges facing the sector.

1.3            OBJECTIVE OF THE STUDY

                      i      To examine the relevance of insurance business in Nigeria

                   ii      To assess the extent of insurance service provided to client in Nigeria

                 iii      To evaluate the contribution of insurance business to economic development in Nigeria.

                 iv      To identify the challenges facing the insurance business in Nigeria.

                   v      To make policy recommendation.

1.4            RESEARCH QUESTION

a.     What are the roles of insurance industry in the Nigeria economy.

b.     To what extent has the insurance services been made available in Nigeria

c.      To what extent has insurance business contributed to the economic development of Nigeria?

d.     What are the likely challenges facing insurance business in Nigeria?  

1.5     RESEARCH HYPOTHESIS

H₀: The Insurance industry does not play any vital roles in Nigeria economy.

H₁: The Insurance industry plays a vital role in Nigeria economy.

1.6     SCOPE OF THE STUDY

The scope of the study is confined to the role of insurance industry in the Nigeria Economy with particular interest to NICON Insurance Abuja. 2005-2013 and the data used for the study are data and time series based.

1.7     SIGNIFICANCE OF THE STUDY

The study is important because the result and findings of the study will be useful to the following class of users:

a.     Policy makers: They shall consider this research work as basis for making economic policies.

b.     Academia: The research work is also significant to lecturers and students as an addition to existing literally works, thereby serving as a resource material to all who wish to further the study of the subject matter.

c.      Other researchers: The research work is significant because other researchers of related subject matter will make use of it as a resource material.

1.8     LIMITATION OF THE STUDY

The challenges encountered by the researcher in the course of the study range from:

a.      Accessibility to relevant data: it  was no easy to get relevant data that will help researcher to develop more idea on the topic.

b.       Time constraint: this is another problems, the time limit is not much for a researcher to carry out more study on the work.

c.       Financial challenge: is also the most important problem that the researcher encountered during researching which involve traveling to relevant organizations and companies to get relevant data and information so limitation in data correcting went a long way in affecting this research work.

1.9     DEFINITION OF TERM

Insurance: This is a contract in which the insurer, for a consideration or for a sum of money which is called premium, agrees to pay to the insured a sum of money or its equivalent whenever the event that was insured occurs.

Reinsurance: This is particularly important in any modem economy. It is simply a secondary insurance or the process by which an insurance company places a proportion of its insured risks which it cannot bear with another insurance or reinsurance company

Premiums: This is the amount paid by the insured to the insurer for the insurance cover provided in the policy.

Indemnity: The maximum amount pays able by an insurer to beneficiary of loss. The principle of indemnity implies that the claimant does not profit from the loss.

Insurable Interest: The pecuniary interest a person has in a possible subject matter of insurance such as car, property or life, such that he might suffer a financial loss as a result of the happening of the event insured against.

Insurer: The insurance company that has undertaken to provide an indemnity, pecuniary benefits or render services. The word insurer is sometimes synonymous to the word ‘Assurer; Assurance or assurer’ are however more applicable in life business. In view of the certainty of happening of the event assured, benefit could be paid on the death of the life assured or on the maturity of the policy.

Contribution: This is a doctrine, which enables an insurer to call upon another insurers similarly (but not necessarily equally) liable to the same insured to share the cost of an indemnity. It arises when there is more than one policy in respect of the same loss and each policy is covering the interest of the same insured.

Claims: A demand made by an insured or the insured’s beneficiary for payment of benefits or indemnity following a loss in accordance with the terms of an insurance contact.

Cover: A contract of insurance, to effect insurance, that is to ‘cover’ and insured for example, motor insurance with effect from a given time.

Cover Note: A document which signifies temporary acceptance of issuance of the policy document.

Excess: The portion of a loss which an insured is expected to bear while the insurer will be responsible for any amount of the insured loss over the portion. This is mainly applicable to motor insurance.

Pool (insurance): An agreement between a group of insurance and reinsurance companies to cede a percentage of some defined classes of business to a common source from where premiums, losses and expenses are shared in agreed proportion amongst them. Pools are usually formed to cater for volatile classes of business as well as to increase local retention capacity as in the case with most developing insurance markets.

Broker: A broker is an independent operator whose main duty is to bring parties to an insurance transaction together for a commission. The broker conducts his business for all and sundry and does not represent any particular insurer to the exclusion of others. The broker is professionally liable to the insured in view of his professed expertise in insurance.

Agent: One who solicits, negotiate and effects contract of insurance on behalf of insurer(s) within a defined limit of authority and subject to statutory and common laws. An agent may be a full time sales employee of an insurer or appointed on a part-time basis.

 

CHAPTER TWO

LITERATURE REVIEW

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 implementable.

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 17^th century, “friendly societies” existed in England, in which people donated amounts of money to a general sum that could be used for emergencies.

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