IMPACT OF UNIVERSAL BANKING ON THE INSURANCE INDUSTRY
A CASE STUDY OF SELECTED INSURANCE COMPANIES IN NIGERIA
ABSTRACT
Sometimes in 1999, some sector of the
Banking Industry began to advocate the adoption of Universal Banking
(UB). As the argument for and against the introduction ranged on in
conferences and workshops, the CBN had to succumb to the pressure from
the proponents of Universal Banking by giving approval for the
introduction of Universal Banking. Fears have been expressed over the
introductions of Universal Banking. These fears appear to be harboured
by insurance that hold the notion that Banks are only coming to disturb
their seemingly exclusive business. Some people, including the insurance
experts have however, dismissed these fears, stressing that the
phenomenon would rather boost Insurance business and make the
practitioners sit up for real competitive insurance marketing and sales.
In the light of the above, this research work seek to look at the
Impact of Universal Banking on the Insurance Industry. To identify the
problem that could arise there from and to proffer solutions to the
problem. Universal Banking is a multi-purpose banking which removes the
restrictions between commercial banking merchant banking, and insurance
market such that a banking institution can offer integrated financial
services in one stop centre. The principal research instrument used is
the questionnaire. The case study is the first ten insurance companies
on the rating of the Nigeria Reinsurance Corporation of Insurance
Companies in Nigeria, based on their asset base. The study population
consists of the management and senior staff of the case study. Ten
questionnaires were given to each of the case study making it a total
population of 100 workers. Since the total population is known we used
Bourley’s formular to determine the sample size of 80.
The data were analysed using likert scale statistical model. The
hypotheses were tested using Z-score test. The result showed that
Universal Banking will have tremendous positive impact on the insurance
industry. It is strongly believed that the introduction of Universal
Banking is good to the bettered image of insurance industry in Nigeria.
Universal Banking will improve the service delivery in the insurance
industry. The banks are popular, with banks transacting insurance
business the insuring public will be rest assured of the settlement of
their claims. The work equally showed that the long standing insurance
unawareness in the country will be broken down by Universal Banking and
Insurers will stand to gain more clients.
CHAPTER ONE
1.0 INTRODUCTION
1.1 Background of the study
In choosing any project, there must be
the consideration of several factors, the most prominent of which should
be the end-user value. The need should have arisen for the user to look
out for an external help, such need could be a more reliable and
comprehensive information concerning Universal Banking system.
Ever since creation, there has been a
continuous quest for man to improve his well being through his relations
to the problems and challenges posed by his environment. Tools upon
tools have been fashioned and defined by man to aid him in conquering
these problems and challenges posed by his over crowded and pressurized
work and leisure environment.
In the developed countries of the world,
the Universal Banking system has been operating for almost a decade now.
In Nigeria, it is a new innovation in the Banking and Insurance
industries. Since January 1, 2001 when the central Bank of Nigeria
approved the “Financial Supermarket” system, merchant bankers who fought
and won the battle may have started counting their chicks even before
they are hatched. And it is expected that their fortunes will be
enhanced soon after. Proprietors of merchant banks had complained that
the unequal playing field in the banking industry which had, over the
years, tilted in favour of the Commercial Banks had been responsible for
continued poor performance of their outfit. This is even so when it is
on record that some merchant banks post a lot more profit than the
commercial banks.
The news of Universal Banking ha caused
some uneasiness in some quarters, notably, the Insurance industry.
Although the proponents of government policies and the promoters of
universal banking have assured the insurance industry that they have
nothing to worry about. However, it does not really accord with sound
reasoning that the insurance industry will remain the same after the
introduction of Universal Banking (Nwite 2004).
The full impact of Universal Banking on
insurance remains a matter of conjecture since the policy has just been
newly introduced in Nigeria. Scarcity of detailed information on
Universal Banking has not really helped matters.
However, a report on universal banking
has to do with the dismantling of functional barriers in the financial
service delivery thereby granting each bank the right to decide to
engage in any financial service from a wide range of service such as
accepting deposit, lending, trading in financial instruments, foreign
exchange transactions, underwriting of debts, equity issues brokerage,
investment management and insurance. In order words, a bank can be a
jack of all trade (financial services) whatever effect this will have on
the banking industry is up to bankers to appraise. What bothers the
researcher and warranted this write up is the need for us to be told
what impact Universal Banking will have on the insurance profession and
industry.
Take the often recycled arguments that
are anchored on banks increased capital base for insurance. It has often
been said that Universal Banking is the only way by which the huge
capital investment of the banks could be justified. This will make sense
if we fail to remember that the N500m capital base was considered the
minimum for a bank to carry out the present functions they are
performing. It was felt that the capital base of the banks were too
small in comparison to the total deposits that they receive from the
public. But now that they have increased their capital base to N25b it
will no longer form a negligible ratio of the total deposit that they
receive from the members of the public. The current capital base is the
minimum they should hold to carry on with their present specialist
banking services. Bankers have boasted that their huge capital base will
boost public confidence in insurance. No insurance literate person will
wait for bankers to engage in insurance before having confidence in the
efficacy of insurance products.
Having shown reservation on the bankers’
capital base and globalization as justification for dabbling into
insurance now to highlight the likely impact Universal Banking may have
on the insurance industry. Before now, bankers provide mainly agency
services to the insurance companies or in the alternative incorporate
insurance underwriting or brokerage firms to provide insurance services.
With Universal Banking however, bankers are expected to be licensed
providing some or all of the following insurance services:
- Acts as insurance broker
- Provide insurance or reinsurance protection
A combination of the above two functions
then bankers are not likely to increase the volume of insurance business
by breaking new grounds and introducing hitherto uninsured risks. There
is hardly any “Marketing music” that they will play which insurance
marketers are not already playing in their attempt to foster insurance
culture on Nigerian who are overwhelmingly insurance averse.
This will only mean that bankers will
swell the number of the people chasing the few available insurable
risks. This will surely exacerbate the problem of unethical practices
which has been the bane of insurance development in Nigeria.
The second envisaged problem is that
bankers will take advantage of their vantage position with the insured
to poach on the customers of currently existing insurance firms. This in
the long run will lead to the edging out of insurance brokers in the
brokerage business. If we consider that insurance intermediaries control
to a large extent the insurance practices of any insurance market, then
we can easily foresee the relegation of the insurance industry in the
financial subsector of our economy in the near future.
The bankers surely have higher capital
base but they cannot boast of better insurance technical expertise.
Their only source of such expertise will be the insurance industry.
Again, if we reckon with the fact that an employee in the banking
industry is better remunerated than his counterpart in the insurance
industry, we can then foresee drain in the insurance industry if
Universal Banking is implemented. However, if the only thing that will
force the insurance industry to dispense with her below poverty line
remuneration structure is Universal Banking, then there is nothing one
can do but to accept it.
The fear is that Universal Banking may be
a void attempt by banks to finally swallow up the insurance industry in
Nigeria. It does not matter whether or not a single bank provides
commercial, merchant, investment, and any other purely banking services.
Perhaps, this will enable ordinary Nigerians to qualify for bank loans
and similar services that are currently the exclusive preserve of the
rich and mighty in the society.
No doubt, there is the challenge for the
insurance industry to rise to the realities of our time (Chizea 2000).
As it is, the industry does not seem to be prepared to do business in
the twenty-first century. An industry where people are not serious about
the needs to deal decisively with the unprecedented level of
unprofessional practices cannot be taken seriously. How do we expect to
remain relevant in future with the lean capital base and poor
remuneration structure as present in the industry today? (Dodo 2000).
All over the world, the financial strength of an insurance company
increases with years. In order words, the older the company, the better
its performances.
No one can say with all sincerity of
purpose, that this is the case in Nigeria were many old companies just
managed to meet the minimum capital requirements while others sold off
their license to new companies as they could not measure up.
This should not be the case where
companies are making adequate reserves. It goes on to show poor resource
management of these companies. The government cannot continue to
shoulder the responsibilities of such companies forever. If insurance
industry chooses to indulge in self delusion that all is well, when all
is not actually well, they should have themselves to blame, if their
services are taken over by a more dynamic industry Ezeano (2005).
1.2 Guidelines on Universal Banking
One must commend NICOM and the
Sub-committee on insurance for their input in ensuring that if banks
must take incursion into the insurance industry, they should do so
through clearly spelt out guidelines which will guide the operators and
protect consumers. Even though there were guidelines on banking,
generally, this work shall focus specifically on the guidelines on
insurance activities as issued by central bank of Nigeria in its
Universal Banking Guidelines of 22nd December, 2000.
- All insurance activities wherever they occur shall be licensed and regulated by NAICOM and subject to provisions of Insurance Decree of 1997 or such other insurance laws as may be enacted;
- An insurance subsidiary of a bank shall comply with the capitalization required under the Insurance Decree No. 2 of 1997 and any subsequent amendments;
- An insurance policy should not be rejected solely because the policy has been issued or underwritten by a person not associated with the bank when such insurance is required in connection with a loan or extension of credit;
- A bank shall not use health information obtained from the insurance records of customers for any purpose without the customer’s consent except for activities as licensed in insurance agent or brokers;
- A debtor insurer, or insurance agent or broker must not pay a separate charge for the handling of insurance that is required in connection with a loan unless such is required when the bank’s affiliate is the licensed insurance agent or broker providing the insurance;
- There should be no payment or receipt of any commission or brokerage fee for services as broker or agent unless such a person is properly licensed by NAICOM;
- A bank shall not release any insurance information about a customer to any person other than an employee, subsidiary of affiliate of a bank for the purpose of soliciting or selling insurance without the consent of the customer;
- A bank shall not insist on extension of credit on the condition that the customer obtains insurance from the bank’s affiliate or associate of a particular insurer, agent or broker but must inform the customer that insurance is required in order to obtain a loan and that approval of a loan is contingent upon the customer obtaining insurance, or that insurance is available from the institution.
1.3 Universal Banking and the Insurance Industry
A critical look at these guidelines
brings us to the thrust of this work, that is, The Impact of Universal
Banking on the Insurance Industry. From the guidelines, it can be seen
that banks can engage in practically all insurance services. This is not
to go on without some checks. The implication is that the current
seventy one (71) registered insurance companies will be joined by about
30 registered banks that survived the N25b capitalization giving total
of one hundred and one (101).
This is what some termed “Bank Assurance”
to chase the business. The effect of bank incursion into insurance
industry through Universal Banking can be better appreciated when we
note that the Nigerian economy has not really grown in recent years.
Even though some argue that the advent of democracy has created
conducive and enabling environment for macro-economic growth, the
effects are yet to be manifest. Okafor (2006) said that the incursion of
banks into insurance may spell doom for the insurance industry in
various areas if they do not sit up. The areas are:
1.3.1 Capital Base
I see banks move into insurance with
stronger capital base and therefore, better to assume larger risks.
Universal Banking with its attendant liberalization may bring in even
bigger and stronger international conglomerates to compete with the
insurance industry; therefore, the market share of large insurance
companies that have lost their focus may dwindle. Some insurance
companies without strong asset base will definitely go into extinction.
1.3.2 Manpower Flight
Because the banks are moving into
specialize field of insurance for which they do not immediately have the
skill and competence to manage, they will naturally poach into the
insurance industry for manpower in this specialized area. Professional
and qualified stall will thus be lured with bigger and better packages
often offered in the banks.
Expectedly, the insurance and brokers
have vehemently opposed Universal Banking because of obvious fears. They
argue that if a bank is allowed to own an insurance company, a broking
firm and or lost adjusting firm, the customer’s protection and freedom
may not be guaranteed and that banks may make issuing of credit
conditional to the extent that such credit must be insured with their
insurance company and possibly through broken firm.
1.4 Statement of Problem
Sometimes in 1999, some sectors of the
Banking Industry began to advocate the adoption of Universal Banking.
Initially, the forefront proponents were Merchant Bankers that felt
restricted by legislation from engaging in commercial banking. They felt
Universal Banking will create a level playing field that will enable
them receive deposits and ultimately make more profit. Soon the whole
financial industry got engulfed in the controversy over Universal
Banking, thus dividing the financial industry into two camps.
On one hand, there were the banks that
hinged their clamour for Universal Banking on global financial
liberalization in which Nigeria could not afford to be left out. They
cited examples from all over the world were Universal Banking had been
adopted successfully. They include such places as United States of
America, Germany, South Africa, United Kingdom, Kenya and Zambia (Orjih
2005).
On the other hand were the practitioners
who felt threatened by the introduction of the new system. They argued
that Universal Banking will enable banking to encroach on the insurance
industry to the detriment of the practitioners.
As the arguments, for and against the
introduction raged on in conference and workshops, the Central Bank of
Nigeria had to yield to the pressure from the proponents of Universal
Banking by giving approval in principle in the first quarter of 1999 for
its adoption.
Fears have been expressed over the
introduction of Universal Banking. These fears appear to be harboured by
insurance who hold the notion that banks are only coming to disturb
their seemingly exclusive business. Some people, including the insurance
experts have however, dismissed these fears, stressing that the
phenomenon would rather boost Insurance business and make the
practitioners sit up for real competitive insurance marketing and sales.
In the light of the above, it is the intention of this work, while
dismissing these fears, to urge the insurance industry to cooperate with
banks and look at the ways of improved product diversification to
satisfy the yearning of the insuring public.
1.5 Objective of the Study
The objective of this research work into Universal Banking system is as follows:
- To find out whether the introduction of Universal Banking has any effect on the insurance industry;
- To find out the Impact of Universal Banking on the Nigerian Insurance Industry;
- To identify the expected problems that will arise from the Universal Banking;
1.6 Relevant Research Questions
In order to determine the various
implications of Universal Banking system, this research work will
consider the following research questions;
- To what extent does the introduction of Universal Banking influence workers’ performances in the insurance industry?
- To what extent does the Universal Banking influence the general output of insurance company?
- What are the possible problems Universal Banking will cause to the insurance industry?
1.7 Formulation of Hypotheses
Ho: There is no significant impact of Universal Banking on the insurance industry
Ho: There will be no control of banking industry over insurance industry under
Universal Banking
Ho: Universal Banking will not improve the service delivery of the insurance industry.
1.8 Scope of the study
The topic under study covers Nigeria as a
whole, but due to time, financial and proximity constraints, going
round the country to get the whole facts needed was not possible rather
the researcher was limited to quite a number of places that were found
very useful.
The research materials were gotten from Textbooks, Magazines, Journals,
Seminar papers from different libraries
across the country and websites. Some staff of insurance companies were
not willing to cooperate. Some have no idea what Universal Banking is
all about. Most of them found it very reluctant to disclose certain
information. This, no doubt hindered getting the necessary information
needed.
1.9 Limitations of the study
In carrying out this research work, the researcher was faced with certain problems which include the following:
- Time: Time constraints, as a student researcher, the problem of trying to keep up with lectures and at the same time running around for the collection of necessary information for the completion of this research work.
- Money: The cost incurred in carrying out this study is very high in terms of transportation, photocopying and internet browsing.
- Corporation: Most of them found it very reluctant to disclose certain information. Some have no idea what Universal Banking is all about so they cannot offer any reasonable information.
1.10 Definition of Terms
In the context of this research work, the terms under listed would have the meaning(s) stated against them.
-
- Academic Load: This is the load of work piled up for students.
-
- Capital: The firm’s finances or funds are known as its capital. It is t he key resource in business, one factor of production. Capital is needed to acquire the other resources like land, building, plant and machinery, raw materials and labour. It is the total amount paid up on all the classes of shares of a company.
-
- Deposit: It is money paid or given for safe keeping. Deposit money is “created” by the commercial banking system. Customers deposit money with banks and banks give a promise to pay on demand the amount deposited by the customers. The funds which customers deposit in these accounts can be used by the banks to create loans to other customers of the bank.
-
- Insurance Company: Company where insurance business is transacted.
-
- Investment: Can be defined as an expenditure of money for income or profit. It may also mean the purchase of something of intrinsic value such as common stocks from the capital market, properties, painting or jewelry. Investment may also involve his commitment of fund with a view to minimizing risk and safeguarding capital earning or return.
-
- Merchant Bank: Bank specialized in trade,
sometimes known as accepting houses.
- Merchant Bank: Bank specialized in trade,
-
- Minimum Capital: The least money that has to be raised to purchase the real capital for starting up the business.
-
- System: A group of separate pieces or units working together to a common goal.
- Universal Banking: One stop shop or financial supermarket. Universal Banking is a combination of commercial banking, investment banking and various other activities including insurance. If specialized banking is one end, universal banking is the other. This is most common in European countries.
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