Historical Background of Modern Insurance Stocks Business in Nigeria

 

Historical Background of Modern Insurance Stocks Business in Nigeria

According to Hamadu and Mojekwu (2010), historically, insurance stocks business behavior in Nigeria can be traced to the actions of British merchants in 1874. These British merchants commenced their insurance business activities as agents for insurance companies in Britain, the major area of business being marine insurance. These agents operating in Nigeria packaged and organized insurance covers for imported and exported products. The modern insurance business was introduced into West Africa during the early 20th century by European traders to provide financial and economic protection for their business (Ngwuta, 2007). All underwriting was done at the metropolitan head office while the headquarters office was in Europe. Subsequently, local agents were appointed to represent their interest in the country. The first branch office in Nigeria was the Royal Exchange Assurance in 1921, later followed by other British companies. There was an initial slow pace of the growth of the insurance industry in the country, particularly between 1921 and 1949. This has been traced to adverse effect of the World War II on trading activities both in United Kingdom and Nigeria. As soon as the war ended, business activities gradually picked up again, and insurance industry in Nigeria began to record remarkable improvement in growth (NICON, 1994). It was not until 1958 that the first indigenous insurance company, the African Insurance Company Limited, was established. At independence, only four (4) of the then twenty five (25) firms in existence were indigenous. Following this development, more insurance companies were established in the country.

 

According to NAICOM (2011), the first major step at regulating the activities of Insurance stock business in Nigeria was the report of J.C. Obande Commission of 1961, which resulted in the establishment of Department of Insurance in the Federal Ministry of Trade and which was later transferred to the Ministry of Finance. The report also led to the enactment of Insurance Companies Act 1961, which came into effect on 4th May, 1967. The 1961 Act focused mainly on the activities of direct insurers, made provisions for registration and record keeping. Furthermore, in 1968, Insurance Companies regulations was put in place to facilitate the implementation of Act No 58 of 1961 which then classified insurance business into different classes for registration purpose and relevant forms for record keeping. The promulgation of the 1968 companies Act requiring the incorporation of indigenous companies also facilitated the establishment of more insurance companies in the country (Kantudu and Tanko, 2008). The 1968 Act stipulated a paltry N50,000 and N100,000 for life insurance companies and composite insurance companies respectively. Indigenous Nigerian insurers such as NICON which was established in 1969 later followed (Agbakoba, 2010).

 

In addition, the Insurance Decree No 59 of 1976 was enacted putting together the provisions of the various laws. The 1976 Decree among others made the following provision; Condition for authorization of Insurers, Mode of operation, Amalgamation and Transfer, Administration and Enforcement and Penalties. The Insurance Decree, No 59 of 1976 constituted the first All-embracing Law for the regulation and Supervision of Insurance business in Nigeria. By 1976 the number of indigenous companies had far surpassed that of the foreign companies. Indigenous Nigerian Reinsurance Corporation was then established in 1977 (Agbakoba, 2010). Moreover, the National Insurance Commission (NAICOM) was established in 1997, with the responsibility of regulating and supervising insurance business in Nigeria. It replaced the previous regulatory organ – the Nigerian Insurance Supervisory Board. Prior to 1992, the Federal Ministry of Finance licensed and supervised insurance companies. Historically, in 1968, concern was given to life Insurance business and it led to the enactment of Decree 40 of 1988 which made provisions among others for Assignment of Life Insurance Policy, named beneficiary on Life Insurance Policy document. The Agricultural Insurance Scheme was established on 15th of November, 1987. The implementation of the Scheme was initially vested in the Nigerian Agricultural Insurance Company Limited, which was later incorporated in June, 1988 but later turned into a Corporation in 1993 by the enabling Act 37 of 1993. Nigerian Agricultural Insurance Corporation is therefore a wholly-owned Federal Government of Nigeria insurance company set up specifically to provide Agricultural risks insurance cover to Nigerian farmers.

 

The Pension Reform Act 2004 established the National Pension Commission (PenCom) as the body to regulate, supervise and ensure the effective administration of pension matters in Nigeria. The pension reform programme is governed by the key principles of sustainability, safety and security of benefits, transparency, accountability, equity, flexibility, inclusivity, uniformity and practicability. The recent Pension Act repeals the Pension Reform Act No.2, 2004 and enacts the Pension Reform Act, 2014 to continue to govern and regulate the administration of Uniform Contributory Pension Scheme for both the public and private sectors in Nigeria. The recent Act was the Nigerian Insurance Commission Act, 2003, which recapitalized the insurance companies in the country. The Objective of insurance sector reforms is achieving a consolidation that will produce companies capable of meeting claims obligations and compete at the continental and global levels. The Insurance Act 2003 required the insurance companies to increase their capital bases and the companies were given February, 2004 as a compliance month. After the recapitalization period the companies were reduced from 117 to 103. On September 5, 2005 Insurance companies were also required to increase their capital bases and they were also given a maximum period of 18 months to comply with the 2005 recapitalization requirements (From 5th September, 2005 to 28th February, 2007). Following the completion of the 2005/6 recapitalization exercise, which also involved quite a number of consolidations, the number of insurance companies dropped from 103 to 49 as at 31st December, 2007.

 

According to Ngwuta (2007), indigenous Nigerian insurance companies were not profoundly entrepreneurial at the earlier stage because of lack of trained manpower, intense competition from superior foreign companies and lack of adequate and sufficient capital base on the part of indigenous insurance companies, poor infrastructural development and poverty of the Nigerian capital market. Therefore, early indigenous Nigerian insurance companies were owned and operated by regional governments, and the patronage of these insurance companies was mainly from the regional governments that owned them. The relatively good performance of these regional insurance companies, in addition to the liberalized regime of governments of the day pertaining to regulations in the industry, resulted in the proliferation of insurance companies. This proliferation tasked insurance companies to design and implement efficient and effective marketing strategies, in addition to other strategies, in order to achieve set organizational goals and objectives. Presently, the Nigerian insurance market consists of the buyers of insurance and the sellers together with the intermediaries (agents) who bring the two together. In addition, there are also the regulators, representative bodies or organizations, consultants and technical advisers which are part and parcel of the market (NAICOM, 2012). The buyers of insurance can be segmented as follows: Individuals and families, Governments (federal, state and local Government) and their agencies, parastatals, multinationals, conglomerates, manufacturing industrial concerns, small and medium scale industries, banking industry, health institutions, tourist and hospitality industries, hotels, transport industry, other corporate bodies, educational institutions, oil and energy industry. For marketing purposes the buyers can further be segmented to suit the strategy of the insurer, or the insurance agent.

The intermediaries are mainly insurance brokers and insurance agents. Nigerian insurance market has been described as brokers market because presently brokers control over 90% of the premium income, leaving less than 10% for insurance agents and even direct marketing channel by insurers (Daniel, 2014). The banking industry on the other hand has become a formidable channel for distributing insurance services not necessarily as intermediaries, but by facilitating a form of direct marketing by insurers.

INSURANCE BUSINESS CONCEPTUAL ISSUES

             INTRODUCTION

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.

           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 ), automobile accidents (auto) and the cost of medical treatment (health). The industry has been profitable and has provided attractive employment insurance opportunities for white collar workers. It helps eliminate risk as when fire 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.

     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 1^stApril 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 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 1^stOctober 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 1^st July 1969, NICON has been in existence since around 1969 and today is recognized as the best among other insurance companies in Nigeria.

              CLASSIFICATION 

Insurance generally is divided into classes according to class or business into (17 groups) some of them are:

a.     Money

b.     Accordant

c.      Marine

d.     Engineering

e.      Life

f.       Non-life

g.     Burglary

h.     Theft

 

It 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: 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: 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: This type  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 : 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 : 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 : 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.

–         LIABILITY: This aspect of policy deals with types of insurance in viable and monetary term principles of insurance and few others

 

                 RISK

The basic 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 

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.

                 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. 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 claim (which include matured endowment)

2.     Health 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)

           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 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	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 is relatively small.

REFERENCE

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)