EMPIRICAL INVESTIGATION ON THE IMPACT OF INSURANCE
INVESTMENT ON THE ECONOMY OF NIGERIA
BY
AGBAOSI REGINA OLAIDE
110207035
BEING A RESEARCH PROJECT SUBMITTED TO THE DEPARTMENT OF
ACTURIAL SCIENCE AND INSURANCE, FACULTY OF BUSINESS
ADMINISTRATION, UNIVERSITY OF LAGOS IN PARTIAL FULFILLMENT
OF THE REQUIREMENT FOR
THE AWARD DEGREE OF BACHELOR OF SCIENCE (B.Sc)DEGREE IN
INSURANCE
JUNE, 2015
1
CERTIFICATION
This is to certify that the research project titled “Empirical Investigation on the Impact of
Insurance Investment on the Economy of Nigeria” was submitted by AGBAOSI REGINA
OLAIDE with matriculation number 110207035 of Department of INSURANCE, Faculty of
Business Administration, University of Lagos, in partial fulfilment of the requirements for the
award of Bachelor of Science Degree.
…………………………………….
…………………………………….
DR DallahHamadu
Date
Supervisor
……………………………………..
…………………………………..
Professor R.O Ayorinde
Date
Head of Department
2
DEDICATION
This research project is dedicated to Almighty God for protecting me throughout the preparation
of this project.
I also dedicate the study to my parents, Mr and MrsAgbaosi for their never ending moral and
financial support.
And also to my friends for always being there.
3
ACKNOWLEDGEMENTS
My most profound gratitude goes to God Almighty for preserving my life throughout the
research period. My gratitude goes to my supervisor, Dr. DallahHamadu for his guidance,
assistance, corrections and tolerance from the inception of the project to its completion.
Acknowledgement also goes to the individuals who provided materials, advice and information
to me in the course of my research study.
Thanks you and God bless you.
.
4
ABSTRACT
The project work studies “The Empirical investigation on the Impact of Insurance
Investment on the Economy of Nigeria”. The major objective of the research was to
investigate the extent to which the activities of insurance industry in Nigeria have contributed to
the economic growth of Nigeria.In carrying out this research work, data would be sought through
secondary sources. Analysis of the secondary data will be generated from the annual reports and
account of the selected companies. The data were analysed using SPSS (The Statistical Package
for Social Science). The descriptive statistics such as mean and standard deviation was
undertaken to confirm that the individual is sampled from population. Furthermore, linear and
multiple regression analysis were done to display the unit root test and co-integration.The
following findings were made; there is a negative linear relationship between total investment of
insurance companies and gross domestic product in Nigeria. There is a positive linear
relationship between total investment of insurance companies and Unemployment in Nigeria.
There is a positive linear relationship between total investment of insurance companies and
Capital Utilisation in Nigeria. There is a negative linear relationship between total investment of
insurance companies on Inflation Rate in Nigeria.Hence, the study recommends that the National
Insurance Commission (NAICOM) which is the regulatory body for insurance business in
5
Nigeria, in conjunction with the government should work to see that some of the premiums
collected and other income generated by the industry are being invested to ensure diversification
of investible fund of insurance industry to boost the economy. It is also recommended that
government policies should focus on improving insurance industry so as to have a corresponding
impact on the economic growth in Nigeria.
TABLE OF CONTENTS
PAGES
Title page
i
Certification
ii
Dedication
iii
Acknowledgement
iv
Abstract
v
Table of contents
vi
CHAPTER ONE: INTRODUCTION
1
1.1
Background of the study`
1
1.2
Statement of the research problem
9
1.3
Objectives of the study
11
1.4
Research questions
11
1.5
Statement of hypothesis
12
1.6
Scope and limitation of the study
12
6
1.7
Methodology
13
1.8
Relevance of the study
14
References
15
CHAPTER TWO: LITERATURE REVIEW
17
2.1
Introduction
17
2.2
The challenges of insurance industry in Nigeria
20
2.2.1 Unfavourable macro-economic environment
22
2.2.2 Market is suspicious of insurance companies
24
2.2.3 Poor regulatory framework
24
2.2.4 Poor attitude towards insurance services
26
2.3
29
Strategies for operational efficiency of insurance industry in Nigeria
2.3.1 The adoption of solvency 11
29
2.3.2 Improved customer service strategy
30
2.3.3 Adoption of modern technology
33
References
35
CHAPTER THREE: RESEARCH METHODOLOGY
37
3.1
Introduction
37
3.2
Research design
37
3.3
Source of data
38
3.4
Research population
38
7
3.5
Sample of study
38
3.6
Sampling procedure
39
3.7
Data collection method
40
3.8
Method of data analysis
40
References
41
CHAPTER FOUR: DATA ANALYSIS AND INTERPRETATION
42
4.0
Introduction
42
4.1
Tabular presentation of the variables used for the data analysis
43
4.2
Presentation and analysis of the gathered data from the selected
4.3
Years of investment
44
Test of hypothesis
45
CHAPTER FIVE: SUMMARY OF FINDINGS, RECOMMENDATION
AND CONCLUSIONS
55
5.1
Summary of the findings
55
5.2
Conclusion
56
5.3
Recommendations
57
5.4
Area of further research
59
Bibliography
60
8
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The British colonial government introduced insurance business into Nigeria in
1910. Traditionally, though some forms of social insurance existed in part of the
Nigerian society long before their arrival. This was in form of mutual and social
schemes (Aaron1966), which evolved through, the extended family system, age
grades and clan unions typical of African cultures. This simple form of social
insurance was practiced by means of cash donations, organized collective labour of
assisting one another and the entire community, who suffer mishap. The people in
the community, especially those of the same age bracket collect funds periodically
just in the same manner as the industrial life insurance premiums are collected.
Right from the onset, Nigerian cultures and indeed African people have seen the
reason to contribute funds to assist members who may suffer mishap such as
illness, important ceremonies as child naming, marriage, funeral and all kinds of
social obligations.
The enactment of workmen’s compensation ordinance of 1942 and the Road
Traffic Act of 1945 both contributed to the meaningful take-off of insurance
industry at that time. Against the backdrop of the fact that Nigerian economy in the
9
60’s was dependent on agriculture, Marine Insurance was popular for external
trader to produce export. Fire Insurance was never popular and the expatriates
mainly held mortgage security policies. However, the parliament in the first
republic set up Obadan Commission (1961) to review the situation in insurance
industry and was to come up with recommendations. The outcome of Obadan
Commission gave rise to the establishment of Insurance Companies Act of 1961.
Arising from this Act, by 1969, Nigeria had registered close to 50 insurance
companies, though with foreign domination. The foreign domination was so
serious that both Great Nigeria Insurance Company (GNIC) owned by Western
Region and African Alliance Insurance (AAI) Company had a meagre share of
operation when compared with the overall volume of business in the entire
industry. This unfavourable trend persisted for a long time that the Federal
Government of Nigeria became skeptical as to what future holds for the then
insurance industry that was generally dominated by the foreigners (Hofstede,
1995). Nigerians were not allowed to hold sensitive positions, which would have
equipped them for managerial or technical responsibilities in the industry.
Out of the 25 insurance companies that existed in 1960, only 7 were indigenous
and their total market share was far below 10%, as the bulk of the business went to
the foreign-owned companies. The Nigerians business and economic life was
dominated by the foreigners. The fallout from this was the heavy drain on Nigeria
10
foreign exchange earnings. As a result of these problems, a parliamentary
committee was therefore, set up in 1964, under the chairmanship of honourable J.
Obadan, for another time, to carry out the following enquiries:
•
To look into the possibility of introducing governmental control for motor
vehicle insurance premium.
•
To find out about premiums charged for the insurance of motor vehicles in
Nigeria, for comprehensive covers and the third party so as to know the
extent to which rates have increased since, 1950.
•
To know whether the rights of the insurance clients are appropriately
covered.
•
To make recommendation to the state.
In the end, Obadan committee’s recommendation could not go beyond
sensitization of government over the danger inherent in the foreign domination of
insurance industry.
The Nigerian agents were given power of attorney to transact insurance business
such as issuance of cover and service on behalf of the London Principals.
Throughout, this period, Insurance focuses more on marine insurance and trade
rather than overall development of the economy. The situation was as
disenchanting to Nigeria as trading companies were being granted license to
operate as insurance companies especially to supervise claims and to issue covers
11
on marine insurance. For example, in 1919 the Africa and East trade companies
were both established as Royal Assurance Agency, which later metamorphosised
into a full blown insurance companies branch in 1922. This event then opened up
the flood gate for PaterzonZochonis (PZ), General insurance, Liverpool London
and Law Union and Rock to mention just a few. It is pertinent to say that all of
these companies were wholly owned by the Britons and for the major purpose of
providing insurance service for their trading activities. However, in 1985 the
African Insurance Company limited emerged as the first wholly indigenous
insurance company.
Between 1985 and 1990, there was an upsurge and a phenomenal increase in the
number of insurance companies operating in Nigeria. This proliferation accounted
for over 110 companies operating in the market during this period. The need for
control and timely intervention of the government led to the formation of the
National Insurance Corporation of Nigeria (NICON), which was later christened
NICON Plc. As at 1969, as an apex company, NICON was further empowered to
act as the nation’s re-insurance company with other Nigerian insurance firms
shedding compulsory shares of their business to the corporation. In compliance
with the provisions of the Nigerian Enterprises Promotion decree, the Federal
government in 1975, NICON was chosen to participate in the equity shares of 14
foreign owned insurance companies to the tune of 49%. In 1977, the indigenous
12
participation increased to 60% and the control of insurance market by the
foreigners began to decline. NICON for a long time assumed the monopoly role of
government insurer. The first remarkable risk business of NICON in the insurance
industry came up when an A.D.C 10 aircraft, newly acquired by the Nigerian
Airways and insured by NICON crashed at Iju, Lagos state on 25th November,
1989. The 89 persons on board were reportedly killed in the crash. NICON
demonstrated its insurance ability by the settlement of the huge claims. Shortly
after this episode, there was a phenomenal increase in the number of insurance
companies in Nigerian financial market. This was coupled with the fact that in
1986, Structural Adjustment Programme (SAP) brought about the emergence and
proliferation of financial institutions, especially, commercial banks and insurance
companies (Adams, Andersson and Lindmark, 2005). To streamline insurance
business activities and stem the upsurge of the mushroom insurance companies,
insurance capital base was raised from 1 to 2 million. Fall-out from this event was
that only 57 out of 152 insurance companies qualified for registration. This was
coupled with tighter control over the industry that requested for provision for the
licensing and control of insurance intermediary. Generally, sanity was meant for
the insurance market through, this legislation and the control of insurance
intermediaries.
13
Insurance, as a formidable financial sector in Nigerian economy has grown by
leaps and bounds in terms of market size and premium income generation (Arena,
2008). For instance, a Gross Premium Income (GPI) of 124 million was realized in
1975 but rose to 189 million in 1976 and 290 million in 1977. Although, the gross
income increase also rose to 372 million in 1988, it fell to 364 million in 1979
(CBN, 2005). The performance of Nigerian insurance industry in the last 2 decades
has been remarkable, increasing its gross premium income by well over 250%
within the first one decade. In 1991, Nigerian insurance market was dominated
by118 companies and 299 insurance brokers. The gross premium for the first
ranked insurance company, NICON was close to 2 billion and the total gross
premium income for the entire industry was well above 42 billion (NICON, 19691994), but this amount grossly fall short of enormous risk businesses which
insurance companies have undertaken in the economy.
Arising from the above facts, Nigerian insurance market is free but not operating
optimally. The new entrants are always ready to float a new business and further
deepen the competition. The foregoing therefore, suggests that despite the
numerical growth and to some extent, expansion in the insurance industry in
Nigeria, the insurance market requires a thorough empirical investigation to
determine the cost structure and optimal production levels in which an insurance
company can efficiently operate. The knowledge of this cost efficiency study
14
serves to help insurance regulators, practitioners and the industry to identify the
policies and strategies that could be deployed to salvage the industry and make the
insurance sector contribute effectively to financial market development of the
Nigerian economy (Haise and Sümeg, 2008).
In the event of deregulation policy, especially restructuring and recapitalization in
the finance sectors of the Nigeria economy (Adeyemi, 2005), most financial
institutions have had to operate in an increasingly competitive environment. This
trend might subsist for long as government policy is geared towards competitive
market based on privatization, commercialization and deregulation. The need to
meet up with capitalization requirement of the Central Bank had engendered
consolidation process, which in turn, has brought about mergers, acquisition and
raising of more capital through, the stock market. Another sub-sector similarly
affected in Nigeria is the insurance industry (CBN, 2005).
For instance, the insurance regulatory institution in Nigeria, National Insurance
Commission (NAICOM, 2005) specified guidelines which insurance firms must
meet alongside with the new capital bases. According to the guidelines, insurance
firms handling life assurance businesses will have 2 billion capital bases, while
those ones in Composite business attract 3 billion. Insurance firms in reinsurance
business would have to raise their capital base to 10 billion. Using 2005 as base
15
year these increments represent 1.233% for life insurance, 1.400% for general
insurance and 2.757% for reinsurance business. At various floras, NAICOM has
reaffirmed the need for re-capitalization of insurance sector so that they would be
financially strong to effectively cover all risks associated with the developmental
efforts in the economy. This need becomes more important in view of
recapitalization that has taken place in the Nigerian banks.
The study conviction is that given certain operational conditions, there exists an
optimal production scale that must be met by insurance companies. Ability to
recognize this optimum scales, scope and the most efficient cost frontier will assist
both insurance regulators and insurance companies in shedding light on what
constitute optimal production process and market structure in insurance industry.
Many works in the literature, have suggested various avenues through, which a
business organization could experience cost efficiencies; among such avenues
include organizational structure, executive compensation, market concentration,
mergers and acquisition, common stock performance and risk-taking. There is no
doubt that the central role of an insurance company is taking risk to cover investor
or would be investors from risk-bearing investment decision. By this, insurance
manages risks, while banks match risks.
16
Insurance companies like banks also operate in competitive environment. With
heightened competition, whether and how insurance companies may survive in the
emerging environment depend in part on how economies of scale and scope,
impact on their operations.
1.2 STATEMENT OF THE RESEARCH PROBLEM
In spite of remarkable development in the Nigeria insurance markets, the
proportions of the insurance markets are small due to low premium income
compounded by the generally poor attitude of the people towards insurance
services. Arising from the above, the industry is under-capitalized, hence, most
insurance companies found it extremely difficult to retain a reasonable percentage
of large risk undertaken by them (Ezekiel, 2005). A situation which encouraged
capital flight to other countries by foreign insurance companies which dominate
highly but blue chip risk businesses in oil and gas. Majority of insurance
companies’ especially small scale ones operate under a scale of inefficient
situation. The scale and scope of economies are not the types that could make most
insurance companies in Nigeria operate at the optimal level, hence, low investment
interests in the industry, not at the same level with banks. The regulatory institution
for insurance business in Nigeria, NAICOM has severally accused insurance firms
of not actually living up to their expectations in terms of service delivery or
meeting up with regulations governing their activities (NAICOM, 2005). Not many
17
of them attract investors’ attention as their performance is generally poor.
Commissioned agents who are the major marketers of insurance products are not
adequately remunerated, hence, low rate of turnover. On the basis of the above
reasons, it might be important to determine the optimal cost efficiency level for the
production of insurance services in the economy. The main problems have been
poor performance and the Nigerian people attitudes towards demand for insurance
services have been lukewarm.. Market statistics show that the Nigerian Insurance
Industries covers less than 5% of the nation’s insurable population. Many
insurance companies have multiple products and multiple branches than what they
could cope with operationally; hence, they have poorly delivered services.
According to Fatula (2007), recapitalization of the insurance industry in Nigeria
has no doubt recorded a huge volume of business; the sector was able to pull an
aggregate gross premium income of 90 billion in 2006, over 18% more than what
was obtained in 2005. Aside the social and institutional factors inhibiting the
process of economic development in Nigeria, the bottleneck created by the dearth
of undertaking risk as investment to the economy constitutes a major setback to its
development (Fola, 2011). As a result, it is necessary to evaluate the insurance
market investment activities.
18
1.3
OBJECTIVES OF THE STUDY
The broad objective of this study is to examine the impact of insurance investment
in the Nigeria economy.
The specific objectives of the study are as follows:
1. To examine the effect of Total investment on the Nigerian GDP.
2. To assess the effect of Total investment on Unemployment.
3. To investigate the effect of Total investment on Capital Utilisation.
4. To observe the effect of Total investment on Inflation Rate.
1.4
RESEARCH QUESTIONS
This research shall be guided by the following research questions:
1. What are the effects of Total investment on the Nigerian GDP?
2. What are the effects of Total investment on Unemployment?
3. What are the effects of Total investment on Capital Utilisation?
4. What are the effects of Total investment on Inflation Rate?
1.5 STATEMENT OF HYPOTHESIS
The hypothesis that would be tested in the course of this research is stated below
as:
HYPOTHESIS ONE
H0: There is no significant impact of Total Investment on GDP.
19
H1: There is a significant impact of Total Investment on GDP.
HYPOTHESIS TWO
H0: There is no significant impact of Total Investment on Unemployment.
H2: There is a significant impact of Total Investment on Unemployment.
HYPOTHESIS THREE
H0: There is no significant impact of Total Investment on Capital Utilisation.
H3: There is a significant impact of Total Investment on Capital Utilisation.
HYPOTHESIS FOUR
H0: There is no significant impact of Total Investment on Inflation Rate.
H4: There is a significant impact of Total Investment on Inflation Rate.
1.6
SCOPE AND LIMITATION OF THE STUDY
The economy is a large component with lot of diverse and sometimes complex
parts; this research work will only look at a particular part of the economy. This
work will not cover all the facets that make up the insurance subsector, but shall
focus only on the insurance market and its activities as it impacts on the Nigerian
economic growth.
The following are limitations to the research study;
Inadequate fund to finance this research study will be the major limiting
factor.
20
A lot of problems will be encountered in the collection and collation of data.
Time will also be one of the limiting factors to this research study; the
researcher may not have enough time to carry out the research work.
Lack of access to relevant data. Epileptic power supply will also cause
hindrance to this research study.
1.7 METHODOLOGY
Study population and the area: As at the time of this study, Nigeria has a total
population of 57 life and non-life insurance companies with 2 registered reinsurance companies, 577 registered brokerage services, and 54 registered lost
adjusters companies and over 1,900 insurance agents (NAICOM, 2014). In
carrying out this research work, data would be sought through primary sources.
The primary source enables the researcher have a direct contact with the
respondent.
The
questionnaire
is
developed
by
the
researcher
with
acknowledgement of existing instrument, verified and approved by the supervisor.
However, this study is strictly focused on registered insurance companies and for
this purpose; stratified random sampling is employed to select 3 registered
insurance companies. The 3 companies are later categorized into large, medium
and small scale firms. Descriptive statistics in ithe form of frequencies and
percentages would be used. In the test of hypothesis, Regression and correlation
would be used so as to either accept or reject the null hypothesis.
21
1.8 RELEVANCE OF THE STUDY
The study conviction to employees, employers, shareholders, stakehoholders, is
that given certain operational conditions, there exists an optimal production scale
that must be met by insurance companies. Ability to recognize this optimum
scales, scope and the most efficient cost frontier will assist both insurance investors
and insurance companies in their investment activities (Brown, Chung and Frees,
2000). Many works in the literature, have suggested various avenues through,
which a business organization could experience cost efficiencies; among such
avenues include organizational structure, executive compensation, market
concentration, mergers and acquisition (Adeyemi .M 2005), common stock
performance and risk-taking. There is no doubt that the central role of an insurance
company is taking risk to cover investor or would be investors from risk-bearing
investment decision. By this, insurance manages risks, while banks match risks.
Insurance companies like banks also operate in competitive environment with
numerous insurance companies. With heightened competition, whether and how
insurance companies may survive in the emerging environment depend on how
economies of scale and scope, impact on their investment activities.
22
REFERENCE
Aaron .H.J (1966).“The Social Insurance Paradox”.Canada Journal of Economic.
Polit. Sci., p. 32.
Adams MJ, Andersson LF, Lindmark M (2005). “The historical Relation between
Banking, Insurance and Economic Growth in Sweden: 1830 to1998”,
Department of Economic Discussion Paper.SAM, 26.
Adeyemi M (2005). “An Overview of the Insurance Act 2003”.Issues in Merger
and Acquisition for the Insurance Industry. pp. 61-78 (ED)
Arena M (2008).“Does insurance market promote Economic Growth? A crosscountry Study for Industrialized and developing countries”. Journal of Risk
Insurance, 75(4): pp.921-946.
Central Bank of Nigeria Communiqué No. 74 of the Monetary Policy Committee
Meeting, January, pp24-25, (2005).32 Repositioning Insurance Industry …
The Nigerian Case.
Ezekiel OC (2005). “The Nigerian Insurance Market in the Context of the
Insurance Act 2003”.Issues in Merger and Acquisition for the Insurance
Industry. pp. 61-78 (ED)
Fatula O (2007). “The imperative of Recapitalisation and Consolidation in the
Nigeria Insurance Industry” I (I&II), Ikeja Bar Review, p. 128.
23
Fola D (2011). “We aim for Trillion naira incomes with compulsory insurance: An
interview with Nike Popoola on the NAICOM’s plan to move the sector
Forward, Sunday punch, January9.
Haise P, Sümeg K (2008). “The relationship between Insurance and Economic
Growth in Europe.A Theoretical and empirical analysis”. Empirical,
35(4):pp. 405-431.
Hofstede G (1995).“Insurance as a product of National values”, Geneva Pap.
Journal of Risk Insurance, 20(4):pp. 423-429
NAICOM Research and Market, Nigerian Insurance Report 1969-1994, Retrieved
on 21th of September, 1994 from http://www.reportlink.com.
NAICOM Research and Market, Nigerian Insurance Report 2014, Retrieved on
21th of May, 2014 from http://www.reportlink.com.
24
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
Prior to the introduction of insurance, there were some forms of traditional social
and mutual schemes that existed in Nigeria, which evolve through the African
communal channels like the extended family system, age grades, and clan unions
African cultures (Obasi, 2010). This form of traditional social insurance was by
means of cash donations, organized collective labour of assisting one another and
the entire community, especially for those that suffer mishap (Usman, 2009).
The origin of insurance in Nigerian can be traced to the activities of European
merchants in the West African coast. This was influenced by two factors; first, the
expansion of cash crop production for exports, and the upward surge in economic
activities in the 1890s; second, the British desire to protect its interest and
properties in the protectorate of West Coast Africa. According to Uche and
Chikeleze (2001), increased trade commerce [in Nigeria] led to increased activities
in shipping and banking, and it soon became necessary for foreign firms to handle
some of their risks locally. They further show that “trading companies were
therefore subsequently granted insurance agency licenses by foreign insurance
companies”.
25
The Nigerian economy at that time depended so much on agriculture, so the major
risk the European merchants were confronted with, was the risk of transporting
their cash crops to Europe. This accounted largely for the dominance of marine
insurance in the country between 1918, when the first insurance agency came into
force in Nigeria, and 1942, when marine insurance dominance was marginally
diluted. In the country’s post-independence era, another characteristic of the
insurance industry was the dominance of non-indigenous insurance companies.
The Obadan Commission of 1961 was set up to review the situation of the
Nigerian insurance industry. The outcome of Obadan Commission gave rise to the
establishment of Insurance Companies Act of 1961. Arising from the Act, the
number of insurance companies in Nigeria increased to 70 in 1976. Of the 70
insurance industries, fourteen were foreign owned, ten were wholly owned while
forty six were indigenously owned. The upsurge in the number of indigenous
insurance industry, in the main, could not transform to efficiency, as foreign
domination was still prevalent in terms of volume of business. The fallout from
this was the heavy drain on Nigerian foreign exchange earnings. The introduction
of Structural Adjustment Programme, led to a phenomenal increase in the number
of insurance companies in Nigeria. For instance, the number of insurance
companies increased to 110 in 1990. The financial system reforms of 2004, led to a
dramatic change in the insurance industry. The National Insurance Commission in
26
September 2005 set in place capitalisation requirements for insurance companies
operating in Nigeria. The Commission stipulated Naira2bn for life insurance,
Naira3bn for general insurance, and Naira5bn for composite insurance or have
their operating licenses revoked. Insurance companies were given till February 27,
2007 to comply with the new directives. According to Research and Market
(2009), of the 104 insurance companies and four reinsurance companies that
existed before the reforms, only 49 underwriters and two reinsurers met the new
capital requirements and were certified by the government in November 2007.
Also, of the 312 companies listed on the exchange with 36 industry classification
as at 2011, insurance industry has the highest number of individual firms listed on
the exchange.
The astronomical increase in the number of insurance companies in Nigeria, and
the recent improvements recorded in the industry between 2006 and20097, has a
serious research question on the strategies for economies of scale and optimum
performance of insurance companies in Nigeria. Usman (2009), adopted the CobbDouglas cost and profit functional models to investigate the performance of
randomly selected insurance firms in Nigeria. The result of his study suggests that
operational cost drastically reduces profitability and overall penetration rate
remains very low. It has been argued that “the insurance penetration level
27
inNigeria is a mere 0.6 per cent, which is lower than that of emerging markets in
African”.
The performance of Nigerian insurance industry is sub-optimal. Insurance density
stood at 6.9%, industry global ranking was 61 and the gross premium income was
Naira180bn in 2008 (NAICOM, 2010). According to the National Insurance
Commission (NAICOM, 2008), the industry has the potential to deliver
Naira1.3trillion (US$7.5bn) in Gross Premium by 2012 and Naira60trillion
(US$400.81bn) by 2020. NAICOM also targeted increased insurance penetration
from the current 6% to 30% in 2012, grow insurance contribution to GDP from
0.7% to 3% in 2012, and grow insurance density from the present Naira1, 200 per
individual to Naira7, 500.
In view of the projections by the National Insurance Commission and the suboptimal performance of the insurance industry, this paper advocates for the
application of strategic management insurance investment in achieving economic
growth the Nigerian.
2.2 The Challenges of Insurance Industry in Nigeria
Insurance is generally defined as the pooling of funds from the insured (policy
holders) in order to pay for relatively uncommon but severely devastating losses
which can occur to the insured. Insurance as a contract is between two parties
28
where one party called the insurer undertakes to pay the other party called the
insured a fixed amount of money on the occurrence of a certain event. Obasi
(2010) defines it as “a contract between the person who buys insurance and an
insurance company who sold the policy”. He opines that “by entering into the
contract, the insurance company agrees to pay the policy holder or his family
members a predetermined sum of money in case of any unfortunate event for a
predetermined fixed sum payable which is in normal term called insurance
premiums”. The types of insurance products available in Nigeria include, motor
insurance; general accident insurance; fire insurance; marine, aviation and transit
insurance; life insurance; oil and gas insurance; health insurance; among others.
Insurance industry is generally seen as the backbone of any country’s risk
management system, since it ensures financial security, serves as an important
component in the financial intermediation chain, and offers a ready source of long
term capital for infrastructural projects. Insurance also promotes the growth of
small and large firms as it provides stability by allowing large and small businesses
operate with a lesser risk of volatility or failure. Insurance is also very important to
the financial system. In collecting relatively small premium from the insured in the
economy, insurers are able to pull together a large pool of funds that could be
invested for short and long term periods (Obasi, 2010). Such long-term funding of
29
the economy is very critical for economic growth, and the deepening and
broadening of the domestic financial system.
Thus, a strong and competitive insurance industry is a compelling imperative for
Nigeria’s economic development and growth. The insurance industries globally are
experiencing a daunting task of sustained profitability in the face of capital
constraints and volatile assets value. In Nigeria, there are wide ranges of
challenges facing the insurance industry. The major challenges include.
2.2.1 Unfavourable Macroeconomic Environment
A stable macroeconomic environment promotes the savings necessary to finance
investments - a precondition for achieving viable insurance industry and
sustainable economic growth. Insurance companies are sensitive to economic
fundamentals. What we mean to say is that insurance companies factor
macroeconomic variables into the amount they collect as premium and their
investment decisions in order to meet up with claims. These macroeconomic
variables include among others, the size of the current account deficit in relation to
foreign exchange reserves, government debt, government deficits, inflation,
interest rates and exchange rates. Nigeria’s macroeconomic policies over the last
decade have been characterized by periodic financial indiscipline, leading to
volatile and generally high inflation, large exchange rate swings, and negative real
30
interest rates for extended periods. For example, in a communiqué released by the
Central Bank of Nigeria Monetary Policy Committee meeting on 24th24thJanuary, 2011, the Committee noted that “although inflation has been trending
downwards, the single digit benchmark was not achieved in 2010”. They
recommended that “one of the ways to keep aggregate demand in check is to
restrain debt-financed government spending” and called “for a review of subsidies
and other recurrent expenditure categories that constitute a drain on the national
budget as well as improving the revenue base”. However, a review of the 2011
budget shows that recurrent expenditure is over 70% of the total budget. Thus, the
committee opines that “the risk to price stability posed by fiscal operations will
need to be constantly monitored if inflation is to be brought down to a single digit
level in the short to medium term”. This could be interpreted to mean that the
government is not sincere in promoting a favourable macroeconomic environment
that will allow the financial service industries thrive. This will adversely affect the
operational efficiency of the insurance industry. For instance, insurance companies
will be unwilling to invest the premiums in long-term instruments because of the
fear of inflation built up over several years by fiscal indiscipline and high inflation.
Short-term investment yields lower returns. Such economic conditions might
increase insurance premium or deter the ability of insurers to pay claims.
31
2.2.2 Market is Suspicious of Insurance Companies
Nigerians have a negative attitude toward insurance companies. This accounted
largely for the low patronage of insurance companies in Nigeria. This poor
patronage and performance stemmed from the poor attitude of the insurers in nonclaims payment. This tradition of defaulting in claims translated to some form of
bad publicity for the industry and consequently, confidence in the industry eroded
significantly (Obasi, 2010). Because of the confidence crisis of the industry,
Nigerians developed strong apathy for insurance, which made the industry a pariah
industry. The industry has refused to change with the times, as policy documents
still carry clauses that breeds distrust with customers (Obasi, 2010).
2.2.3 Poor Regulatory Frame work
The regulators of Nigerian insurance industry display puerile policies in making
the industry viable. The history of insurance in Nigeria shows that at the early
stage of insurance development in Nigeria, the government policy trust was on
legislation to whittle-down foreign dominance in the industry. Currently the
National Insurance Commission is empowered to ensure the effective
administration, supervision, regulation and control of insurance business in
Nigeria. The Commission is to establish standards in the conduct of insurance
business in Nigeria. No such standard is known to have yet been established other
than as contained in the constituting legislation. The Commission is given
32
extensive powers of inspection in sections 3 of the Insurance Commission Act.
Section 31 endows the Commission with a mandatory inspection powers every two
years over insurers, or as and when the inspectorate department of the Commission
determines. The implementation of section 31 of the Insurance Act leaves much to
be desired. The Commission is not stern in stamping out corruption in the industry.
For example, of the one hundred and four insurance companies and four
reinsurance companies in existence before the minimum capital requirements for
insurance companies, only forty nine insurance companies and two reinsurance
companies met the requirements and were certified by the government in
November, 2007. Till date, no concrete policy statement is issued on the
companies that could not comply with the requirement, except for speculation on
mergers and acquisition, which is not fashionable right now going by the high
profile corporate scandal witnessed in the banking sector after consolidation The
National Insurance Commission (NAICOM), have been criticized for its reform
programmes. The common feeling among scholars and practitioners is that these
reforms have not had any impact on the insurance industry. The Commission only
followed suit with the banking sector reforms, and following the aftermath of the
banking sector crisis, the Commission seem confused on the next line of action,
which vividly shows absolute lack of direction. For example, there was no closure
of poorly performing companies and the sector continues to suffer from a poor
33
image and high distribution costs. There is a clear case of lagging supervision as
few companies publish financial details that are more recent than 2006. For some,
the latest figures are even older.
According to Research and Market Report (2010), NAICOM has not published
statistics for the industry since 2004, when it released numbers for 2002. In
developed and developing economies, the regulatory model for insurance
companies is the risk-based model, and this has not been adopted in our economy.
All these culminate into operational sub-optimality of insurance industry in
Nigeria.
2.2.4 Poor Attitude towards Insurance Services
The abysmal level of insurance culture in developing economies has attracted
relative interests among researchers and practitioners alike (Yusuf, Gbadamosi and
Hamadu, 2009). Omar (2005) assesses consumers’- attitudes towards life insurance
patronage in Nigeria and found out that there is lack of trust and confidence in the
insurance companies. Other major reason he adduced is lack of knowledge about
life insurance products. An instructive opinion suggested by the researcher is the
call for a renewed marketing communication strategy that should be based on
creating awareness and informing the consumers of the benefits inherent in life
insurance so as to reinforce the purchasing decision. The drawback to Omar‘s
34
study is not identifying demographic influence on these attitudes. The demand for
life insurance in a country may be affected by the unique culture of the country to
the extent that it affects the population‘s risk aversion. Nigeria is a nation
characterised by varying levels of development, vast income inequalities, and
cultural diversity in terms of language, religion, ethnicity and resource control
crises.
Standard of living and religion could be some of the demographic factors that
influenced the poor attitude of Nigerians towards insurance services. For example,
where people living below poverty line are high and per capital income is low,
insurance penetration is bound to be low. The foregoing thus suggests that there
might be disparity between the common behavioural response to insurance
offerings and strategies, and what obtains in Nigerian business environment. On
religious front, Henderson and Milhouse (1987) argue that an individual‘s religion
can provide an insight into the individual‘s behaviour; and understanding religion
is an important component of understanding a nation‘s unique culture. Also, Yusuf
(2006) notes that religion historically has provided a strong source of cultural
opposition to life insurance as many religious people believe that a reliance on life
insurance results from a distrust of God‘s protecting care. Until the nineteenth
century, European nations condemned and banned life insurance on religious
grounds (Yusuf, Gbadamosi and Hamadu, 2009). Some scholars are of the opinion
35
that religious antagonism to life insurance still remains in several Islamic
countries. For instance, Wasaw and Hill (1986) tested the effect of Islam on life
insurance consumption using an international data set. The results of their study
indicate that consumers in Islamic nations purchase less life insurance than those in
non-Islamic nations. This becomes more evident in the fact that there is
comparatively very low ratio of Muslims in developed countries with the majority
residing in medium to low human development countries8. In Nigeria, the
incidence poverty has remained all time highest in core Northern states who are
predominantly Muslims. Patel (2004) opines that Muslims around the world are
commonly faced with low-income levels, and lack access to social security
systems, healthcare, education, sanitation, and employment opportunities. Other
challenges facing the insurance industry in Nigeria include; poorly developed
distribution channels, poor capitalisation; lack of requisite skill to participate in
highly specialized transactions especially in high value risk segments such as
marine, aviation, and oil and gas; unsophisticated product offerings, with only a
few companies creating new opportunities and exploring ways of filling existing
gaps in the market; inability to attract and retain skilled talents; low technology
leverage; low investment and assets capability; among others.
36
2.3 Strategies for Operational Efficiency of Insurance Industry in Nigeria
Companies in the insurance sector face complex challenges to improve
performance, meet financial and operational targets and comply with insurance
regulations. These challenges may deter the operational efficiency of insurance
companies in Nigeria, but are not insurmountable. Many insurance companies are
aiming at achieving operational efficiency and increasing their market share. For
these insurance companies to achieve these goals, they must adopt a strategic
management approach to these objectives. To maximize value for stakeholders
while protecting policyholders, insurance companies must simultaneously in
operating efficiencies while seeking profitable new avenues for growth by
adopting the following operational efficiency strategies.
2.3.1 The Adoption of Solvency 11
Insurance companies are faced with a lot of specific risks which necessitated the
introduction of solvency 1 which is similar to Basle 1 in the banking industry. The
development of solvency 1 in 1997 and subsequent implementation in 2004 was
aimed at protecting the insured and maintain stability in the insurance industry.
The focus was on stricter equity requirements for adequate solvency at all times
(BGL Insurance Report, 2010).
37
However, due to the rapid changes in the capital markets, technology, investment
instruments and increasing competition, the risk environment of insurance
companies also altered, necessitating a revision on solvency 1 (BGL Insurance
Report, 2010). This led to the introduction of solvency 11. Solvency 11 framework
seeks to create solvency requirements that are more aligned to the risks faced by
the companies, and to establish consistent supervision across all European
members states. Solvency 11 is also compatible with the Financial Reporting
Standards which requires that assets and liabilities are marked to the market.
Similar to Basle 11 for the banking industry, Solvency 11 requires the insurance
industry. Rather, a more pragmatic strategy to permanently curb the poor
capitalisation syndrome of insurance industry as is the case in Nigeria is the
adoption of Solvency 11. This approach has the inherent appeal of eliminating the
calibration of insurance companies, which poses some regulatory challenges. It
also has the appeal of allowing insurance companies develop strong risk
management system in relation to their exposure.
2.3.2 Improved Customer Service Strategy
Most insurance companies in Nigeria are having problem satisfying their
customers in terms of product offerings, quality of services and sophistication of
products offered. While customer service is clearly important for winning new
customers and retaining existing ones, Nigerian insurance industry struggles to
38
achieve an acceptable level of customer satisfaction. In the light of slow industry
growth, many insurance companies have pursued mergers and acquisition to grow
market share and achieve economies of scale. While this strategy might be
functional, the optimal strategy is keeping existing customers and attracting new
ones. The first step in ensuring an exceptional customer experience is to offer
multi-channel contact center interactions. Offering superior channel interaction
gives insurance companies a greater chance to differentiate their products and
services, deliver more personalized services, improve cross-sell and up-sell rates
and lower operating costs.
Giving the customers self-service insurance through the use of the web also
improves customer satisfaction. Members can view policy coverage, pay bills,
make changes to policies, submit claims and check the status of claim progress. In
the health insurance business, providers can use online compliant tools to verify
benefits or coverage, automate claim processing, review claims and correct errors.
Agents and brokers can more easily obtain online quotes, proposal and plans,
design for customers with different designs and needs. insurance companies to set
aside regulatory capital based on the amount of risk they face, with incentives in
the form of reduced capital requirements for companies that have strong riskmanagement system and robust controls. Solvency 11 represents a much wider and
39
much more sophisticated consideration of risk than Basle 11. While Basle 11 is a
much more rule-based regulation.
Solvency 11 is more principle based, accommodates institutional differences in
terms of organization, regional scope and maturity.
Given the double digit inflationary pressure in Nigeria, legislating minimum
capital for insurance industry as was the case in 2005 will not ensure stability in
Initiating proactive contact can also improve customer satisfaction. Companies
should consider initiating proactive contact to stay in touch with the customer.
Insurance companies find that policy renewals increase with frequent
communications leading up to the renewal event, and that the number of products
sold per customer also increases. Whenever an agent or broker opens or renews a
large account, using proactive contact to send a thank you message can let these
important distributors know that you appreciate their business. Proactive contact
management is also a useful form of automated telemarketing to scale the contact
center for increased cross-selling and up-selling activities. Insurance companies
can further use proactive contact to notify their customers of new products and
services or special promotions.
Given the slow growth in a mature market, some insurance companies are
abandoning their product-centric approaches to selling. Instead, they are
40
maximizing the lifetime value of customers through cross-selling and up-selling. In
this new paradigm, using customer data and segmentation to anticipate the future
needs of individual customers becomes more import than mass marketing.
Going one step further, high-value policy holders and distributors may interact,
when possible, with a life-time advisor who is intimately familiar with the client’s
history and needs, or using demographic matching as a way to assign the customer
to an agent who has a common demographic profile.
2.3.3 Adoption of Modern Technology
Insurance process as a paper-oriented process is a common characteristic of
Nigerian industry. So, it stands to reason that changing the way the insurance
industry does business for the better means finding new ways of handling
information and revamping the manual processes that today push mountains of
paper from place to place and department to department. The key is managing the
process and the paper optimally to achieve the most effective results.
The first step in overcoming the restrictions placed on insurance by paper files and
manual processes is modernizing the legacy systems which drive most insurance
companies in terms of core administration. The sheer number of transactions
handled and paper generated each day makes business process management a new
essential for insurance companies. Since high-tech firms have developed
41
technology that effectively manages complex processes across multiple systems,
its adoption can deliver improved process control and increased agility.
Modern technology initiatives incorporate industry standards and have the inherent
ability to support core business concerns – from legislation and regulation to
disaster recovery and business continuity; from security, privacy, and litigation
support to efficiency, productivity, capacity, and customer service. However,
equally important are the tools to monitor and alert based on Key Performance
Indicators (KPIs). They provide insurance company executives an eagle’s eye view
of what is going on inside the business on any given day and the means to
proactively improve processes, fully-manage workloads, and meet or exceed
production and service goals. Proactive insurance companies can adopt and utilize
these technological innovations today to gain greater control of processes, decrease
expenses, and streamline operations. By utilizing some of the best practices
defined by successful technological initiatives, insurance companies can realize a
near immediate return on investment (ROI).
42
REFERENCES
BGL Insurance Report, Promise Kept or Promise Deferred, 2010, Retrieved on
14th of April, 2011 from http://www.bglplc.com.pdf.
Central Bank of Nigeria Communiqué No. 74 of the Monetary Policy Committee
Meeting, January, pp24-25, (2011). 32 Repositioning Insurance Industry …
The Nigerian Case
Henderson .G and Milhouse .V.H., (1987), International Business and Cultures:
AHuman Relations Perspectives, Cummings and Hathaway, New York.
Obasi .N., (2010), Policies, Challenges, Reforms and Nigerian Disposition to
Insurance Contracts,The Fronteira Post, pp1-6.
Omar .O.E., (2005), the Retailing of Life Insurance in Nigeria: An Assessment of
Consumers'
Attitudes,Journal
of
Retail
Marketing
Management
Research,I(1), pp 41-47.
Patel .S, (2004), “Insurance and Poverty Alleviation”, Retrieved on 14th of April,
2011 from http://www.bris.ac.uk/Depts/CMPO/workingpapers/wp139.pdf.
Research and Market, Nigerian Insurance Report 2009, Retrieved on 14th of April,
2011 from http://www.reportlink.com.
Research and Market, Nigerian Insurance Report 2010, Retrieved on 14th of April,
2011from http://researchmarkets.com/reports/837131.
43
Shepherd .T.
and Miller .D., (2010),
Breaking with Tradition in Insurance
Industry: Strategies to Insure Operational Efficiency, Retrieved on 14th of
April,2011 from http://insurance_execbrief.pdf.
Uche C.U. and Chikeleze, B.E., (2001)” Reinsurance in Nigeria: The Issue of
Compulsory
Legal
Cession”,
The Geneva
Papers
on
Risk
and
Insurance,26(3), pp.490-504.
Usman.O.A., (2009), Scale Economies and Performance Evaluation of Insurance
Market in Nigeria, the Social Sciences, 4(1), pp 1.
Wasaw. B and Hill R.D., (1986), The Insurance Industry in Economic
Development, New York University Press, New York.
Yusuf .T.O., (2006), Insurance in Muslim Countries: Nigeria‘s Takaful Scheme in
Focus”, Journal of Islamic Banking and Insurance, 6(2), pp 15-33.
Yusuf .T.O., Gbadamosi .A. and Hamadu .D., (2009), Attitudes of Nigerians
Towards Insurance Services: An Empirical Study, African Journal of
Economics,Finance and Banking Research, 4(4), pp 34-46.
44
CHAPTER THREE
METHODOLOGY
3.1
INTRODUCTION
The research methodology is a set of related principles which are adopted to
specify how to reach a particular conclusion or achieve a given objective.
Methodology refers to the principles that determine how methods are used and
interpreted in any given discipline. In other words, research methodology involves
the whole structure used in conducting the research. It refers to how the tools of
scientific investigation were deployed and interpreted during the course of the
study. Therefore this concept implies that we have to justify the method we have
chosen as tools for accomplishing the objectives in addition to specifying them. In
this chapter the research methodology was presented in the following order:
research design, Population of the Study, Sample of the study, Sampling
Technique, Description of the Instrument, Validation of the Research Instrument,
Reliability of the Instrument, and Method of Data Analysis. The section also
explained how data was to be analyzed to produce the required information
necessary for the study.
3.2
RESEARCH DESIGN
For the purpose of this study, trend analyses of the audited total investment of
insurance companies in Nigeria and the Nigerian economy indicators between”
45
1996-2014” would be used. In trend design, each set of observation is directed at
different sampled of the population at various point in time (asika 2006).
This design is used to enable the researcher carry an in-depth study of the sampled
population for the selected period so as to capture the trend of total investment of
those firms for the periods. From the trend, observation would be made as to the
level of total investment maintained for those periods.
3.3
SOURCE OF DATA
The study made use of secondary data which would be collected from CBN
Statistical Bulletin Vol. 20, December, 2014 and CBN 2014 Annual Report, 31st
December, 2014. The data was obtained from document analysis of consolidated
financial report of years ending dec 1996 - 2014 of the insurance companies and
the indicators of the Nigerian economy. The use of the secondary data would
enable the researcher to collect reliable information from the target population.
These report enabled the researcher to save time in data collection; they were cost
effective and contained the required information.
[
3.4
RESEARCH POPULATION
The population of this study comprised all the insurance companies listed on the CBN
Annual Report 2014. Listed companies were appropriate for the study since they are
46
public entities operating under strict corporate governance regulations, making their
financial and accounting disclosure largely reliable.
3.5
SAMPLE OF STUDY
In most cases, we do not know all the values of a population. Hence, what we have
is a certain number of values that any particular variable has assumed and which
have been recorded in one way or the other. Such data form a sample from the
population. A sample is a collection of observations on a certain variable.
In the words of Fagbohungbe (2009), a sample is a set of elements drawn from a
larger population. However, this study is strictly focused on registered insurance
companies and in our research work, the sample size is a period of nineteen (19)
years.
3.6
SAMPLING PROCEDURE
The probability sampling method would be employed. This method of statistical
sampling rests on the assumption that the selection of sample elements have been
done in a randomized manner. More specifically, the stratified random sampling
method would be used. The sample size is a period of nineteen (19) years.
47
3.7
DATA COLLECTION METHOD
In carrying out this research work, data would be sought through secondary
sources. Analyze of the secondary data will be generated from the annual reports
and account of the selected companies.
3.8
METHOD OF DATA ANALYSIS
The data were analyzed using SPSS (The Statistical Package for Social Sciences)
software. This will ensure the data was analyzed effectively. Descriptive statistics
such as mean and standard deviation was undertaken to confirm that the individual
variable is sampled from a population. Furthermore, linear and multiple regression
analysis were done to display the unit root test and co-integration.
48
REFERENCES
AsikaNnamdi (2005) “Research Methodology in the Behavioural Science”.Lagos;
Longman.
Fagbohungbe, O. B. (2009), The Basics of Research Methodology (3 rd edition)
Kotleb Publishers, Lagos Nigeria.
NAICOM Research and Market, Nigerian Insurance Report 2014, Retrieved on
21th of May, 2014 from http://www.reportlink.com
49
CHAPTER FOUR
DATA ANALYSIS AND INTERPRETATION
4.0
INTRODUCTION
This chapter presents empirical findings in reference to research objectives in
chapter one. These findings were obtained from secondary sources. The sample
size for this research work is 19 years of the insurance companies’ total investment
and their contribution to Nigerian economy. They were selected using CBN
Statistical Bulletin Vol. 20, December, 2009 and CBN 2010 Annual Report, 31st
December, 2010. This research work is focused on the aggregate total investment
of the insurance companies and will be limited to the Nigerian economy. The total
investment comprises of the government securities, stock of bond, real estate and
mortgage, policy and other loans, cash deposit and bills of exchange while the
Nigerian economy indicators are gross domestic product, unemployment, capital
utilization and inflation rate. Tabular method was used in analysing this data and it
was tested using Linear Regression method. They were presented and analysed
using SPSS version 20.0 which displays the descriptive tests, testing of hypotheses,
interpretation of and decision on the results of tested hypothesis.
50
4.1
TABULAR PRESENTATION OF THE VARIABLES USED FOR THE
DATA ANALYSIS
Table 4.1 Data for the Study
YEARS
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
TOTAL
INVESTMENT
12379.46
13613.08
15656.88
21583.46
25192.64
32257.27
36940.87
25192.63
22678.80
121844.22
216359.91
329247.33
336491.40
343894.20
351459.90
359192.20
2263984.25
4515589.04
9017565.00
GDP
42.79
4.09
-3.48
2.8
3.8
4.6
3.5
10.2
7.1
6.2
6.9
5.3
6.4
7
7.9
6.8
UNEMPLOYMENT
RATE
3.8
3.6
3.2
3
3.6
3.8
4.1
4
5.2
5.6
12.3
12.7
14.9
19.7
21.1
23.9
27.8
28.4
28.8
6.4
5.9
6.2
CAPITAL
UTILIZATION
32.46
30.4
32.4
34.8
36.1
42.7
54.9
56.5
55.7
54.8
53.3
53.38
54.67
55.52
55.8
55.92
56.4
57.36
57.53
INFLATION
RATE
29.3
8.5
10
6.6
6.9
18.9
12.9
14
15
17.9
8.4
5.4
11.5
12.6
13.8
14.50
15.2
16.6
17.8
Source: CBN Statistical Bulletin Vol. 20, December, 2014 and CBN 2014 Annual Report, 31st December, 2014
In table 4.1 above, the growth rate of gross domestic product (GDP) in 1990 was
15.94% when unemployment, capacity utilization and inflation rates stood at 3.5%,
40.3% and 7.5% respectively. From this figure, the GDP growth rate increased to
42.79% in 1996 when a total investment of N12,379.46 million was made by
insurance firms in the country. The capacity utilization rate declined from 40.3% in
51
1990 to 32.46% in 1996 leading to a rise in inflation rate from 7.5% in 1990 to
72.8% in 1995. However, it later declined to 13.8% in 2010 as the investments of
insurance firms roses to N359,192.22 million. By 2003, the capacity utilization rate
reached its peak at 56.5% and declined slightly to 55.52% in 2009. This was not
consistent with the movement of unemployment rate which increased from 4.0% in
2003 to 23.9% in 2011. On aggregate, the growth rate of GDP was not impressive
as it ranged between 3.5% and 10.2% from 2000 to 2011 when compared with the
increase in investment of these firms from N25,192.64 million to N359,192.20
million during these periods. This implies a very minimal contribution of
investments of insurance firms to economic development in the country.
4.2
PRESENTATION AND ANALYSIS OF THE GATHERED DATA
FROM THE SELECTED YEARS OF INVESTMENT
Table 4.2One-Sample Statistics
N
Mean
Standard
Skewness
Deviation
7.3895
9.00444
3.64211
Kurtosis
Gross Domestic Products
19
Unemployment
19 12.0789
9.83495
0.67387
-1.21044
Capital Utilizations
19 48.9811
10.20971
-0.97348
-0.94626
Inflation Rate
19 13.4632
5.56739
1.04721
2.43336
Total Investment
19
.88155
0.68690
-0.48410
5.1089
15.14623
Source: Field Survey, 2015.
Table 4.2 revealed that the Nigerian economy indicators and the total investment
were measured from the year 1996 – 2014. GDP measures a mean score of 7.3895,
52
standard deviation of 9.00444, skewness of 3.64211 and kurtosis of 15.14623.
Unemployment measures a mean score of 12.0789, standard deviation of 9.83495,
skewness of 0.67387 and kurtosis of -1.21044. Capital Utilisation measures a mean
score of 48.9811, standard deviation of 10.20971, skewness of -0.97348 and
kurtosis of -0.94626. Inflation measures a mean score of 13.4632, standard
deviation of 5.56739, skewness of 1.04721 and kurtosis of 2.43336 while the total
investment of the insurance companies measures a mean score of 5.1089, standard
deviation of 0.88155, skewness of 0.68690 and kurtosis of -0.48410.
4.3
TEST OF HYPOTHESIS
Decision Rule
The test of hypothesis used was Linear Regression method. The SPSS highlighted
the result that is significant with the output indicating significant at 1% and 5%
level. Reject the null hypothesis if p-value ≤ 0.01 or 0.05.
HYPOTHESIS ONE
H0: There is no significant impact of Total Investment on GDP.
H1: There is a significant impact of Total Investment on GDP.
53
Variables Entered/Removeda
Model
Variables Entered
Variables Removed
Method
1
Total Investmentb
. Enter
a. Dependent Variable: Gross Domestic Products
b. All requested variables entered.
Model Summary
Model
R
R Square
Adjusted R Square
1
.154a
.024
a. Predictors: (Constant), Total Investment
-.034
Std. Error of the
Estimate
9.15459
ANOVAa
Model
Sum of
df
Mean Square
Squares
Regression
34.731
1
34.731
1
Residual
1424.709
17
83.806
Total
1459.440
18
a. Dependent Variable: Gross Domestic Products
F
.414
Sig.
.528b
Coefficientsa
Model
Unstandardized
Standardized
Coefficients
Coefficients
B
Std. Error
Beta
15.440
12.680
1.218
.240
-.154
-.644
.528
(Constant)
1
Total
-1.576
2.448
Investment
a. Dependent Variable: Gross Domestic Products
b. Predictors: (Constant), Total Investment
54
T
Sig.
The analytical results clearly indicate a weak positive relationship between Total
Investment of the Nigerian Insurance Companies and GDP of Nigeria, as
coefficient of correlation (r) is 0.154. This firmly establishes that Total Investment
is significantly associated with GDP. The coefficient of determination (r2) is
0.024, implying that Total Investment accounts for 2.4% of the variation in GDP.
This is also a very low explanatory potency, characteristic of Total Investment in
boosting the Nigerian GDP.
HYPOTHESIS TWO
H0: There is no significant impact of Total Investment on Unemployment.
H2: There is a significant impact of Total Investment on Unemployment.
Variables Entered/Removeda
Model
Variables Entered
1
Total Investmentb
a. Dependent Variable: Unemployment
Variables Removed
Method
. Enter
b. All requested variables entered.
Model Summary
Model
R
R Square
Adjusted R Square
1
.948a
.899
a. Predictors: (Constant), Total Investment
55
.893
Std. Error of the
Estimate
3.22120
ANOVAa
Model
Sum of
df
Mean Square
Squares
Regression
1564.678
1
1564.678
1
Residual
176.394
17
10.376
Total
1741.072
18
a. Dependent Variable: Unemployment
F
Sig.
150.796
.000b
b. Predictors: (Constant), Total Investment
Coefficientsa
Model
Unstandardized
Standardized
Coefficients
Coefficients
B
Std. Error
Beta
-41.954
4.462
(Constant)
1
Total
10.576
Investment
a. Dependent Variable: Unemployment
.861
.948
t
Sig.
-9.403
.000
12.280
.000
The analytical results clearly indicate a strong positive relationship between Total
Investment of the Nigerian Insurance Companies and Unemployment of Nigeria,
as coefficient of correlation (r) is 0.948. This firmly establishes that Total
Investment is significantly associated with Unemployment. The coefficient of
determination (r2) is 0.899, implying that Total Investment accounts for 89.9% of
the variation in Unemployment. This is also a very high explanatory potency,
characteristic of Total Investment in boosting the Nigerian Unemployment.
56
HYPOTHESIS THREE
H0: There is no significant impact of Total Investment on Capital Utilisation.
H3: There is a significant impact of Total Investment on Capital Utilisation.
Variables Entered/Removeda
Model
Variables Entered
Variables Removed
Method
b
1
Total Investment
. Enter
a. Dependent Variable: Capital Utilisation
b. All requested variables entered.
Model Summary
Model
R
R Square
Adjusted R Square
1
.695a
.483
a. Predictors: (Constant), Total Investment
.453
Std. Error of the
Estimate
7.55085
ANOVAa
Model
Sum of Squares
Regression
907.024
1
Residual
969.261
Total
1876.285
a. Dependent Variable: Capital Utilisation
b. Predictors: (Constant), Total Investment
57
df
1
17
18
Mean Square
F
907.024
15.908
57.015
Sig.
.001b
Coefficientsa
Model
Unstandardized
Standardized
Coefficients
Coefficients
B
Std. Error
Beta
7.842
10.459
(Constant)
1
Total
8.052
2.019
Investment
a. Dependent Variable: Capital Utilisation
.695
t
Sig.
.750
.464
3.989
.001
The analytical results clearly indicate a strong positive relationship between Total
Investment of the Nigerian Insurance Companies and Capital Utilisation of
Nigeria, as coefficient of correlation (r) is 0.695. This firmly establishes that Total
Investment is significantly associated with Capital Utilisation. The coefficient of
determination (r2) is 0.483, implying that Total Investment accounts for 48.3% of
the variation in Capital Utilisation. This is also a very moderate explanatory
potency, characteristic of Total Investment in boosting the Nigerian Capital
Utilisation.
HYPOTHESIS FOUR
H0: There is no significant impact of Total Investment on Inflation Rate.
H4: There is a significant impact of Total Investment on Inflation Rate.
58
Variables Entered/Removeda
Model
Variables Entered
1
Total Investmentb
a. Dependent Variable: Inflation Rate
Variables Removed
Method
. Enter
b. All requested variables entered.
Model Summary
Model R
R Square Adjusted R Square
a
1
.082
.007
-.052
a. Predictors: (Constant), Total Investment
Std. Error of the Estimate
5.70928
ANOVAa
Model
Sum of Squares
Regression
3.794
1 Residual
554.130
Total
557.924
a. Dependent Variable: Inflation Rate
df
1
17
18
Mean Square
3.794
32.596
F
.116
Sig.
.737b
b. Predictors: (Constant), Total Investment
Coefficientsa
Model
Unstandardized Coefficients Standardized Coefficients
t
Sig.
B
Std. Error
Beta
(Constant)
10.802
7.908
1.366 .190
1
Total
.521
1.527
.082
.341 .737
Investment
a. Dependent Variable: Inflation Rate
59
The analytical results clearly indicate a strong positive relationship between Total
Investment of the Nigerian Insurance Companies and Inflation Rate of Nigeria, as
coefficient of correlation (r) is 0.082. This firmly establishes that Total Investment
is significantly associated with Inflation Rate. The coefficient of determination (r2)
is 0.007, implying that Total Investment accounts for 007% of the variation in
Inflation Rate. This is also a very low explanatory potency, characteristic of Total
Investment in boosting the Nigerian Inflation Rate.
60
The tables below display the Unit Root test and co-integration of the
independent Variables.
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.957764468
0.917312776
0.893687855
0.287434492
19
ANOVA
df
Regression
Residual
Total
Coefficien
ts
Interce 3.6066512
pt
77
0.0081933
GDP
69
UNE
0.0761793
MP
16
SS
MS
F
Significance F
4 12.83172 3.207929682 38.82818374
1.96129E-07
14 1.15666 0.082618587
18 13.98838
Standard
Error
Unit Root
T
9.0419066
0.398882
54
0.6960379
0.011771
17
8.4843529
0.008979
52
0.497798
298
6.86335E
-07
P-value
3.2036E07
CAPU
T
0.0119941
09
1.3565622
0.008842
8
0.196393
808
INFL
0.0040993
89
0.2167810
0.01891
78
0.831506
146
Lower
95%
2.7511350
77
0.0334405
99
0.0569217
03
0.0069691
23
0.0364591
11
Upper
95%
4.462167
477
0.017053
86
0.095436
928
0.030957
342
0.044657
89
The result of the analyzed multiple regression shows the unit root test of the
following variables (GDP, UNEMP, CAPUT and INFL) -0.69, 8.48, 1.35 and 0.21
with a P-value of 0.49, 6.86, 0.19 and 0.83 respectively. The variables are all co61
integrated which summarizes the results in making decision. The conclusions are
there is no significant impact of Total Investment on GDP, there is no significant
impact of Total Investment on Unemployment, there is no significant impact of
Total Investment on Capital Utilization and there is no significant impact of Total
Investment on Inflation.
62
CHAPTER FIVE
SUMMARY OF FINDINGS, RECOMMENDATIONAND CONCLUSIONS
5.1
SUMMARY OF THE FINDINGS
The conclusion of this study revealed that the researcher has conducted a versatile
analysis and investigation on the investment of insurance industry to gross
domestic product (GDP) of Nigeria between the periods 1996 to 2014. The major
objective of the research was to investigate the extent to which the activities of
insurance industry in Nigeria have contributed to the economic growth of Nigeria.
The following findings were made; there is a negative linear relationship between
total investment of insurance companies and gross domestic product in Nigeria.
There is a positive linear relationship between total investment of insurance
companies and Unemployment in Nigeria. There is a positive linear relationship
between total investment of insurance companies and Capital Utilisation in
Nigeria. There is a negative linear relationship between total investment of
insurance companies and Inflation Rate in Nigeria.
The study identified some challenges that are facing insurance companies not to
carry on their work effectively. They are:
1. The enforcement of the laws governing insurance practice in Nigeria is
neglected and thereby failing to collect the premiums from the insurance
cover for building fire and public liabilities in the country.
63
2. Government policies have not been made in favour of insurance growth in
Nigeria.
3. There is poor awareness of the working of insurance, which may partly be
attributed to the poor attitude of the public towards insurance. This is in
addition to poor public image of the insurance business.
4. There is neglect in the industry in respect of rendering of accounts, prompt
settlement of claims and efficient services to the clientele.
5. There is poor diversification of investible funds of the insurance industry.
Crucial areas like housing which can improve on the welfare of the citizens
while improving on the investment income of the insurers have been
neglected.
5.3
CONCLUSION
Based on the findings and recommendations, the researcher concludes with the
following observations;
Economic relations between countries are growing stronger and stronger.
Economic development should be seen as a major challenge of the nation and the
Nigeria economy should be managed in consonance with global trends so that near
accurate decisions have to be made otherwise the insurance industry in Nigeria
may be left behind and become irrelevant in the scheme of things.
64
It is hoped that with the present effort of the government working very hard to
bequeath an enduring democracy in Nigeria, there is therefore a good prospect for
political stability which will create the environment for economic growth and
stability.
In view of the present realization of the importance of insurance as a means for
achieving economic independence and development, there is need for concerted
efforts aimed at ensuring that insurance in Nigeria align with current developments
in the global economy. Therefore the industry operators need to constantly work
hand in hand to ensure a healthy mutual beneficial self-regulation.
However, the insurance industry could play a greater role in the resuscitation of the
economy if the economic environment is more conducive with greater reduction in
poverty level and phenomenal increase in per capita income of the people.
5.4
RECOMMENDATIONS
In view of the summary of the findings which resulted from the investigations, the
following are recommended and if followed judiciously by way of implementation,
we shall be projecting the insurance industry and the economy forward;
1. The national insurance commission (NAICOM) which is the regulatory body
for insurance business in Nigeria, in conjunction with the government should
work to see that some of the premiums collected and other income generated by
65
the industry are being invested to ensure diversification of investible fund of
insurance industry to boost the economy.
2. NAICOM in conjunction with the government should enforce existing laws on
insurance practice in Nigeria. This is necessary, considering huge amount of
capital which can be generate by enforcing the insurance cover for buildings,
fine and public liability in Nigeria. The revenue injection will help galvanize
the insurance sector and ensure that more buildings are insured against collapse
and fine accidents in Nigeria. It should be
3. NAICOM should work closely with Pension Commission (PENCOM) in the
setting up and implementation of a group life cover for existing pension fund
assets. This, apart from providing security for these funds, generates investible
funds for the economy through premium generation. (Oshinloye et al, 2009)
4. The insurance industry is expected to render prompt account and insurance
returns as well as quick settlement of claims so to grow the industry and upscale
the insurance patronage in the country. It is an opportunity cost which will
benefit the industry in the long run.
5. There is need for the effective utilization of insurance funds as the industry
could assist the government in creating some social security schemes for old
age or citizens that suffer mishap.
66
6. Another area that should be of great interest especially now is research.
Insurance companies or the industry as a whole could funds research in
medicine or other related areas like agriculture which will be aimed at tackling
certain tropical diseases and improving on food production and availability in
Nigeria.
7. It is also recommended that government policies should focus on improving
insurance industry so as to have a corresponding impact on the economic
growth in Nigeria.
5.5
AREAS OF FURTHER RESEARCH
The areas suggested for further studies include an investigation into causes of the
poor image of the insurance business. Also reasons for the low premium income of
insurance companies in Nigeria compared to their contemporaries in the South
Africa, and Europe. Further the causes of poor investment returns of the industry in
Nigeria.
This is essentially relevant as they play a vital role in contributing to the success of
the industry and its contribution to the GDP of the nation.
67
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