AN EVALUATION OF THE IMPACT OF THE CONSOLIDATION OF THE INSURANCE COMPANIES ON THE ECONOMIC GROWTH AND DEVELOPMENT IN NIGERIA

ABSTRACT.

The research carried out is on Evaluation of the impact of the consolidation of insurance companies on Economic growth and development in Nigeria. The main objective is to evaluate the impact of the Insurance Companies’ consolidation on the Gross Domestic Product (GDP) in Nigeria. The Econometric technique method of analysis was used. The econometric model was based on Capital Assets Pricing Model (CAPM). Relying on data collected an in depth analysis from 1988 to 2008 shows that the Gross Domestic Product (GDP) of the economy would increase by about 55 percent variation for a unit change in the consolidation policy while holding other economic variables constant. This scenario leads credence to the fact that consolidation policy has positive impact on the economic growth and development of the country if all structural bottlenecks to implementation are removed. It is also recognized that the impact of consolidation policy on insurance companies to achieve the desired economic growth and development may not be necessary contemporaneous, but long lived if properly managed-especially as capital projects and human activities tends to have long gestation periods. To achieve intermediate and long-term economic aspirations to make Nigeria among the 20^th most industrialized countries of the world (FSS 2020), efforts should be directed to develop a modern, well-structured, efficient and competitive insurance sub sector that caters for the long term needs of the economy.

CHAPTER ONE

GENERAL INTRODUCTION

1.1    BACKGROUND OF THE STUDY

Many of the fundamental debates regarding the efficient operations of the insurance companies have been wide ranging but not so convincing. While such recorded arguments often posits that insurance companies provide services that are capable of generating productive resources such as increased profits, productivity and investments for the long term growth of the economy, the extent to which insurance companies offers to under write risks, facilitate innovations and develop productive initiatives through policies and coverage remain daunting.

Historically, Insurance business evolved simultaneously with the appearance of human society in which insurance businesses are practiced in the form of people helping each other. Earlier form of transferring or distributing risk (insurance) were practiced by Babylonian and Chinese traders in the 2^nd and 3^rd millennia BC respectively. Then, Chinese traders travelling treacherous river rapids would distribute their wares across many vessels to limit the loss due to any single vessels capsizing. In the Babylonian case, they developed a system which was recorded in the famous code of Hammurabi, c.1750BC and practiced by early Mediterranean sailing merchants. However, the first recorded insurance cover was done by the Achaemenian monarchs of ancient Persia who insured their people and made it official by registering the insuring process in governmental monetary offices. The purpose of registering was that whenever the person presented a gift to the monarch, if at any time such a person is in trouble, the monarch through a specialized court will help him. Equivalently, the Greeks and Romans introduced the origins of health and life insurance c.600AD when they organized guilds called” benevolent societies” which cared for families and paid funeral expenses of members upon death The most formalized insurance business was established in the late 17^th century in England when people, through the “friendly societies” donated amount of money to a general sum that could be used for emergencies. Yet, the post-Renaissance Europe started a more sophisticated insurance business through which a specialized varieties of insurance were developed. Today, insurance business as it is well known can be traced to the great fire of London in 1666 which devoured more than 13,000 houses. The devastating effects of the fire converted the development of insurance “from a matter of convenience into one of urgency” a change of opinion reflected in sir Christopher Wren’s inclusion of a site for insurance office in his new plan for London in 1667.This scenario led Nicholas Barbon and eleven associates to established England’s first fire insurance company in 1681.Initially,5000 homes were insured by Barbon’s insurance office. This development spread to other parts of the world. For instance, the first insurance company in the US under wrote fire insurance and was formed in Charles town(modern-day Charleston),South carolinia in 1732 through the help of Benyamim franklin who popularized and made standard the practice of insurance, particularly against fire in the form of perpetual insurance. In 1752,he founded the Philadelplia contribution ship for the insurance of houses from loss by fire.

Traditionally, some forms of social insurance schemes existed in some part of Nigerian societies. This simple form of social insurance was practiced by means of cash donations, organized collective labour of assisting one another and entire community who suffer mishap e.g illness, funeral, or important ceremonies.

In Nigeria, insurance business came with colonialization. The colonial authorities established the insurance company, which up till independence were dominated by oversea operators-with only three (3) out of twenty five(25) operating in the country. This was done to create a risk management instrument and product that are customized to the peculiarities of various areas of economic endeavour for overall economic activities that may not have taken place otherwise.

1.2    STATEMENT OF RESEARCH PROBLEM.

The Nigeria Insurance Companies was characterized by tUnder capitalization, dearth of human capital and professional skills, poor return on capitals, prominent of unethical practices ,non prompt payment of claims, low GDP per capital figures, lack of innovation in product development, lack of awareness on the part of the consumers on the uses/suitability of insurance products etc. These problems lead to the development in Nigeria whereby all existing properties at the Federal, State and Local government levels are less that 10% insured while household items have insignificant proportion of insurance with more than 70% of private property and businesses uninsured. These gaps in the underwriting of insurable risks for economic growth have remained wide up till today due to the failure of various consolidation policies of the government. These concerns underscore the need for this study. Therefore, this is expected to stimulate the minds of policy makers in the insurance industries, the need to formulate credible policies that will guarantee insurance underwritings for all Nigerians and their property.

Many of the researchers on the evaluation of the impact                Insurance companies’ consolidation to economic growth has provided a fertile interface between economic theorists and empirical economists. In most cases, conclusions from such studies attempt to link the risk management systems of the insurance industries through their risk taking abilities that are capable of eliciting innovation for the growth and development of an economy. This is achieved when insurance companies pools investible funds by offering risk management services relating to life, business and market activities for insurance premium.

It was the realization this that the Federal Government of Nigeria came up with the consolidation exercise in 2005 with the measure –“The Nigerian Insurance Market Development and Restructuring Initiatives(MDRI)” – aimed at addressing the issue of compulsory insurance products, insurance agency system, fake insurance institutions and risk based supervision. Therefore the study will attempt to find answers to the following questions:

• Has the consolidation of the Insurance companies improved the economic performance of the Country?
• How has insurance companies been creative/proactive in order to effectively carry out their businesses?
• What are some of the Post consolidation challenges facing Insurance companies in Nigeria?

(d) What policies that can be introduced or strengthened to ensure that insurance companies carry out their business satisfactorily?

1.3    OBJECTIVES OF THE STUDY

The main objective of this study is to evaluate the impact of Insurance companies’ consolidation on the economic growth to the Nigerian Economy. The specific objectives are to examine:

(a) To Examine impact of consolidation of the Insurance companies to the GDP.

• To examine what post consolidation initiatives embarked on by the Insurance companies to improve their products and services delivery. 

• To examine what are some of Post consolidation challenges facing Insurance companies in Nigeria.

(d) Make    appropriate   recommendations   for                 improvement   in

performances of insurance companies based on the results of the study. When these objectives are realized, the study will help to “inject” a fresh look at the activities undertaken by Insurance companies and thus reconcile all the apparent differences between consolidation policies and the vacuum created by non-implementation of a set target for insurance coverage.

1.4    JUSTIFICATION OF THE STUDY

Essentially, Insurance companies’ consolidation, particularly, the recapitalization policy is intended to resuscitate the economy for a more vibrant operation. Such a policy seeks a higher level of financial strength for the insurance companies to be able to undertake higher risks in the eyes of insuring public. Given that the insurance companies were mandated to share up their minimum capital base from N150million, N200million, and N350million to N2billion,N3billion and N10billion respectively across the re-insurance businesses attaining the resuscitation objective become more even more challenging. The pity state in Nigerian scenario is that with a population of about 150million people, less than 5% are insured. This study is expected to draw the attention of researchers to the concept of insurance consolidation and their importance for overall welfare of the citizens.Morealso,it will contributes to the existing body of knowledge in the areas of definition, quantification and test for the demand for and supply of insurance services. Finally, it is hoped that future researchers on this subject of insurance consolidation will find the study useful as a reference material in formulating policies that relates to insurance companies.

1.5    SCOPE AND LIMITATION OF THE STUDY

The study is an empirical analysis of an evaluation of the Nigerian Insurance Industry Consolidation and its impact on the economic growth. It covers the period between 1988-2008 and is subdivided into three periods. Pre-consolidation, consolidation and post consolidation. The study focus only on Insurance Companies and not on other players in the Industry.

The choice of 1988-2008 period is informed by the following:

(a) The period is considered significantly long enough to capture the various trends and variations in the consolidation exercise on Insurance industries in Nigeria.

(b) The periods also cover the formulation and implementation of various insurance policies and their impacts on the development of the Nigerian economy.

(c) The periods also covers the era of military regimes and civilian governments and their interests in insurance consolidation policies in Nigeria. This is to ensure a balanced assessment of issues relating to the insurance world.

(d)It is in late 1980’s that Nigerian Insurance Industry started relation with foreign Insurance companies.

1.6   DEFINITION OF TERMS

• Annuity – An agreement by an insurer to make periodic payments that continue during the survival of the annuitant(s) or for a specified period.

• Insurance: – This is a contract in which the insurer, for a consideration or for a sum of money which is called premium, agrees to pay to the insured a sum of money or its equivalence whenever the event that was insured occurs.
• Re-insurance: – This is simply a secondary insurance or the process by which an insurance company places a proportion of its insured risks which it cannot bear with another insurance or re-insurance company.
• Premium: – This is the amount paid by the insured to the insurer for the insurance cover provided in the policy.
• Indemnity: – The maximum amount payable by an insurer to a beneficiary of loss. The principle of indemnity implies that the claimant does not profit from the loss.
• Insurable Interest: – The pecuniary interest a person has in a possible subject matter of insurance such as car, property or life, such that it might suffer a financial loss as a result of the happening of the event insured against.
• Insurer: – The insurance company that has undertaking to provide an indemnity, pecuniary benefits or render services.
• Contribution: – This is a doctrine, which enables an insurer to call upon another insurers, similarly (but not necessarily equally) liable to the same insured to share the cost of an indemnity. It arises when there are more than one policy in respect of the same loss and each policy is covering the interest of the same insured.
• Claims: – A demand made by an insured or the insured’s beneficiary for the payment of benefits or indemnity following a loss in accordance with the terms of an insurance contract.
• Cover: – A contract of the insurance, to effect insurance, that is to cover an insured, for example, motor insurance with effect from a given time.
• Cover Note: – A document which signifies temporary acceptance of insurance of the policy document.
• Consolidation: It is viewed as the reduction in the number of economic institutions (entities) with a simultaneous increase in size and concentration of the consolidated entities in the sector (BIS, 2001); it is mostly motivated by deregulation of financial services, technological innovations, enhancing business operation and emphasis on shareholder value, privatization and international competition (Berger et al, 1999; IMF, 2001; and De Nicolo et al, 2003).

• Hazard – A circumstance that increases the likelihood or probable severity of a loss. For example, the storing of explosives in a home basement is a hazard that increases the probability of an explosion
• Policy – The written contract effecting insurance, or the certificate thereof, by whatever name called, and including all clause, riders, endorsements, and papers attached thereto and made a part thereof.
• Reinsurance – In effect, insurance that an insurance company buys for its own protection. The risk of loss is spread so a disproportionately large loss under a single policy doesn’t fall on one company. Reinsurance enables an insurance company to expand its capacity; stabilize its underwriting results; finance its expanding volume; secure catastrophe protection against shock losses; withdraw from a line of business or a geographical area within a specified time period.
• Risk Management – Management of the pure risks to which a company might be subject. It involves analyzing all exposures to the possibility of loss and determining how to handle these exposures through practices such as avoiding the risk, retaining the risk, reducing the risk, or transferring the risk, usually by insurance
• Solvency – Having sufficient assets–capital, surplus, reserves–and being able to satisfy financial requirements–investments, annual reports, examinations–to be eligible to transact insurance business and meet liabilities.
• Underwriter – The individual trained in evaluating risks and determining rates and coverages for them.

(1.7) ORGANIZATION OF THE STUDY

The study will be structured into five chapters. Chapter one gives the proposal which incorporates the background of the study; statement of the problem; objectives of the study; justification of the study; scope of the study; and definition of terms, . Chapter two will present the literature review-including conceptual, theoretical and empirical literatures. Chapter three presents the methodology used in the study including sources of data, method of data collection and analysis, hypothesis and tests of hypothesis. Chapter four will give the analysis of the results-made up of introduction, presentation of results, results of hypothesis testing, discussing of results and policy issues of the finding. Chapter five will give the summary of major findings, policy recommendations and conclusions.

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