ABSTRACT
This study investigated the effect of insurance industry performance on economic growth in Nigeria. Insurance is a protection from financial loss. The problem was that, there has been a paucity of local literature and studies on the performance of the insurance industry on economic growth in Nigeria. The specific objectives of the study were; to examine the effect of non- life insurance penetration on economic growth in Nigeria, assess the effect of life insurance penetration on the economic growth in Nigeria, evaluate the effect of insurance density on the growth of Nigerian economy and investigate the effect of insurance industry’s expenditure on economic growth in Nigeria. The study adopted the ex-post facto research design. Time series data for the period 1988-2014 were collated from the Central Bank of Nigerian Statistical bulletin. Data were analyzed using regression. The ordinary least square regression was adopted for testing the four hypotheses formulated. The results of the study revealed that life insurance penetration exerted a negative but significant effect on the economic growth in Nigeria, Non-life insurance penetration had positive and significant effect on the economic growth in Nigeria during the period; Insurance density had positive and significant effect on economic growth in Nigeria while insurance expenditure had positive but non significant effect on the economic growth in Nigeria within the period of this study. The study recommends among others that life insurance companies should come up with life products mainly designed for the low income earners as the target which will enhance penetration and deepen the market. More awareness should be created to enhance the participation of products industry and firms as this will deepen the activities of insurance industry in Nigeria. Furthermore, this study recommends an increased diversification of insurance products especially in the non-life businesses. This has to be done for insurance industry in Nigeria to exert most significant positive impact on the Nigerian economy. Again government insurance policies covering compulsory insurance for all Nigerians, particularly life and health insurance cover should be strictly enforced and implemented.
CHAPTER ONE
INTRODUCTION
1.1. BACKGROUND TO THE STUDY:
Insurance companies are among the non-bank financial institutions that play great roles in financial intermediation within the financial system in an economy. Insurance industry plays the dual role of risk management and capital formation. Primarily, insurance provides cover against the various business risks that arise within the economy. Anyanwa, cited in Ugwanyi (2004). Insurance companies collect premium from policy holders and from the pool so collected, those who suffer losses are indemnified. Through these activities, insurance companies mobilize a lot of funds which they invest in both money and capital market.
Ajayi (2002), posits that insurance is a promise of reimbursement in the case of loss, paid to people or company so concerned about hazards they have made a prepayment to an insurance company.
Awe (2008) opines that insurance makes it possible for risk of loss to be eliminated for the individuals through the combination of a large number of people in the same position contributing to a common fund premium payment, out of which an unfortunate may be indemnified for the loss caused to him/her.
An insurance company exists primarily to manage risk. Risk cannot be separated from social and business aspects of an individual life, and so, insurance companies came into being for the sole aim of bringing back insured into the original position he was before the risk occurred. The impact/role of an insurance company can never be over emphasized because; it is the pillar of every successful business. The insurance companies had given Nigerians the faith to invest in a business without fear of losing out even with the introduction of compulsory insurance for all Nigerians by the Federal Government. More so, most financial institutions may not want to grant a loan to an individual without them endorsing insurance policy.
Arnold, cited in Adeyele (2011), reveals that vulnerability is increasing as emerging economies grow and accumulate more assets as well as the increase in hazards exposure which points to a continuing trend of increasing losses due to a natural disaster. The insurance industry also helps us to put into practice what is known as sustainable
development. Development is said to be sustainable when people can make a good living and be healthy and happy without damaging the environment or other people in the long run.
Among financial intermediaries, the insurance companies play a very crucial role; they are the main risk management tool for companies and individuals. Insurance companies, together with mutual and pension funds, are one of the biggest institutional investors in stocks, bonds and real estate markets and their possible impact on the economic development will rather grow than decline due to issues such as widening income disparity and globalization.
Furthermore, the insurance sector represents the backbone of Nigeria’s risk management systems; it ensures financial stability and serves as an important component in the Nigerian financial market. According to Sumegi and Haiss (2006), the role of the financial sector and the economic growth became a major topic in the last decade, elaborating on the work of King and Levine (1993). These financial institutions issue and sell indirect securities to the surplus units of the economy and consequently, purchase other securities, which are primarily from the ultimate borrowers of these funds. ( Agwuegbo & Olowokudejo, 2011).
One of the indices for measuring the development of any economy is the size and maturity of its insurance industry. Insurance industry acts as the absorber of the risk and uncertainty associated with economic activities, and its absence can greatly reduce the growth of economic activity. Most Nigerians especially the rural dwellers are ignorant of significant of the insurance industry.
Role of the Insurance sector in mitigating sudden and devastating occurrences thereby stimulating economic growth cannot be overemphasized. ( Olulekan, and Akinlo, 2013). Both in developed and developing countries, insurance sector contributes to economic growth both sectorally and geographically. Since insurance sector has linked with sectors such as industrial, transportation, Agriculture, mining, petroleum and trade both locally and internationally, its relevance to general human activities has continued to grow for all ages as all categories of risks increase.
According to Arrow, (1971) , Roth and Stylists cited in Seyed, et al. (2010) one of the main benefits of the Insurance is the fact that it allows the insured to balance their income whenever an adverse event occurs, or on the condition in which such event does not take place, and this is done through the payment of premium and the receiving of compensation (Indemnity), in case of misfortune.
Several studies have found sufficient evidence to suggest that the development of Insurance Industry is related to economic growth (Ward and Zubruegg, 2000,Webb, 2000, Soon 1996, in (Osaka 1992 and Njogu, 1991 cited in Ebitu, 2012), Insurance has taken on an increasing importance as a means for individuals and groups to manage their income risks.
In the view of Ujunwa and Modebe ( 2011 p.19), insurance Industry is 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.
Global economy refers to the worldwide economic activities between various countries that are considered intertwined and thus can affect other countries negatively or positively. In
2008, the global economy went into a tailspin as stock markets around the world faltered. The world economy or global economy is the economy of the world, considered as the international exchange of goods and services that is expressed in monetary units of account (money).
1.2 Statement of the Problem
There has been a paucity of local literature and studies on the performance of the insurance industry on economic growth in Nigeria. It could be observed that the number of empirical studies on this topic is relatively scanty especially compared to those on banking sector’s contribution to economic growth, and where there is literature, there are mostly foreign- based.
More so, due to the neglect of the insurance industry in Nigeria, carrying out business in Nigeria today is very risky considering the rate of insecurity in the country. Because of the insecurity, the level of growth and development that should correspond with the country’s enormous potential has not been achieved yet even in other developing countries. Ideally, the major role of an economy’s financial sector is helping to channel resources from surplus to deficit units for investment, resource allocation mobilizes savings and provides risk management and liquidity. The insurance industry can play major roles in those functions if properly managed and thus supporting economic growth. Majority of insurance companies’ especially small-scale ones operate on a scale of the 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 living up to their expectations regarding service delivery or meeting up with regulations governing their activities ( NAICOM, 2005). Not many of them attract investors’ attention as their performance is poor. By 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’s attitudes towards demand for insurance services have been lukewarm because of lack of enough local literature on insurance activities.
1.3 Objectives of the Study.
The main objective of this study is to analyze the effect of insurance industry performance on economic growth in Nigeria.
Specific Objectives
The specific objectives of this study are:
1. To examine the effect of life- insurance penetration on economic growth in Nigeria.
2. To assess the effect of non- life insurance penetration on economic growth in
Nigeria.
3. To evaluate the effect of insurance density on the growth of Nigerian economy.
4. To Investigate the effect that insurance Industry’s expenditure has on economic growth in Nigeria.
1.4 Research Questions
This research seeks an answer to the following questions:
1. To what extent does life- insurance penetration exert positive and significant effect on economic growth in Nigeria?
2. To what extent does non- life insurance penetration exert positive and significant effect on economic growth in Nigeria?
3. How far does insurance density have a positive and significant effect on the profitability of the insurance Industry in Nigeria?
4. To what extent does insurance Industry’s expenditure exert positive and significant effect on economic growth in Nigeria?
1.5 Research Hypotheses
The hypotheses of this study are as follows:
1. Life insurance penetration does not exert positive and significant effect on the growth of the Nigerian economy.
2. Non- life insurance penetration does not have a positive and significant impact on economic growth in Nigeria.
3. Insurance density does not exert positive and significant effect on the economic growth of Nigeria.
4. Insurance industry’s expenditure does not have a positive and significant impact on economic growth in Nigeria.
1.6 Scope of the Study
The research is centred on the effect of insurance industry performance on economic growth in Nigeria. For proper analysis, a period of 27 years was reviewed, i.e. 1988-2014. This research covers the best performing and quoted insurance companies both with the National Insurance Commission (NAICOM) and the Nigeria Stock Exchange (NSE).
The period is about 27 years. This period is enough to assess the impact of sub-sector in the economic development of a country. The choice of this period allows for comparison of various economic development indicators such as the Gross domestic product growth rates (GDPGR), Gross domestic product (GDP), insurance premium, savings, expenditure, investment and total assets.
1.7 Significance of the Study
This study is significant because, it provides information on the relationships between the insurance industry and the Nigerian economic growth, the performance and efficiency of insurance industry which if considered, will be of benefit and useful to the following:
❖ The insured: This study will build up confidence in insured to invest more in the insurance industry, the confidence of investors to invest in Nigeria will influence the
growth of the economy positively. The study, therefore, would help investors to choose the best investment options.
❖ Policy Makers: This study provides a plat form that could assist policy makers to come up with policies capable of impacting positively on business risk management. The evaluation of alternative policy strategies based on the assumption that policy can react to data that are not available to policy makers. This study provides policy makers with a large pool of resources on improving and repositioning the insurance industry and to enhance productivity and economic growth.
❖ Insurers: The study will help the staff of insurance companies to see the need to improve their customer service, corporate governance and rebranding of their products to meet the need of the insured and the general public.
❖ Economic watchers and the General public: Economic analysts will utilize the platforms of this study in their analysis on the relationship between the insurance industry and the Nigeria economy in general. More so, the general public through the findings of this research will be better informed and educated on the kinds of risks and how to manage them effectively. The general public particularly those that are interested in the insurance industry will find this study useful because it will help them to understand more about the performance of the Nigerian insurance industry as it relates to economic growth.
❖ Financial Market Regulators: This research provides required empirical and theoretical base concerning the working of the insurance industry. Such insights will offer useful guides to insurance market regulators like the Central Bank of Nigeria (CBN) and National Insurance Commission (NAICOM)).
❖ Banks and Other Financial Institutions: Financial institutions that deal with insurance companies will find this study very important, because, it gives a fair picture of the performances of such insurance firms while in their terms of credit, whether or not to grant them credits and other considerations. It provides benchmarks for caution, lending, credit policy formulation and adjustments since the insured pays their premiums through them and the insured are also indemnified or compensated through them, especially, banks.
❖ Researchers and students: Academically, the study will assist broadening the frontier of knowledge in various ways. The study will add to literature and other areas of interest in subsequent studies, and it is also expected to provide vital information to guide future researchers in the related field. This study would contribute to existing literature in the area of finance since there is a paucity of literature on the insurance industry.
1.8 Limitation of The Study
The major limitation of this study was associated with data generation. Generating accurate statistical data from various insurance companies and financial institutions and publications covering 27 years period posed some challenges. This is because, Nigerians as at now, still have a poor attitude towards data documentation and record keeping.
The dearth of local literature on insurance is also expected to affect the quality of this work. The reason is that, although this study is meant to close a local gap, foreign theoretical and empirical studies constitute the volume of data used in the review of the literature.
More so, the time needed to go round to all the insurance companies for first-hand data collection was faced.
This material content is developed to serve as a GUIDE for students to conduct academic research
EFFECT OF INSURANCE INDUSTRY PERFORMANCE ON ECONOMIC GROWTH IN NIGERIA 1988-2014
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