The Challenges of Insurance Regulation in Nigeria
The objectives o f this study were to;
i) Identify the challenges affecting the success of insurance regulation in Nigeria
ii) Find out measures that can be taken by all stakeholders to counter the challenges.
The Concept of insurance
Insurance is a social device in which a group of individuals called insureds transfer risk to another party called insurers in order to combine loss experiences, which permits statistical prediction of losses and provides for payment of losses from fund contributed (premium) by all members who transfer risk (Pritchett,1996).
Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.
According to study texts of The Chartered Insurance Institute, there are the following categories of risk:
- Financial risks which means that the risk must have financial measurement.
- Pure risks which means that the risk must be real and not related to gambling
- Particular risks which mean that these risks are not widespread in their effect, for example such as earthquake risk for the region prone to it.
It is commonly accepted that only financial, pure and particular risks are insurable.
An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount of money to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.
The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer’s promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.
An insurance policy is a contract whereby a person called the insurer undertakes against payment of one or premiums to pay to a person, called the beneficiary, sum of money where a specified risk materializes (Commercial code of Nigeria, 1960:140). Insurance system operates on the principles of pooling /sharing of risks and the law of large numbers. Pooling/sharing refers to the combination of similar insurable pure risks of individuals and organizations in a pool, predicting the probable loss to pool, and then distributing the predicted loss of the group to all those in the pool on some equitable basis (Hailu Zeleke, 2007).
History of insurance
Methods for transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively. Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel’s capsizing.
The Babylonians developed a system which was recorded in the famous Code of Hammurabi, in 1750 BC, and practiced by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender’s guarantee to cancel the loan should the shipment be stolen or lost at sea.
At some point in the 1st millennium BC, the inhabitants of Rhodes created the ‘general average’. This allowed groups of merchants to pay to insure their goods being shipped together. The collected premiums would be used to reimburse any merchant whose goods were jettisoned during transport, whether to storm or sink.
Separate insurance contracts (i.e., insurance policies not bundled with loans or other kinds of contracts) were invented in Genoa in the 14th century, as were insurance pools backed by pledges of landed estates. The first known insurance contract dates from Genoa in 1347, and in the next century maritime insurance developed widely and premiums were intuitively varied with risks. These new insurance contracts allowed insurance to be separated from investment, a separation of roles that first proved useful in marine insurance.
Insurance became far more sophisticated in Enlightenment era Europe, and specialized varieties developed. Property insurance as we know it today can be traced to the Great Fire of London, which in 1666 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 ‘the Insurance Office’ in his new plan for London in 1667. A number of attempted fire insurance schemes came to nothing, but in 1681, economist Nicholas Barbon and eleven associates established the first fire insurance company, the “Insurance Office for Houses”, at the back of the Royal Exchange to insure brick and frame homes. Initially, 5,000 homes were insured by his Insurance Office.
At the same time, the first insurance schemes for the underwriting of business ventures became available. By the end of the seventeenth century, London’s growing importance as a centre for trade was increasing demand for marine insurance. In the late 1680s, Edward Lloyd opened a coffee house, which became the meeting place for parties in the shipping industry wishing to insure cargoes and ships, and those willing to underwrite such ventures. These informal beginnings led to the establishment of the insurance market Lloyd’s of London and several related shipping and insurance businesses.
The first life insurance policies were taken out in the early 18th century. The first company to offer life insurance was the Amicable Society for a Perpetual Assurance Office, founded in London in 1706 by William Talbot and Sir Thomas Allen. Edward Rowe Mores established the Society for Equitable Assurances on Lives and Survivorship in 1762.
It was the world’s first mutual insurer and it pioneered age based premiums based on mortality rate laying “the framework for scientific insurance practice and development” and “the basis of modern life assurance upon which al life assurance schemes were subsequently based”.
In the late 19th century, “accident insurance” began to become available. This operated much like modern disability insurance. The first company to offer accident insurance was the Railway Passengers Assurance Company, formed in 1848 in England to insure against the rising number of fatalities on the nascent railway system.
In this chapter, we will describe how the study will be carried out.
Research design is a detailed outline of how an investigation took place. It entails how data is collected, the data collection tools used and the mode of analyzing data collected (Cooper & Schindler (2006). This study will use a descriptive research design. Gill and Johnson (2002) state that a descriptive design looks at particular characteristics of a specific population of subjects, at a particular point in time or at different times for comparative purposes. The choice of a survey design for this study was deemed appropriate as Mugenda and Mugenda (2003) attest that it enables the researcher to determine the nature of prevailing conditions without manipulating the subjects.
Further, the survey method was useful in describing the characteristics of a large population and no other method of observation can provide this general capability. On the other hand, since the time duration to complete the research project was limited, the survey method was a cost effective way to gather information from a large group of people within a short time. The survey design made feasible very large samples and thus making the results statistically significant even when analyzing multiple variables. It allowed for many questions to be asked about a given topic giving considerable flexibility to the analysis. Usually, high reliability is easy to obtain by presenting all subjects with a standardized stimulus; observer subjectivity is greatly eliminated. Cooper and Schindler (2006) assert that the results of a survey can be easily generalized to the entire population..
This study will be carried out in NICON in Enugu metropolis in Enugu State South east, Nigeria.
Sources of Data
The data for this study will be generated from two main sources; Primary sources and secondary sources. The primary sources will include questionnaire, interviews and observation. The secondary sources will include journals, bulletins, textbooks and the internet.
Population of the study
A study population is a group of elements or individuals as the case may be, who share similar characteristics. These similar features can include location, gender, age, sex or specific interest. The emphasis on study population is that it constitute of individuals or elements that are homogeneous in description (Udoyen, 2019). The population of the study will be all the staff of NICON insurance in Enugu metropolis Enugu state south-east Nigeria.
RESULTS AND DISCUSSIONS
This chapter examines the findings gathered from the field. Data were collected through questionnaire from primary sources and secondary sources were collected from the insurance companies and from the Central Bank of Nigeria. Findings from these primary and secondary sources are shown with tables and percentages.
CONCLUSIONS AND RECOMMENDATIONS
By analyzing the results and findings of the research from the previous chapter, the researcher draws conclusions about the characteristics, challenges and opportunities of insurance regulation in Nigeria. Finally the chapter provides some recommendations to be taken by the insurance industry of Nigeria to overcome the current challenges and to exploit the existing opportunities of the market.
The insurance business in Nigeria is not a recent phenomenon, it accounts over a century started from the establishment of the first insurance company in the country in 1905. But the growth of the sector is still underdeveloped. Nigerian insurance market is under developed. This can be explained by low level of penetration and density in the market and its low level contribution to the GDP. It contributes only 0.2% of the GDP which much lower than the performance of the insurance industry in other African countries.
The Nigerian insurance market is characterized by having a very small life insurance and higher percentage of general insurance unlike developed countries. The majority of insurance business in Nigeria is targeted at corporate market and focused on general insurance business. The contribution of life insurance for the total amount of premium generated by the industry is less than 5% (Smith & Chamberline, 2009).
According to Fortune (2013), the insurance sector in Nigeria has an aggregate capital of 1.8 billion Naira- an increase of 600 million Naira from the previous year. In paid-up capital too, there has been a welcome change in the sector. Although previously a paid-up capital of only seven million Naira (four million for general insurance and three million Naira for life insurance) was required, this has been raised to 75 million Naira (60 million Naira for general insurance and 15 million for life insurance).
In the fiscal year of 2012/2013 the insurance companies in Nigeria collected combined gross premium of 4.5 billion Nairafrom general insurance. In that year the state owned Nigerian insurance Corporation and other 15 private insurance companies collected net premium of 2.9 billion Naira; 1.9 billion Nairaof which went on to claim payments (Fortune, November, 2013
Although the insurance market in Nigeria is a young industry at its early stages of development with limited skill, capacity and management, there are a lot of opportunities to develop the sector. Having sixteen insurance companies with low amount of branch penetration around cities and towns in the country of having over 80 million population mainly agrarian dweller shows the insurance opportunities of the country are still untapped.
As it is discussed in the previous chapter the Nigerian insurance market has many challenges currently. The first challenge of the industry is the existence of price war and unhealthy competition among the insurance companies. Rather than competing with qualified and efficient service and competing with new products, the current insurance companies mostly compete with premium. Competition with price leads companies to reduce premium payments collected from insurance clients. This is unhealthy competition because it will reduce the revenue of the insurance industries. In turn, insurance companies focus on reduction of premiums to attract customers rather than focusing on quality service. It also back fires on insurance companies by putting pressure while settling claims payments to those claimants.
Lack of adequate qualifies insurance professionals is also the current challenge of the insurance industry. Insurance companies in Nigeria start out insurance transaction with little understanding of it. This is because there is little specialized training in the subject of insurance. As result, insurance companies lack experienced and qualified staff. This makes insurance companies inefficient while determining risks and giving professional insurance services to their customers.
Retaining existing insurance for a longer period of time is another challenge of the insurance companies in Nigeria. The existence of price war among firms and the similarity on insurance packages throughout the industry makes customers switching from the one and moving to the other frequently.
The other major challenge of the Nigerian insurance market is the current increasing rate of car accidents. This is a major challenge for the companies because the majority of their business depends on the motor insurance. The frequent happening of accidents creates pressure by increasing the workforce settling those claims and by increasing the claim costs of the insurance companies. This increasing rate of car accidents in the country also adversely affects the companies by decreasing their profits. Therefore, the current increasing rate of motor accidents is a major challenge for the insurance industry.
The new proclamation of the National Bank of Nigeria about insurance companies also creates a problem especially on new insurance companies. It obliged the new insurance companies to raise their paid up capital about seven folds (from 7 million Nairato 75 million Naira).
Even though the insurance market in Nigeria has many challenges as stated above, there are many opportunities to be exploited in the insurance industry. The existing low number of insurance companies with low level of competitiveness makes the insurance industry attractive investment. Because of the attractiveness many insurance companies are joining the insurance market.
The current existence of fast economy growth in the country creates an opportunity to the insurance companies to expand their business throughout the country by creating additional insurance customers and additional revenue. The existing economic growth in the country is creating a number of business transactions and projects which require insurance covers. This makes insurance companies to expand their business coverage in the country and able to have higher income generated from the economy.
The other major opportunity for the current insurance market is the existence of large number of government and private projects. The government is operating various mega projects all around the country. The private sector is also building large number of projects in different sectors. This boom of construction sector creates additional market for the insurance industry. This additional market will increase the revenue of the insurance industry. Therefore, the current large number of private and government projects is the major opportunities of the insurance market.
The other opportunity identified in the research is the current increasing amount of import and export trade in Nigeria. The existence of increasing international trade in the country is an opportunity to the domestic insurance market by increasing its market volume and by creating additional market. This will eventually helped the insurance market to boost its financial capacity.
The current protection given to the financial sector by the government from international competition is also an opportunity for the existing insurance companies. This is because it enables them to strengthen their capacity without the challenges of international competition.
The researcher recommends the following points to be taken by the insurance companies to overcome the current challenges and to exploit the existing opportunities of the insurance regulation in Nigeria.
-The insurance companies should avoid the existing price war and unfair completion among them. As long as the existing competition with premium causes decline in their revenues and puts pressure on them while there are many claims, they should avoid competing with price. It will also has a total negative impact on the insurance industry by reducing the share of the industry in the national market
-The existing insurance companies should take appropriate actions to make their current staff more professional and qualified in the field of insurance business. The insurance companies should create relations with higher education institutes to get specialized insurance courses from those higher education institutes.
-Insurance companies should provide better customer services to avoid the current problems of customer turnover. The insurance companies should revise their services according to their customers needs and they should be customer focused.
-Insurance companies in Nigeria should make more on creating public awareness about the current high number of traffic accidents around the country. In addition to giving efficient claim services the insurance companies should focus on preventive mechanisms to minimize the current level of car accidents by working on creating public awareness about the problem.
-Insurance companies should increase their effort on modernizing their insurance services according to international standards to be internationally competitive.
-Insurance companies should change their current operations which are done manually to automated systems to minimize their operating costs and to deliver efficient and satisfactory services to their customers.
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