The Pricing and Risk Profiling in the Insurance Industry Using Nigeria as the Theatre of Study
Chapter One
Research Aim and Objectives
This research aims to critically analyse the pricing and risk profiling in the insurance industry using Nigeria as the theatre of study. The specific objectives are to:
- Examine the factors that drive pricing and risk profiling in the Nigerian Insurance Industry
- Investigate how the level of competition influences insurance pricing and risk profiling
- Evaluate the effect of government regulation on insurance pricing and risk profiling
- Assess how firm-specific factors drive insurance pricing and risk profiling.
CHAPTER TWO
LITERATURE REVIEW
This section critically analyses the literature on the variables influencing insurance prices in Nigeria. Theory, perspective, and conceptualisation of the link between independent factors and dependent variables are all examined in this chapter. The sections of this chapter are a theoretical foundation, an empirical review, a conceptual foundation, and a description of how the variables will be used.
Conceptual Review
Nigerian Insurance Sector
Markets everywhere, including Nigeria’s insurance industry, are inextricably related to the larger demographic, economic, and political climates in which they thrive (Vos, Hougaard, & Smith, 2011). According to the 2010 study by Enhancing Financial Innovation & Access (EFInA), just 1% of the adult population in Nigeria is insured, even though the country is the most populated in Africa and the seventh most populous in the world, with an estimated annual growth rate of roughly 3.2%. Currently, the insurance industry only contributes 0.72 percent to GDP, much less than the worldwide average of 7 percent and the African average of 3.3 percent (Swiss Re, 2020). Assets in the life industry are around half of the assets in the non-life sector, showing a low level of savings and investment insurance products, while the insurance sector as a whole in Nigeria accounts for less than 2% of GDP (IMF, 2013).
The entire sector grew at an average rate of 23% from 2012 to 2020, but it is still minimal, with a total premium income of $192 billion in 2010, representing 0.7% of GDP, and the gross written premium is estimated to be $232 billion in 2011. This is according to a report by the International Monetary Fund (2013). Seven life insurers specialising in life insurance are compared to 22 non-life insurers and 20 composite underwriters. The non-life insurance market is almost three times the size of the life insurance sector. Premiums are dominated by non-life insurance (84%). (of which motor insurance has been the dominant source of premiums for more than five years). Despite this, the Nigeria Insurers’ Association reports that the insurance market is highly lucrative, with continuous average underwriting losses (claims) that are comparatively small compared to collected premiums that have contributed to the company’s estimated 25% profit (Vos et al., 2019). The lengthy paperwork involved is typically blamed for the percentage of the low claims. The ratio of claims paid out to management/administrative and marketing costs is higher than it should be. This results in poor value for customers and damages confidence in the market.
Experience Rating System
Based on the groundwork laid by Delaporte (1965), Bichsel (1964), and Buhlmann (1962), experience ratings were first used in Europe in the early 1960s (1964). The question of how best to create a system for grading experiences has been the subject of much research. Loimaranta (1972) discovered formulae for some asymptotic features of bonus systems when such systems are seen as Markov chains. The bonus systems of Denmark, Norway, Sweden, Finland, Switzerland, and Germany were analysed using this technique by Vepsäläinen (1972). In order to determine the best course of action for a given problem, Lemaire (1976) developed an algorithm owner of a policy. The bonus systems of Denmark, Norway, Sweden, Finland, Switzerland, and West Germany were analysed using this technique.
Hastings (1976) proposed a basic model as a Markov decision problem that could be addressed using dynamic programming under the assumptions that claim frequency is Poisson and damage severity is negative and exponentially distributed. A merit-based rating system for automobile third-party liability insurance was calculated by Lemaire (1979). The findings are then applied to a real-world portfolio owned by a Belgian firm and contrasted to the premium structure suggested by the anticipated value principle. Numerous actuarial uses for the Markovian analysis of BMS have been suggested (Mesike & Adeleke, 2016).
Norberg (1976) inferred optimum scales; Centeno and Andrade (2002) inferred optimal scales for bonus systems that were not first-order Markovian processes. Lemaire (1988) researched the experience rating mechanism for auto insurance by comparing the bonus-malus system in 13 European nations based on three metrics: the relative stagnant average premium level, the effectiveness of the bonus-malus systems, and the average ideal retention. This research led to the identification of five principles that should be followed when designing a bonus-penalty structure.
Lemaire and Zi (1994) examined 30 BMS from across the globe and concluded that economic development and culture have a role in the design of a BMS.
Park, Lemaire, and Chua (2009) used principal component analysis and regression analysis to assess the consumer-hostiles of 16 Asian BMS and their association with cultural and economic characteristics. This research reveals that cultural factors like aversion to uncertainty have a role in determining how much weight is given to the benefits of management consulting (BMS). Analysis of the no-claim zone using Markovian techniques and data from the India Regulatory and Development Authority, Nath and Sinha (2014) revealed that NCD rates and the likelihood of claims are not proportional.
CHAPTER THREE
METHODOLOGY
Research methodology, including its rationale, population of interest, sample size, sampling strategy, equipment for collecting data, analysis of such data, and any relevant ethical considerations, are all presented in this section.
Population
According to Orodho and Kombo (2002), the term “target population” refers to all the entities or individuals that comprise the research focus. The research surveyed 146 workers from Jubilee Insurance’s three primary departments. Unlike with the full company, the researcher had relatively easy access to personnel from the sub-divisions. Therefore, segmenting managers into target groups is a practical strategy.
Methodology
Descriptive research methods were employed for this investigation. For one thing, “descriptive research methodology is ideal for educational fact- gathering and delivers a lot of extremely accurate material,” as stated by Mugenda & Mugenda (2012). When conducting a study, descriptive survey research yields statistical data, as Orodho and Kombo (2002) mentioned. Since the design allowed the researcher to collect data on insurance policy and pricing, it is suitable for the study.
CHAPTER FOUR
RESEARCH FINDINGS AND DISCUSSIONS
Introduction
This chapter undertakes to analyse and discuss the data collected from the respondents in relation to research objectives and quantitative analysis and qualitative analysis. The quantitative data was analysed using tables, charts and percentages while qualitative analysis was presented through content analysis.
CHAPTER FIVE
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
Introduction
This chapter comprises of summary and conclusion of the study based on the findings detailed in chapter four. It also provides recommendations based on the study “s conclusions which can therefore lead to appropriate mechanisms to insurance pricing in the Nigerian sector.
Summary of Findings
The majority of respondents (42%) agreed that claim settlement substantially impacted insurance cost. This suggested that, depending on the pace at which the insured anticipates the claimed amount, resolving insurance claims affects insurance price. In addition, early inspection of claims meant that the amount waived was modest based on assured circumstances, and 49% of respondents agreed that a committee should be established to evaluate appeals filed on insurance claims. This suggested that most insurance firms had pending appeals that hampered claims settlement and needed to be evaluated. What the responder realised about the impact of management choices on the claims processing. It was determined that the management’s choice on claim settlement was impacted by the proportion of claims that were handled on time, the relative profitability of the claims, customer feedback, and the amount of time required to make proper judgments. According to the findings, insurance company management was swayed to give the green light to claims processing after considering the elements as mentioned earlier.
In summary, the results showed that sales promotion was successful. This meant that, generally speaking, sales promotion is enough to determine insurance price models. Regarding the impact of sales promotion on insurance price, as seen by the respondents. A lack of technical training and experienced employees impeded appropriate interpretation of insurance pricing laws, and the results suggested that insurance businesses should reorganise their marketing operations in response to changes in the insurance industry. This suggested that insurance sales promotions ought to focus on educating consumers about the benefits of the coverage price, the insurance market is always evolving, and premiums must be adjusted accordingly.
According to the results of the research, the government also plays a significant role in controlling insurance prices in Nigeria. According to research conducted on the topic of government regulation policies and insurance pricing, it was discovered that insurance policy and pricing regulates business competitiveness of insurance markets and maintains their profitability, while insurance policy and pricing also heavily influenced decisions regarding insurance shields and insurance investments. The results showed that insurance pricing in Nigeria’s insurance business was affected by the extent of competition. It was also obvious that the price of insurance plans rose due to intense competition. In addition, the data showed that insurance providers use under-pricing strategies to stay competitive. According to the findings, more competition leads to cheaper insurance rates.
Conclusions
The research shows that insurance premiums are determined by the claim settlement, sales advertising, government regulating policies, and degree of competition. Regarding the first goal, the research found that insurance companies did not look into customer appeals. Unresolved appeals were also cited as a cause of delays in the insurance claims settlement procedure. Management’s choices gave the go-ahead to process claims, therefore, that’s what happened.The research found that sales promotion was adequate for developing price models for insurance policies. Also, it was clear that sales promotion is a useful instrument for insurance pricing because of the way it is designed to account for changes in the insurance market.
The research found that the government of Nigeria has a significant influence in controlling insurance prices in the country. It seems that government regulations protecting insurance firms from social and political meddling would benefit everyone. This demonstrates how insurance companies model their pricing structures after the regulatory framework established by governments.Furthermore, the research finds that the presence of competition impedes insurance pricing models. This is because in a competitive insurance market, the degree of competition has an impact on the price that consumers pay. In this way, more competition leads to cheaper insurance rates.
Recommendations
Based on the findings, the following recommendations were made;
- One of the biggest obstacles to providing high-quality service was a lack of appropriate training in claim settlement processes. The research concludes that insurance companies may improve the speed with which they settle claims and make decisions by automating and updating their technology infrastructure.
- Insurance companies should hire only qualified and skilled salespeople to increase the value of insurance goods to customers. In order to expand their services into attractive new insurance markets, they need use competitive tactics.
- There has to be a level playing field for the insurance industry in Nigeria, and the government may do this via the Insurance Regulatory Authority. As a result, insurance companies will be less likely to engage in unethical behaviour.
- In order to stay competitive, the report suggests that the insurance industry diversify its offerings. This is because several insurance companies provide very similar plans. With so many alternatives already available, it will be very difficult to establish a foothold in the market. Also, by spreading their risks, insurance companies may increase their market share and decrease their dependence on any one client.
Suggestions for further study
Further study should be done using other variables that are related to the study. The studies should highlight various interactions not addressed by the researcher that affects insurance pricing in the Nigerian market. Moreover, a study can be done on the same topic with a larger sample to provide more insight on insurance pricing.
REFERENCES
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- Africa Insurance Barometer (2017), Market Survey, African Insurance Organization Publication, Douala, Cameroon. Retrieved from www.african-insurance.org
- African Development Bank. (2009). The financial crisis and access to financing. Retrieved from
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- Agarwal, A. (2008), “Repudiation the last resort”, IRDA Journal, September, pp. 23- 25.
- Amoroso, C. (2011) Driving Operational Excellence in Claims Management.
- Retrieved from http://www.deloitte.com
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