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THE IMPACT OF THE GOVERNMENT POLICIES IN REGULATING THE ACTIVITIES OF INSURANCE COMPANIES IN NIGERIA


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Abstract

Regulation of Nigeria’s insurance industry has become substantially intensified in the last two decades. This paper critically evaluates the philosophy and challenges of insurance regulation in the context of post-authoritarian governance and increasing economic liberalization in Africa’s potential largest insurance market. The last two decades has witnessed among others, government regulatory intervention through the establishment of a regulator and mandatory recapitalization. This study assesses the regulatory experience of the Nigerian insurance industry prior to and after the capitalization era; spanning 1999 to 2009. Temporally, the trajectory of developments in the last decade which coincides with post-authoritarian military rule in the country is significant. As a developing economy, the Nigerian insurance industry presents an example of untapped and gross under-utilization of its boundless potentials.

 

 

 

 

CHAPTER ONE

INTRODUCTION

  • Background of the study

“Risk is a phenomenon which has been in existence since the beginning of the world. Risk exists whenever the future is unknown” (Lemon 1989: 17). This means that the word implies some element of doubt about the future and the outcome may be worse than what it had been at the moment. This man in his daily operations could be viewed as a risk manager, in that man does his best possible to reduce, eliminate, avoid, retain or share risk where they are present. Though there were some forms of risk management before the advent of insurance companies inNigeriasuch as the extended family system, age grade association and others. Insurance in its modern form was introduced intoNigeriaby British.

In 1921, the Royal Exchange Assurance Company was established and it was the first insurance company to open full branch inNigeria. In 1949, three other companies emerged. In 1958,Africainsurance company. By 1965, the number of insurance companies rose to 70. In 1977, the Nigeria Re- insurance company was established as a federal government owned insurance company. Nigeria was however under the British colonial rule up to 1960 when she gained her political independence and as a developing country. From 1960 to date a lot of insurance companies came into operation. Insurance is a modern method of sharing loss or spreading risk lightly over a great number of people so that the few unfortunate ones or persons who sustain or suffer loss do not heavy financial loss as a result of their misfortune to the community. The insured pay premium into a common pool outcome of which the unfortunate few who suffer loss are compensated.

The secondary function of insurance companies includes:

  1. Provision of loans for building on the security of a life policy.
  2. Encourage and promote commercial enterprise men and industrialist
  3. The accumulated sum of money by insurer reinvested to state approved securities and this helps to provide the state with a steady flow investment funds with which the state can provide development and promotions to the local industries which will be of benefit to the community. Insurance is a contract whereby a person called the insurer or assurer agrees in consideration of money paid to him or her known as premium by another person called the insured or assured to indemnify him against loss resulting to him on the happening of certain events. However, it was known that risk exist whenever the future is unknown and therefore insurance exist primarily to combat the adverse effect of risk.

The purpose of insurance is to compensate or indemnify the victim for his financial loss. It should be noted here that the insurance neither eliminate the loss nor stops the disaster from happening, what insurance does is to soften the blow in a purely financial sence by offering monetary compensation to the victim whereby placing him in the same financial position after loss as he was before though within the terms of the policy.

Re- insurance is the transfer of insurance business from one insurance company to another. The original insurer who obtain the insurance contract from the insured or assured is called the direct insurer or the ceding company. Re- insurance arose form the need of the original insurer to spread the risk he has undertaken. Under re- insurance contract is between the ceding company policies. Therefore in the event of a loss, the insured cannot enforce the re- insurance contract.

However, the effect of re- insurance contract on the ceding company includes:

i        Re- insurance reduces the probability of the ceding company’s ruin by assuming his catastrophe risk.

ii       Re- insurance stabilizes the ceding company’s balance sheet by taking on apart of his risk of random fluctuation risk of change and risk error.

iii      Re- insurance increases the amount of capital effectively available to the ceding company by freeing equity that was tied up to cover risk.

iv      Re- insurance enlarges the ceding company’s underwriting capacity by accepting a proportional share of risks and by providing part of the necessary reserves.

The insurance sector is made up of a large number of companies with varying sizes, among which the NAICOM was established. The government uses this commission to regulate the insurance industry. The government uses this commission to regulate the insurance industry. It was established in 1997 by NAICOM decree N0. 1 of 1997. Prior to the establishment of National insurance commission, the insurance business regulation and supervision were done by the insurance department of the Ministry of finance.

The national insurance supervisory board (NISB) was established in 1991 to take over the supervision of insurance from the director of insurance. National Insurance Commission (NAICOM) is the head by the commission finance and administration and deputy director for insurance technical.

NAICOM Decree 1 of 1997 stated the functions of NAICOM as follows:

  1. To ensure the effective administration, supervision regulation and control of insurance business inNigeria.
  2. Establishment of standards of the conduct of insurance business inNigeria.
  3. Approval of rate insurance premium to be paid of all classes of insurance business.
  4. Regulation of transactions between insurers and re- insurance inNigeriaand those outsideNigeria.
  5. Ensuring adequate protection of strategic government assets and other properties.
  6. To act as adviser to the federal government on all insurance related matters.
  7. Approve standards, conditions and warranties applicable to all classes of insurance business.
  8. To protect insurance policy holders and beneficiaries and third parties to insurance contract
  9. To publish for sale and distribution to the public, annual reports and statistics on the re- insurance industry.
  10. To liaise with and advise federal ministries, extra ministerial departments, statutory bodies and other government agencies on all matters relating to insurance contained in annual technical agreements to which Nigeria is signatory.
  11. To contribute to the educational program of the chartered institute of Nigeria and the West African insurance institute.
  12. To carry out such other activities connected or incidental to its other functions under the decrees.

1.2     STATEMENT OF THE PROBLEM

The insurance industry in Nigeria has acute shortage of high level manpower for most classes of insurance and re- insurance business. The Nigeria insurance industry does not enjoy the required public goodwill and reason for this has to do with the damage done to practice of the profession by the get rich entrepreneur who goes about the business of insurance with the little regard to the principle of the profession. As a result of this, the government has come up with so many policies aimed at the study though will save the insurance industry. The extent to which all those government policies affect insurance companies and provides solution to ensure the survival of these insurance companies is another thing. The research therefore, is indicated to examine the impact of various control measures as promulgated by government to regulate the activities of the insurance industry.

1.3   PURPOSE OF THE STUDY

The purpose of this research is essential in a direct investigation on the impact of government policies on the insurance industry inNigeria.

*        To look into the factors hindering the performance of insurance companies through the various government regulatory policies.

*        To determine the impact of those government policies on the insurance companies and the insuring public.

*        Since the insurance industry is the second largest deposit mobilization institution in the country, it therefore encourages saving which plays an important role in the social and economic well being of the country.

*        To evaluate the performance of the industry therefore, is necessary for the growth of the economy.

1.5 RESEARCH HYPOTHESES

The following hypothesis were formed to achieve the objectives of the research.

H0: The regulatory authorities are unable to carry out their roles and functions in the Nigerian insurance industry.

H1: The regulatory authorities are able to carry out their roles and function in the Nigeria insurance industry.

H0: The regulatory authorities did not contribute substantially to the manpower development in the insurance industry.

H1: The regulatory authorities have contributed to the manpower development in the insurance industry.

H0: The regulatory authorities did not make the desired impact on the Nigeria Insurance Industry.

H1: The activities of the regulatory authorities have made the desired impact on the Nigeria Insurance Industry.

H0: The activities of the regulatory authorities will not have future prospects in the Nigerian Insurance Industry.

H1: The activities of the regulatory authorities will not have future prospects in the Nigerian Insurance Industry.

 

1.4 SIGNIFICANCE OF THE STUDY

i        To enlighten the Nigerian populace about the benefit that they could drive by taken up insurance cover.

ii       To guide the policy makers when they are enacting laws concerning insurance.

iii      Ascertain the need or otherwise for government intervention through regulatory body in the insurance industry.

1.5 SCOPE OF THE STUDY

i        To determine the impact of government policies in regulating the activities of the Nigerian insurance industry.

ii       The study therefore will concentrate on the Nigeria insurance industry.

1.6 DEFINITION OF THE TERM

INSURER / ASSURER: This is the insurance or assurance company that issue out policy to the policy holder.

NSURED / ASSURED: This are policy holders in the insurance business

PERIL: This is known as a prime cause or what gives rise to the loss.

PREMIUM: This is periodic consideration payment by the policy holder to the insurance company which will necessitate compensation by the insurer to the insured.

POLICY: This is a written contract of insurance which is issued to the policy holder.

RE- INSURANCE: This is an insurance company re-insuring again a risk that had already been insured to another insurance company.

CEDING COMPANY: This is the direct insurer or the original insurer who is re-insuring the risk to another insurer.

UNDERWRITING: This is a process by which an insurance company determine weather or not on the basis it will accept an application for insurance

NAICOM: National Insurance Commission which was established by military decree on January 10, 1997 to ensure the effective administration, supervision, regulation and control of insurance business in Nigeria.

NIA: The Nigeria Insurers Association is a trade association of registered insurance companies in Nigeria.

Policy: This is a document which is the evidence of the contract between the insured and the insurer.

Premium: This is the financial consideration the policyholder gives to the insurer in exchange for the compensation he receives when he (the insured) suffers a loss.

Risk: This is the possibility of a loss occurring.

Reserve: A proportion of profit which is set aside for emergencies by a business.

Sanction: This is a form of punishment that can be used if someone breaches a rule of law guiding his or her actions.

Underwriting: The process of assessing a risk proposed for insurance and fixing proper premium rates by an expert known as an underwriter.

1.8 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study

 

 

 

 

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Author: SPROJECT NG