IMPACT OF INSURANCE MARKET ACTIVITY ON ECONOMIC GROWTH IN NIGERIA

ABSTRACT
Insurance is one of the cornerstones of modern day financial services sector. In addition to its traditional role of managing risk, insurance market activity, both as intermediary and as provider of risk transfer and indemnification, may promote growth by allowing different risks to be managed more efficiently through promoting long term savings, encouraging the accumulation of capital, serving as a conduit pipe to channelling funds from policy holders to investment opportunities as well as mobilizing domestic savings into productive investment. Insurance is an indispensable aspect of a nation’s financial system and theoretical conceptions explain that financial systems influence savings and investment decisions through lowering the costs of researching potential investments, exerting corporate governance, trading, diversification and management of risk, mobilization and pooling of savings, conducting exchange of goods and services and mitigating the negative consequences that random shocks can have on the economy. However, the level of insurance market activity which should be commensurate with Nigeria’s huge potentials has not been attained. Insurance by reducing uncertainty and volatility, smoothen the economic cycle and reduce the impact of crisis situations on the micro and macro level. But, the demands for protection against losses of life, property caused by natural disaster, crime, violence, accidents, fire are not met in Nigeria. It is against this background that this study examined the impact of life-insurance penetration, non-life insurance penetration, total insurance penetration and insurance density on economic growth in Nigeria. The study adopted the ex-post facto research design and annualized cross sectional data for 26-year period 1987-2012 were collated from the Central Bank of Nigeria statistical Bulletin, National Insurance Commission and Nigerian Insurers Association. Four hypotheses were proposed and tested using the Ordinary Least Square (OLS) regression model. Descriptive statistics and graphs were also used to complement the regression results. The results emanating from this study indicate that while life insurance penetration and insurance density had positive and significant impact on economic growth in Nigeria, both total insurance penetration and non-life insurance penetration had positive but insignificant impact on economic growth in Nigeria under the period of this study. The study therefore recommends among others, that for the insurance industry in Nigeria to exert more positive impact on the Nigerian economy, government policies concerning insurance should focus more on attracting rural communities into the insurance bracket. This will assist at enhancing savings therefore providing funds for investment into the Nigerian real sector.
 
CHAPTER ONE
INTRODUCTION
1.1       BACKGROUND OF THE STUDY
Insurance is one of the cornerstones of modern-day financial services sector. In addition to its traditional role of managing risk, insurance market activity, both as intermediary and as provider of risk transfer and indemnification, may promote growth by allowing different risks to be managed more efficiently, promoting long term savings and encouraging the accumulation of capital, serving as a conduit pipe to channeling funds from policy holders to investment opportunities, thereby mobilizing domestic savings into productive investment (Skipper, 1997; Arena, 1998).
 
Insurance is often defined as the act of pooling funds from many insured entities in order to pay for relatively uncommon but severely devastating losses which can occur to these entities (Omoke, 2012). The insured entities are therefore protected from risk for a fee, with the fee being dependent upon the frequency and severity of the event occurring (Encarta dictionary, 2009) hence, it is a commercial enterprise and a major part of the financial services industry. Adebisi (2006) argues that insurance is an intricate economic and social device for the handling of risks to life and property. It is social in nature because it represents the cooperation of various individuals for mutual benefits by combining together to reduce the consequence of similar risks. As every new area of risks, and since with every passing day, a new insurance package amount to take care of more and more areas of risks and this increases insurance booms consequently, Vaughan (1997) expresses insurance as an arrangement with a company in which you pay them regular amounts of money and they agree to pay the costs if it occurs.
 
Agbaje (2005) defines insurance as the business of pooling resources together to pay compensation to the insured or assured on the happening of a specified event in return for a periodic consideration known as premium, therefore, an insurance contract is usually evidenced by a document called the insurance policy which is usually signed at the foot by the insurer or assurer or his agent. Gollier (2003) argues that insurance involved the transfer of risk from an individual to a group, sharing losses on an equitable basis by all members of the group.
As opined by Dickson (1960), insurance is designed to protect the financial wellbeing of an individual, company or other entity in case of unexpected loss. According to him, some forms of insurance are required by law; while others are optional agreeing to the terms of an insurance policy creates a contract between the insurer and the insured. Thus, insurance acts as a promise of reimbursement in the case of loss, paid to people or company so concerned about hazards they have prepayments to an insurance company (Ajayi, 2002). According to Osoka (1999), the insurance industry is vital to the wellbeing and smooth functioning of a modern economy and as such for developing country like Nigeria; it can also act as a catalyst of economic growth by helping to accelerate the process of qualitative structural transformation. Bowers et al. (1997) views insurance system as a mechanism for reducing the adverse financial impact of random events that prevent fulfillment of reasonable expectations and Osipitan (2009) argues that the insurance business is vital to the financial system due to its role in helping people and businesses to manage their resources and mitigate risk efficiently.
 
Agbakoba (2010) states that insurance practice has come a long way since the time when Lloyd’s sent runners to the water front to pick up news of ship movements and later would send policy around London for subscription by anyone with sufficient means. The origins of modern insurance are intertwined with the advent of British trading companies in the region and the subsequent increased inter-regional trade. Increased trade and commerce led to increased activities in shipping and banking, and it soon became necessary for some of the foreign firms to handle some of their risks locally (Uche and Chikeleze, 2001). This origin was influenced  according to Ujunwa and Modebe (2011), by two factors; first, the expansion of cash crop production for exports, and the upward surge in economic activities in the 1890s; second, the British desire to protect its interest and properties in the protectorate of West Coast of Africa.
 
This view of origin of the Nigerian Insurance industry was supported by Badejo (1998) who confirmed origin of insurance in its modern form was introduced into Nigeria by the British in the closing years of the 19^th century with the establishment of trading posts in what is now known as Nigeria towards the end of the 19th century by European trading companies mostly British. These foreign companies started effecting their insurance with established insurers in the London insurance market. However, as time went on, some British insurers appointed Nigerian agents to represent their interest in the country. These agents later grew into full branch offices of their parent companies in Britain. Osunkunle (2002) opines that the first branch office in Nigeria was the Royal Exchange Assurance in 1921, later followed by other British companies.
 
Hausell (1990) submits that historically, only one insurance company operated in the country between 1914 and 1948. This was the overseas branch office of the Royal exchange assurance company operating from its head office in the United Kingdom. The first indigenous company to be established in Nigeria was African insurance company in 1950 by Dr. Kingsley O. Mbadiwe; this was to be followed by the Nigerian general insurance company in 1951 and the lion of Africa insurance company in 1952. Since then, the Nigerian Insurance industry has continued to grow, both in number as well as in business.
 
Insurance is an indispensable aspect of a nation’s financial system and theoretical conceptions explain that financial systems influence savings and investment decisions and hence long-run growth rates through the following functions; lowering the costs of researching potential investments; exerting corporate governance; trading, diversification, and management of risk; mobilization and pooling of savings; conducting exchanges of goods and services, and mitigating the negative consequences that random shocks can have on capital investment (Levine, 2004). Financial intermediaries support development through the improvement of these functions (i.e., the amelioration of market frictions such as the costs of acquiring information, making transactions, and enforcing contracts and allowing economies to more efficiently allocate resources (savings) across investments). However, the positive effects of financial development are tailored by the macro policies, laws, regulations, financial infrastructures and enforcement norms applied across countries and time.
 
The importance of the insurance industry as an aspect of the financial system has been neglected over the years as most studies on the interaction between the financial sector and economic growth has focused mainly on the banks and the stock market. However, recently, growing attention has shifted to the interaction between the non-bank financial intermediaries such as the insurance companies because of the work of King and Levine (1993a, b) where it was revealed that non-bank financial intermediaries such as the insurance companies have over the years played important roles in enhancing the efficient functioning of the financial system through its intermediation function.
 
From the foregoing, it could be observed that the number of empirical studies is relatively small, especially in relation to those on banking contribution to economic growth. In order to contribute to filling the gap, the study focused on examining the insurance-growth nexus using Nigerian data from 1987 to 2012.
 
 
1.2       STATEMENT OF PROBLEM
 
The level of growth and development which should be commensurate with Nigeria’s huge potentials has not been attained and may never be attained since independence (Oluoma, 2010).  Thus as opines by Oluoma (2010), several factors have been advocated for this lack of growth of the Nigerian economy and among such notable factors is inadequate funding for investment purposes which have limited insurance penetration in the economy.
 
The major role of an economy’s financial sector is helping to channel resources from surplus unit to the deficit units for investment. Therefore, the financial sector improves the screening of fund seekers and the monitoring of the recipients of funds, thus improving resource allocation, mobilizes savings, lowers cost of capital via economies of scale and specialization, provides risk management and liquidity. Insurance companies could play a major role in these functions if properly managed thus, supporting economic growth. However, in Nigeria, based on the nation’s experience of stunted growth; the insurance sector has not actually contributed meaningfully in its role of effectively mobilizing funds for productive investment which could lead to growth.
 
The major functionality of the insurance on the client side is risk transfer. Usually the insured pays a premium and is secured against a specific uncertainty. By reducing uncertainty and volatility, insurance companies smoothen the economic cycle and reduce the impact of crisis situations on the micro and aggregate macro level. However, the demand for protection against loss of life and property caused by natural disaster, crime, violence, accidents, are not so demanded in Nigeria thus the purchase, possession and sale of goods, assets and services which are often facilitated by the indemnification of the insurance thereby not enhancing growth. Therefore, the assured safety of life and property which enhances trade, transportation and capital lending and many sectors are not heavily reliant on insurance services.
 
It is against the background of insufficient funding from major financial sectors of the economy that could drive Nigeria’s economic wellbeing, alternative sources of funding becomes imperative that it behooves researchers and policymakers to attempt at examining the role of insurance in enhancing economic growth. However, there seems to be paucity of studies especially in developing economies that this study examined the impact of the Nigerian insurance market on economic growth.
 
1.3       OBJECTIVES OF THE STUDY
The general objective of this study is to examine the impact of insurance on economic growth in Nigeria. However, to achieve this, the specific objectives are:

1. To assess the impact of life-insurance penetration on economic growth in Nigeria,
2. To assess the impact of non-life insurance penetration on economic growth in Nigeria,
3. To evaluate the impact of total insurance penetration on economic growth in Nigeria and
4. To investigate the impact of insurance density on economic growth in Nigeria.

 
1.4       RESEARCH QUESTIONS
As a follow-up to the specific objectives of this study, the following research questions emanated. These are:

1. To what extent does life insurance penetration have positive and significant impact on economic growth in Nigeria?
2. To what extent does non-life insurance penetration have positive and significant impact on economic growth in Nigeria?
3. How far does total insurance penetration have positive and significant impact on economic growth in Nigeria?
4. To what extent does insurance density have positive and significant impact on economic growth in Nigeria?

 
1.5       RESEARCH HYPOTHESES
Based on the research questions raised above, the following hypotheses were formulated. These are:

1. Ho₁: Life insurance penetration does not exert positive and significant impact on economic growth in Nigeria.

Ha₁: Life insurance penetration exerts positive and significant impact on economic growth in Nigeria.

2. Ho₁: Non-Life Insurance penetration does not exert positive and significant impact on economic growth in Nigeria.

Ha₁: Non-Life Insurance penetration exerts positive and significant impact on economic growth in Nigeria.

3. Ho₁: Insurance penetration does not exert positive and significant impact on economic growth in Nigeria.

Ha₁: Insurance penetration exerts positive and significant impact on economic growth in Nigeria.

4. Ho₁: Insurance density does not exert positive and significant impact on economic growth in Nigeria.

Ha₁: Insurance density does exert positive and significant impact on economic growth in Nigeria.
 
1.6       SCOPE OF THE STUDY
The study covers the period 1987 to 2012. The reason for this base year is due largely to the liberalization of the Nigerian economy as a result of the introduction of the structural adjustment programme (SAP) in 1986. With the liberalization of the Nigerian economy, functioning of the insurance sector allowed private and foreign insurance companies to increase their cooperation with international insurance standards. The recapitalization of the industry has also led to increase in competition among the operators.  As at 31st December 1996, there were 135 insurance companies operating in Nigerian insurance market with comparative figures of 145 (1995) and 130 (1993). Most of these companies are privately owned indigenous shareholders (118 companies as at 31st December, 1995). Two are broadly owned by the federal government of Nigeria, these are the NICON insurance corporation and Nigeria agricultural insurance company limited. Six were wholly state government owned as at 31st December, 1995 while the remaining 19 were owned by a combination of any of the following Private companies and Government companies. As at 31^st December, 1999, about 15 companies in which government previously owned shares are now completely privatized, while the 2003 Insurance Act has repealed the aspects of monopoly of insurance business by NICON and Nigeria Re. The two institutions are now fully commercialized and privatized to pave way for a healthy competition in the market. As at 2007 after recapitalization, the number of insurance companies reduced to 49, with 2 Reinsurance companies as there were mergers and acquisitions which resulted in efficiency and effectiveness in the market. However, as at December 2012, the number of companies has increased to 62 made up of 59 insurance companies and 3 specialist reinsurance companies.
 
 
1.7       SIGNIFICANCE OF STUDY
 

1. POLICY-MAKERS

This study is very significant first because of its expected usefulness to formulators of insurance policy in Nigeria. Since the enactment of the first insurance legislation in 1961, several insurance policies and guidelines have been formulated, and new insurance regulations enacted to encourage the development and sustenance of insurance consciousness and awareness and ensure the penetration of insurance in Nigeria. Most of these policies and laws have failed to achieve the desired objectives. This study will serve as an eye opener to policy makers by revealing the current level of insurance awareness and factors influencing or militating against the cultivation of insurance awareness/habit in Nigeria. It will also guide them in the formulation and implementation of appropriate insurance policies and enactment of insurance laws that will bring insurance services nearer to the people at the grassroots and inculcate good insurance consciousness and habit into the Nigeria populace. Thus, this study will assist policy makers in formulating policies that conforms to the objectives of enhanced growth and productivity of the Nigerian economy.
 

1. ACADEMIC PURPOSE

This study will also be of much use to students and lecturers of insurance, actuarial science, banking, finance and economics, and other researchers who may wish to carry out further studies on impact of insurance or investment of insurance funds or other related topics. The study will serve as a ready-made database for them to begin with. The study will also serve as a further contribution to knowledge in the areas of insurance, banking, finance and national economic development. It will be particularly useful to foreigners who may need to study the development of insurance business in Nigeria as one of the leading developing countries of Africa and the investment opportunities available.
 

1. GENERAL AND INTERESTED PUBLIC

The study is also very significant because of the effect the findings will have on the Nigerian populace in general. By encouraging the development of good insurance culture, awareness and penetration of insurance in the rural and urban sectors, the study will help to increase the level of patronage of insurance products, understanding of the benefits of insurance as a financial solution to risks, and the deepening of the density of insurance, and as an efficient savings, credit and investment mechanism. This will in turn lead to increase in the number of insurance policyholders, increase in volume of insurance business, gross premium income, increased contribution to the Gross Domestic Product and economic growth and wellbeing of the populace.
 
1.8       OPERATIONAL DEFINITION OF TERMS
The following terms are defined in line with its use in this study.
Life insurance penetration: This is total life insurance premium divided by gross domestic                                                         product.
Non-Life insurance penetration:     This equals total non-life premium divided by gross                                                                          domestic product.
Total Insurance penetration: This equals total life and non-life insurance premium divided by                                                    gross domestic product.
Insurance Density:                This equals total premium of insurance of life and non-life                                                               insurance divided by total population.