The study examined the impacts of insurance industries on Nigeria’s economic growth from 1981 – 2015 using ordinary least squares estimation method and secondary data sources obtained from central bank of Nigeria statistical bulletin. The study provided evidence that insurance sector exerted a positive significant effect on Nigeria’s economic growth. The study therefore recommended that if government wants to grow the Nigerian economy, it should focus on the development of the insurance sector. Furthermore, policies that will bring insurance services to the people should be formulated and implemented by the government.
- BACKGROUND TO THE STUDY
The role of the insurance sector in mitigating sudden negative occurrences thereby stimulating economic growth cannot be over emphasized. Both in developed and developing countries, insurance sector contributes to economic growth both sectorally and geographically. Since insurance sector has links to 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. Recently, several interesting lines of research have begun to map the specific contributions of insurance to the economic growth processes as well as to the wellbeing of the poor. In particular, several studies have focused on the relationship between insurance and economic growth.
The origin of insurance in Nigerian can be traced to the activities of European merchants in the West African coast. This was influenced 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 Africa. According to Uche and Chikeleze (2001), increased trade commerce (in Nigeria) led to increased activities in shipping and banking, and it soon became necessary for foreign firms to handle some of their risks locally. They further show that “trading companies were therefore subsequently granted insurance agency licenses by foreign insurance companies”. The Nigerian economy at that time depended so much on agriculture, so the major risk the European merchants were confronted with, was the risk of transporting their cash crops to Europe. This accounted largely for the dominance of marine insurance in the country between 1983, when the first insurance agency came into force in Nigeria, and 1942, when marine insurance dominance was marginally diluted. In the country’s post-independence era, another characteristic of the insurance industry was the dominance of non-indigenous insurance companies.
The Obadan Commission of 1961 was set up to review the situation of the Nigerian insurance industry. The outcome of Obadan Commission gave rise to the establishment of Insurance Companies Act of 1961. Arising from the Act, the number of insurance companies in Nigeria increased to 70 in 1976. Of the 70insurance industries, fourteen were foreign owned, ten were wholly owned while forty six were indigenously owned. The upsurge in the number of indigenous insurance industry, in the main, could not transform to efficiency, as foreign domination was still prevalent in terms of volume of business. The fallout from this was the heavy drain on Nigerian foreign exchange earnings.
The introduction of Structural Adjustment Programme, led to a phenomenal increase in the number of insurance companies in Nigeria. For instance, the number of insurance companies increased to 110 in 1990. The financial system reforms of 2004, led to a dramatic change in the insurance industry.
The National Insurance Commission in September 2005 set in place capitalisation requirements for insurance companies operating in Nigeria. The Commission stipulated Naira2 billion for life insurance, Naira3 billion for general Insurance, and Naira5 billion for composite insurance or have their operating licenses revoked. Insurance companies were given till February 27, 2007 to comply with the new directives. According to Research and Market (2009), of the 104 insurance companies and four reinsurance companies that existed before there forms, only 49 underwriters and two reinsurers met the new capital requirements and were certified by the government in November 2007. Also, of the 312companies listed on the exchange with 36 industry classification as at 2011, insurance industry has the highest number of individual firms listed on the exchange.
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 (1993) 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 importance and roles of Insurance on the Nigerian economy using Nigerian data from 1980 to 2015.
- STATEMENT OF THE 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 opined 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 inits 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, that alternative sources of funding becomes imperative making researchers and policymakers to attempt to examine the role of insurance in enhancing economic growth. Further, there seems to be paucity of studies especially in developing economies which seeks to examine the role of insurance industry on economic growth of Nigeria. This present study attempts to fill this gap. In essence the study will seek to answer the following research questions:
- What is the role of insurance industries towards the growth and development of Nigerian economy
1.3 OBJECTIVE OF THE STUDY
The broad objective of this study is to determine the effect of the insurance industry to the growth and development of the Nigeria economy
The specific objective includes
- To examine the role of insurance industries to the growth of the Nigerian economy.
1.4 RESEARCH HYPOTHESES
Hypotheses of this work are stated in the null and alternative forms as follows:
H0: Market capitalization of insurance companies has no significant impact on the growth of Nigeria economy.
1.5 SCOPE OF THE STUDY
The study covers the period 1980 to 2015. 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.
1.6 SIGNIFICANCE OF THE STUDY
This research work will enable the pioneers in the insurance industry, having outlined the factors or problems militating against the performance of insurance sector, to articulate policies and strategies that will enhance the overall growth and development of the industry so as to positively impact on the economy with regards to vision 2020.
Furthermore it will enable the relevant government authorities, to appreciate the need for a reduction in policing the affairs of the industry will be made. This will ensure that insurers are given a free hand to operate within the arbit legitimacy.
The findings of this research will also benefit under graduates in the universities. It will add to the volume of literature that is available in the library on the topic and also serve as a source of reference for further research.
1.7 OPERATIONAL DEFINITION OF TERMS
INSURANCE: Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured.
MARKET CAPITILAZATION: Market capitalization refers the total dollar market value of a company’s outstanding shares. Commonly referred to as “market cap,” it is calculated by multiplying a company’s shares outstanding by the current market price of one share
Economic Growth: According to Investopedia, Economic growth is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. It can be measured in nominal or real terms, the latter of which is adjusted for inflation.
Interest Rate: Interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate.