The Impact of Proper Underwriting in Promoting Insurance Image in Nigeria
Chapter One
OBJECTIVES OF THE STUDY
From the above stated problems the study explores the various factors leading to improper underwriting process; and suggests how this process can be improved to aid ability of the insurer to meet their contractual obligations with the insured in times of loss.
In view of the above, this research project is intended;
- To assess the factor that will enhance proper underwriting process.
- To explore the challenges faced by underwriters in the underwriting process.
- To find out the factors militating against proper underwriting
CHAPTER TWO
LITERATURE REVIEW
Introduction
The researcher, in the course of the project, made effort to review important literature concerning the impact of proper underwriting in promoting insurance image in Nigeria, and the challenges of the underwriting process. The review was carried out under the following sub-headings:
- Conceptual clarification of Underwriting
- Historical Development of Underwriting
- Traditional Underwriting Practices
- How underwriters assess risks in insurance industry
- Challenges facing the underwriting process
- The effect of improper underwriting on insurance industry
- Prospect of proper underwriting and management
- Issues regarding the Image of Insurance company
Conceptual clarification of underwriting
The concept of underwriting has been defined by many scholars using related terms and words to justify its meaning; several definitions have been made by different authors, but common to all the definitions is the fact that underwriting involves making decisions after consideration of certain risk factors relating to the proposed risk. Underwriting is the foundation of the insurance transaction process, it is an essential element in the operation of any insurance program. Unless the company selects from among its applicants through the underwriting process, the inevitable result will be adverse selection to the company (Vaughan & Vaughan, 2008). Insurance companies will be faced with major losses if random selection of proposed risk were to be accepted, hence, the need for underwriting. Every insurance company avoids adverse selection by different means, but the most effective is through proper underwriting (Vaughan & Vaughan, 2008). It can be established vividly that underwriting involves risk measurement and evaluation leading to determination of the commensurate cost to cover that risk. It is done by grouping together similar risks for rating (Dowd et al., 2007). For the purpose of defining, Vaughan & Vaughan (2008) stated that underwriting is the process of selecting and classifying exposures. Also, NIILM University described underwriting as the process of choosing who and what to insure. In all definitions as identified by scholars, is that the end product of underwriting is to make a good decision which could be to:
- Accept risk
- Reject risk
- Limit Cover
- Make restrictions
- Premium Loading
The underwriter can choose to accept risks that have proven upon assessment to be Preferred, Standard or Sub-standard as it has been classified in the Insurance industry. The general knowledge is that for each of the three above risk classifications, the degree of risk differs. The preferred risk has the lowest degree of risk while standard risk has a lower degree of risk than sub-standard risk. In cases where the underwriter cannot classify the assessment risk under any of the three classifications, such risks are called bad risks and are only rejected if underwriting measures cannot be taken to mitigate the proposed risk. In this light, the underwriting measures include: limiting the extent of the cover to few damages, premium loading and adding restrictions. For instance, in motor insurance, an age restriction can be placed on the policy in order to restrict some people of a certain age from driving the motor car. Underwriting is pretty much the “behind the scene” work in an insurance company where they determine who is insured and how much of insurance premiums they will charge the insured. Insurance underwriting also involves choosing who the insurance company will not insure i.e avoiding adverse selection. The concept of underwriting is not systematic in nature; as a matter of fact it is not a programmed activity. Macedo (2009) stated that “underwriting is considered to be an art and not a science and as such there is an important space for a subjective assessment of the risk by the underwriter.” To be able to properly assess the risk, insurance companies have developed underwriting guidelines/selection tables to which all underwriters must abide.
It is standard for insurance companies to have guidelines or selection tables that identify various classes according to the likelihood of a claim (Macedo, 2009). Underwriting guidelines differ from one insurance company to the next. Each company selects the risk factors that include in its “underwriting guidelines.” These “underwriting guidelines” are very private, and insurance companies or their agents will not provide these guidelines to anyone besides their employees. Each insurance company creates its own “underwriting guidelines” to help make underwriting decisions with respect to their insurance businesses (People’s Insurance Counsel Division). According to Chiang (2014), ‘underwriting guides’ help to ensure that underwriting policy and selection decisions are made uniformly and consistently through all the companies’ territories. These guides also synthesize the insights and experience of seasoned underwriters and help the less experienced ones. It specifies the lines of insurance that will be written, the amount of coverage to be permitted on various types of exposure, the areas of the country in which each line will be written, and similar restrictions (Baranoff et al, 2009).
CHAPTER THREE
RESEARCH METHODOLOGY AND DESIGN
AN OVERVIEW
Methodology is very important in any research study because it limits and tends to guide the researcher to specific objective(s). It is very important in any study that is being conducted either to inform or to educate the people. Methodology is all about the ways and manners (i.e. the research design) the researcher tends to carry out the study in order to arrive at dependable results. So, researchers must employ known technique(s) that conforms to the study (Wilson, 2008).
The basic methods used in the collection of data for this research work were primary and secondary data, collected from randomly selected people. These methods were used in order to foster accuracy and reduce cost. The researcher used these methods in finding out the impact of proper underwriting in promoting insurance image in Nigeria. The approach used in conducting this research is descriptive and analytical.
SOURCES OF DATA
Data collection is a process of identifying subjects and gathering data from these subjects. The sources of collecting data help the researcher in obtaining the necessary information on which the results and conclusion is based. This could be primary or secondary. Primary Data are usually collected for the first time while Secondary Data are those which have already been collected and analysed by someone else.
PRIMARY DATA
Primary data are obtained directly by the researcher. The researcher is familiar with the condition under which the information was collected. It is more reliable and accurate but expensive and time consuming. Methods of Primary data collection include: Observation method, Survey method, Contact method and Experimental method. The most popular method is contact method which generally involves the use of interview, mail and telephone, but due cognizance was given to Survey method-questionnaire.
Questionnaire
A questionnaire is a set of questions designed to gather information or data for analysis, the result of which is used to answer the research questions or used for the test of the relevant hypotheses (Asika, 2000). Questionnaire is a method of gathering self report information from respondents through administration of questions. A questionnaire facilitates gathering of data from a widely scattered sample for analysis (Asika, 2000). A structured questionnaire gives respondents a number of alternative options from which they must choose the one that approximately matches their view.
This research work used questionnaire as a tool for data collection, this method is characterized by sending out some list of open ended and close ended questions. The value of the study and the instructions were explained to the respondents. Respondents were requested to complete the questionnaires, which were collected personally by the researcher from individual respondents. This ensured a high return rate and encouraged freedom of expression from the respondents.
It is against this background therefore, the researcher sent out a minimum of 3 questionnaires each to 15 Insurance companies in Lagos, which serve as a means of helping data collection. The questionnaire contains Seventeen (17) questions which are not technical in nature for the purpose of this work rather they are straight forward.
SECONDARY DATA
In carrying the research, secondary data were also used to complement the primary data. The researcher used the documentary method of collecting relevant data which is journals, seminar papers, as well as records of Insurance Companies.
POPULATION OF STUDY
The researcher population of the study is made up of the random underwriting and claims personnels of 15 Insurance Companies. More attention was given to the underwriting department and claims department.
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS
AN OVERVIEW
This chapter is devoted to presentation, analysis and discussion of data collected for the study. It also shows the findings of the study; provide the answers to the research questions in line with the objectives of the research.
Data is presented and analyzed and the hypotheses formulated in chapter one is tested for the purpose of this research a total of 60 questionnaires were distributed and 50 were completed and returned. The remaining ten (10) could not be completed as a result of invalidation and logistic problems, hence the final analyses of this project work will be based on the forty (50) questionnaires completed and returned.
CHAPTER FIVE
FINDINGS, CONCLUSIONS, AND RECOMMENDATION
SUMMARY OF FINDINGS
The research has helped in discovering certain facts that confirm and oppose previous views with respect to proper underwriting and Insurance image. From the data collected and analysis of the responses, it was revealed that most Insurance companies in the Nigeria insurance industry encourage the use of proper underwriting to promote the image of the respective insurance companies; there are certain factors that enhance and militate against proper underwriting as identified by scholars in chapter two of this research work; most Insurance companies understand that technology can promote their underwriting performance; and its absence can bring about poor underwriting of businesses; a large portion of the Insurance companies in Nigeria uses automated technology to enhance their underwriting performance; a large portion of insurance companies operational in Nigeria do carry out research about latest global development concerning underwriting most especially in the area of Technological advancement; many of the insurance companies operational in Nigeria are now conscious of the need to have trained personnel working in the underwriting and claims department respectively. In this regards, individuals in the underwriting department are trained frequently on how to achieve proper assessment of risk as opposed to the previous practice of allowing unqualified personnel underwrite risk; a large portion of the insurance companies operational in Nigeria, focus more on underwriting as a means of income than investment. Hence, emphasizing the need to ensure that the underwriting performance is highly effective and efficient; the identified factors of lack of technology, insufficient information during underwriting, inefficiency of the underwriting process and presence of unqualified personnel in the underwriting department are not totally solved, but they have reduced drastically; of the challenges identified, the most pronounced is insufficient information provided by applicants for risk assessment, followed by lack of technological facilities (updated underwriting software inclusive) and the presence of unqualified personnel in the underwriting department; the least of the militating factors against proper underwriting is the issue of inefficiency, which may not be of relevance in today’s underwriting world of Nigerian insurance companies; there have been significant improvements in the underwriting performance of many insurance companies operational in Nigeria, which according to our research had contributed to the improvement experienced in claims payment recently and the ultimate improvement in the insurance image although not yet well entrenched.
CONCLUSION
Nigerian Insurance companies are said to have bad image. In promoting this image, insurance companies have to improve their underwriting performance as GrayMatter’s Insurance Analytics proved from studies that underwriting is the core of insurance business. Proper underwriting has had an impact in promoting insurance image. In essence, proper underwriting has helped insurers maintain a profitable book of businesses as it avails insurers the capability to meet their financial obligations to the insured due to their ability to effectively predict the loss in a pool. Proper underwriting has been established to be a function of Efficiency, Adequate information for risk assessment, Use of modern technological facilities and Existence of qualified personnel in the underwriting department. To fully restore the image of insurance companies, all these functions have to be fully entrenched in the Nigerian insurance industry. If some or all the factors identified are heavily invested in and given due cognizance, the bad image of Insurance companies will be redeemed and the cogent need to trust insurance business as there will be no need to avoid claims payments where necessary will be cast into the minds of the public. It will also make them less skeptical about the operations of the Insurance companies. With the adoption of proper underwriting, Insurance companies will have the capacity to write profitable businesses, select appropriate risk and accept risk with the right conditions and terms. Also, claims payment will be managed well, leaving insurance companies with no option than to pay claims as much as they collect premium. The effects of adverse selection of risks will be minimized and the issue of insolvency in the industry will reduce, hence leading to good business dealings with the public. The bad image of insurance companies will be redeemed as they will earn a good name rather than the ‘corporate thieves’ they are commonly tagged as by Nigerians. Hence, affording the Insurance companies the financial capability to fulfill their financial obligations towards the Insured.
RECOMMENDATIONS
Having established that proper underwriting has impact in promoting insurance image in Nigeria, insurers should invest heavily in acquiring technological facilities that enhance underwriting performance. In this regards, automated underwriting software can be used as well as other technologies adopted in the insurance industry of other developed countries. Also, they should ensure to continually train their employees regularly on proper risk assessment using global standards as the benchmark. Training hubs can be built to further enhance the continuous training process. In addition, deliberate efforts should be directed at orchestrating an efficient underwriting process through the use of technology and other available means in accordance with global standards. From the research, the challenge of insufficient provision of information for underwriting contributes the most in affecting proper underwriting. In this regards, insurers should further put up frameworks that ensure that proper and adequate information is given for proper risk assessment and classification. In the area of technology, they can employ the use of Tele-underwriting to address the issues of insufficient information as proposed by Swiss Re.
SUGGESTION FOR FURTHER STUDIES
It is therefore hoped that further academic research will be undertaken by interested students into the study of the impact of proper underwriting in promoting insurance image in Nigeria.
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