The Actuarist Analysis of Nigeria’s Re-insurance Management in the Development of the Economy
Chapter One
Objective of the study
This research work is set to achieve the following objectives.
- To determine the level of qualified personnel in reinsurance industry.
- To evaluate the performance of reinsurance company in Nigeria
- To determine the contribution of the reinsurance industry to the economic development in Nigeria
- To ascertain the role of the acturist in the development of reinsurance business in Nigeria
- To examine reinsurance as the pillar of insurance business and practice in Nigeria.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
Conceptual frame work
Park (1799) in his study, discussed that: “re-insurance, as understood by the law of England, may be said to be a contract, which the first insurer enters into, in order to relieve himself from those risks which he has incautiously undertaken, by throwing them upon other underwriters, who are called re-assurers”. Munich Reinsurance America (2010) sees Reinsurance as transaction whereby one insurance company (the “reinsurer”) agrees to indemnify another insurance company (the “reinsured, “cedant” or “primary” company) against all or part of the loss that the latter sustains under a policy or policies that it has issued. For this service, the ceding company pays the reinsurer a premium.
Croatian Insurance Act (2013) reinsurance is a major financial activity as it allows direct insurance companies, by facilitating a wider distribution of risks at worldwide level, to have a higher underwriting capacity to engage in insurance business and provide insurance cover and also to reduce their capital costs; furthermore, reinsurance plays a fundamental role in financial stability, since it is an essential element in ensuring the financial soundness and the stability of direct insurance markets as well as the financial system as a whole, because it involves major financial intermediaries and institutional investors.
Outreville (2002:59) defined reinsurance as “the transfer of liability from the primary insurer, the company that issued the insurance contract, to another insurer, the reinsurance company. The business placed with a reinsurer is called a cession of an insurance company. An insurance company’s policyholders have no right of action against the reinsurer, even though the policy holder is probably the main beneficiary of reinsurance arrangements. According to the author, a reinsurance contract therefore deals only with the original insured event or loss exposure, and the reinsurer is liable only to the ceding insurance company”. Similarly, Wehrhahn (2009:1) defines reinsurance as “a financial transaction by which risk is transferred (ceded) from an insurance company (cedant) to a reinsurance company (reinsurer) in exchange of a payment (reinsurance premium)”. The author affirmed that reinsurers are professional entities that exclusively deal with the activity of reinsurance.
Patrik (2001) posits that the reinsurer reciprocally agrees to indemnify the reinsured for a specified share of specified types of insurance claims paid by the cedant for a single insurance policy or for a specified set of policies. “Reinsurance can be considered as one of the most important capital and risk management tools which are available to the primary insurance companies. The term insurance simply refers to the acceptance of the risk by a company which is engaged in insurance business. The company accepts this risk for consideration called premium” (Swiss, 2002).
Woldegebriel (2010) opined that a professional reinsurance company can be a multi-national organization operating through a subsidiary or branch offices in different countries, or licensing reinsurance brokers or on a direct basis with its ceding companies. The author also established that reinsurance in turn reduces its underwriting risk by purchasing reinsurance coverage from other reinsurers both domestic and international referred as a retrocession and the assuming reinsurer called retrocessinnaire. Reinsurance is one of a number of options or tools to reduce the financial cost to insurance companies arising from the potential occurrence of specified insurance claims, thus, further enhancing innovation, competition, and efficiency in the marketplace (Patrik, 2001).
Evaluation of Economic Impact of Reinsurance Mechanism on Insurance Companies growth in Nigeria
There are many factors that can be expected to relate to the sustainability and financial performance of insurance companies as a result of reinsurance embracement. These include profitability of the firm, which would be expected to be positively related, that is the higher the profitability rate of growth, the higher the financial performance (Obonyo, 2016). The use of reinsurance by insurance companies, therefore, has significant economic impacts and implications to their performance and decision making. This is evident as Swiss (2002) opined in their report that Reinsurance can be considered as one of the most important capital and risk management tools which are available to the primary insurance companies. And with no doubt, reinsurance assists in reducing the unnecessary volatility or instability in the financial statements, particularly profit and loss statement (Krvavych & Sherris, 2004).
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
According Kamau (2013) research design deals with a logical problem and not a logistical problem. The study employed an ex-post facto research design to obtain data for this study, basically to establish the relationship between reinsurance mechanism and insurance companies’ sustainability in Nigeria. The justification for adopting this type of research design is because, this is research is undertaken after the events have taken place and the data are already in existence for further research.
Population of study
Also, the researcher can not in any way, manipulate the data because the situation has already taken place. The population for this study is the entire insurance companies within Nigerian insurance industry. The choice of these companies is based on the fact that they fully satisfied the listing requirement of Nigerian Stock Exchange (NSE) and must have available data required to carry out the analysis of this study.
Sampling
Five insurance companies out the fifty-eight registered companies are randomly selected for this study. Therefore, financial statements of the companies randomly selected served the purpose for data gathering for the analysis of this study, with a scope of 7 years (2009 to 2015).
Method of data analysis
This study adopted correlation analysis, and an econometric empirical analysis, using ordinary least squares (OLS) estimation technique.
CHAPTER FOUR
RESULTS AND DISCUSSION
REGRESSION ANALYSIS
In this section linear regression analysis has been adopted for measuring and predicts the future significant impact of independent variables (Net Retention ratio, Net Claim ratio, Net Commission ratio, and Ratio of Ceded Reinsurance) on the dependent variables (ROA). The application of linear regression analysis to this study is imperative for the purpose of establish the present relationship between the dependent and independent variables consider for the study, and future predictions in real-life event application, as in this study, are best averred and made by a combination of variables under the study. Principally, the target in this section is to predict the significant impact of set of independent variables on the dependent variable. That is, the extent to which (Net Retention ratio, Net Claim ratio, Net Commission ratio, and Ratio of Ceded Reinsurance), might contribute to the prediction of ROA. This analysis also aims to specify how each of the independent variables is accurate enough in predicting the ROA for the insurance companies under consideration. Therefore, the analysis performed in this study will be regarded as a model, with a view to predicts the criterion variable (dependent). Y= + + + +U.
CHAPTER FIVE
CONCLUSIONS AND RECOMMENDATION
Conclusion
For Net Retention ratio (NRR), the study concludes that it has positive impact on ROA, and is positively correlated with ROA of insurance companies. This study also concludes that Net Claim ratio (NCR) has positive impact on ROA, and is positively correlated with ROA of insurance companies. The study further establishes that Net Commission ratio has negative impact on ROA of insurance companies. Finally, the study averred that Ratio of Ceded Reinsurance has positive impact on ROA of insurance companies, and also is positively correlated with ROA of insurance companies. Therefore, the study concludes that reinsurance proxy by: Net Retention ratio, Net Claim ratio, Net Commission ratio, and Ratio of Ceded Reinsurance
Recommendations
Based on the findings of the study and the conclusions made, the following recommendations were made:
- Insurance companies diversify their investment portfolios and embrace effectively, reinsurance cover for their businesses in order to diversity their risks.
- Insurance companies in Nigeria should put proper reinsurance programs into priority, taking into consideration characteristics of their underwriting documents and consideration factors such as past loss experience, size of risks and frequency of losses. It is important for insurance companies to have optimal retention levels in their risk diversification management basically to ensure favorable financial performance.
- Appropriate effort on the part of the regulatory bodies and stakeholders in the industry should be put in place that will ensure effective underwriting and claims management practices within the industry. As effective underwriting will result to quality business being written at appropriate premiums, which directly affects performance of insurance companies.
- Appropriate effort on the part of the insurance companies and their stakeholders in the industry to properly manage their claims. This will ensure the genuine claims payment, and reduced better loss ratios and ultimately increase underwriting profits
- Insurance companies in Nigeria should ensure that reinsurance commissions earned from reinsurance contracts cover acquisition costs.
References
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- Agiobenebo, T. J., & Ezirim, B. C. (2002). Impact of Financial Intermediation on the Profitability of Insurance Companies in Nigeria. First Bank of Nigeria Quarterly Review, 2(1), 4-14.
- Ansah-Adu, K., Andoh, C., & Abor, J. (2012). Evaluating the Cost Efficiency of Insurance Companies in Ghana. Journal of Risk Finance, 13(1), 61-76.
- Chibuike U. Uche and B.E. Chikeleze (2001) Reinsurance in Nigeria: The Issue of Compulsory Legal Cession. The Geneva Papers on Risk and Insurance Vol. 26 No. 3 (July 2001). Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 1JF, UK490±504
- Choi, B.P. and Elyasiani, E. (2011) ‘Foreign-owned insurance performance in the US property-liability markets’, Applied Economics 43(3): 291–306.
