Reinsurance Practices and Underwriting Capacity of Insurers in Nigeria
Chapter One
OBJECTIVES OF THE STUDY
The will be conducted with the following objectives:
- To examine the relationship between reinsurance and underwriting capacity of insurers in Nigeria.
- To find out how risk selection by underwriters affect insurance companies profitability.
- .To suggest plausible recommendations on how to improve the underwriting capacity of insurance companies in Nigeria.
CHAPTER TWO
LITERATURE REVIEW
Definitions of concepts
The Vagueness of Reinsurance
International Association of Insurance Supervisors (IAIS) (2006) defines reinsurance contract as “an arrangement between a party known as (re-insurer) and another party (insurer or cedant) to indemnify against losses on one or more contracts issued by the cedant in exchange for consideration (premium). Reinsurance arrangement covers the liability which an insurer had undertaken under its own contract of insurance with its policyholder (Irukwu, 2001). In essence reinsurance business is a vague secondary market for insurance risks because it is hardly known outside insurance sector (Plantin, 2006; Oluoma, 2014). Though, risk assumed from the insured is transferred to the reinsurer by the insurer, there is no contractual relationship between the insured and reinsurer (Santosh & Upinder, 2007).
Reinsurance Utilisation
Reinsurance utilisation (RU) is a decision to purchase reinsurance by an insurer not only for the apparent current condition of risk assumed but also its future conditions (Desjardins & Dionne, 2017). The decision to reinsure can be seen as a specialised form of risk finance that may further lead to the relaxation of regulatory constraint on the ratio of capital to insurance, underwriting capacity, expected bankruptcy costs, and capital management decision (Garven &Tennant, 2003). This study conceptualizes reinsurance utilisation (RU) into reinsurance dependence (RD). Reinsurance dependence shows the potential exposure of insurance companies to the collectability problems of reinsurance (Cummins et al., 2012; Iqbal & Rehman, 2014). It is further divided into Ratio of Ceded Reinsurance (RCR) and Reinsurance Dependence Ceded Premium (RDCP). RCR reflects the volume of reinsurance transactions between insurers and reinsurers (Burca & Batrinca, 2014) while RDCP measures the degree of reinsurance concentration and reinsurance exposure of insurance companies (Cummins et al., 2012; Lee & Lee, 2012; Iqbal & Rehman, 2014 & Iqbal et al., 2014).
Performance
Performance of a business entity is very important because it leads to its survival (Ricardo& Wade, 2001). It is arguably the most important indicator of organisational success (Gavrea & Stegerean, 2011). Though, there is lack of consensus among researchers concerning universally acceptable definition of performance, this study conceptualizes performance as a set of financial and non-financial indicators which offer information on the degree of achievement of desired results (Lebans & Eurkel, 2006). While the financial indicators are objective, non-financial indicators are subjective (Malgwi & Dahiru, 2014). The financial indicators adopted for the study include profitability measured as Return on Assets (ROA) and Return on Equity (ROE) (Tulsian, 2014).
Theoretical Foundations
The theoretical underpinning of this research can best be explained using insurance risk theories that deal with models involving premium calculation and credibility. Four theories namely, the ruin theory, the expected utility theory, credibility theory and the information asymmetry theory are reviewed here below.
Ruin Theory
Ruin theory, also known as collective risk theory is an area of actuarial science that uses models in mathematics to illustrate an insurer’s susceptibility to insolvency. The theory was introduced by Lundberg (1932) but although still young and developing, it has become one of the building blocks of the theory of stochastic processes. The ruin model describes the stability of an insurer. It deals with questions like premium rates to charge so that there are enough reserves to cover the future claims, the expected amount of claims, their severity and frequency, and how much of the company’s reserves should be invested (Kaas et al., 2008).
CHAPTER THREE
METHODOLOGY
Research Design
This study employed mixed method research design to examine the impact of reinsurance utilisation on the performance of non-life insurance companies in Nigeria. The objective of combining the two approaches is to preserve the strengths and reduce the weaknesses in both approaches. With this approach, primary method (qualitative) is embedded within the predominant secondary method (quantitative). For the quantitative approach in this study, longitudinal descriptive research design for aggregate industry data comprising of forty one (41) non-life insurance companies was employed while the qualitative approach employed exploratory research design.
Population of the Study
The population of the study comprises all forty one (41) licensed non-life insurance companies operating in Nigeria as at 1st of January, 2016 (National Insurance Commission, 2016).
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION
Hypothesis 1
The regression coefficient of LOG_PT
Table: 2
CHAPTER FIVE
Conclusion
The findings of the study established the statistical significant relationship between reinsurance utilisation and performance of non-life insurance companies in Nigeria. The findings of this study reveal that non-life insurance companies perform relatively low because they rely heavily on reinsurance protection as their main source of risk management technique. The study also stated the importance of non-financial financial performance indicators like customers satisfaction, claims management procedures, time lag and so on. The findings in the study further underline the importance of increased shareholders’ fund and improved performance so that insurance companies can increase their risk appetite vis-a-vis increase in their performance (financial and non-financial). Most importantly, insurance companies must not remain on the same threshold or retention over a long period of time.
In order to ensure that non-life insurance companies in Nigeria perform significantly so that they can reduce considerably their reinsurance utilisation, it therefore recommended that they should not only focus on the financial ratios alone but also special attention must be given to non-financials because of the intangibility nature of insurance products.
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