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NIGERIAN JOURNAL OF .· .:"f>'":.·-<X-»····

·ACCOUNTING RESEARCH
 .

-/
2004)

Nigerian Journal
of
Accounting Research
(A bi-annual publication of the Department of Accounting,
Ahmadu Bello University, Zaria)

Volume 1, Number 2, December, 2004

ISSN: 978-125-193- X

Publish~d by

Department of_Accounting
Kongo Campus,
Ahmadu Bello University,
P.M.B. 1013, Zaria,
Kaduna State -Nigeria

irm' s
1tical
ne of

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Printed in Nigeria by ows:
Ahmadu Bello University Press Limited ncial
P.MB. 1094 The
Zaria, Kaduna State, Nigeria
. .. .ness
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Nigerian Journal of Accounting Research Vol. 1, No.2 (December 2004)

THE INSURANCE INDUSTRY AND NIGERIANECONOMIC DEVELOPMENT

BY

F.O. IYOHA• AND 0. RICHARD••

ABSTRACT

Insurance arises from a contract between an insurer and an

assured/insured, whereby the former undertakes to provide against a risk on
behalf of the latter. The main function of insurance companies is to provide
compensation against risk and also to provide long-term capital to government
and corporate bodies. These functions are very crucial to the economy. Arising
from the above, this study investigates the contribution of insurance companies to
the economic development of Nigeria. The data used in the study was obtained
from the annual reports and statement of accounts of the Central Bank of Nigeria
(CBN) . The data was analyzed using the method of Ordinary Least squares
(OLS). The main finding of this study is that the insurance industry has not
actually contributed much to Real Gross Domestic Product in Nigeria betWeen
1970 and 2002. The study suggests that the government should provide the
enabling environment for the industry to thrive, to carryout enlightenment
campaigns and to increase the capital base of the operators in the industry.

BACKGROUND TO THE STUDY

The role of firms in the insurance industry as a player in the Nigerian financial market
has been growing through their investment activities and increase in the coverage of a wide
range of business and household risks. These roles facilitate economic and financial activities
and growth. In addition, amidst the drive to raise profitability, they have become increasingly
active intermediaries in a wide range of financial services in the country especially since the
birth of the fourth republic in 1999.
The industry now witnesses rapid expansion of branch networks and activities that have
given rise to a high demand for skilled and competent manpower. Besides the rising profile of
expenditure and activities, the industry is also growing in terms of market capitalization.
According to Bisi (2004), the market capitalization of the insurance sub-sector of the economy,
as at June 2004, stood at thirty billion Naira as against the sum of seventeen billion a decade ago.
The increased capitalization was made possible by the entry of some commercial banks into the
market following the introduction of universal banking in 2001. The signing into law of the
Insurance Act in May 2003 has also strengthened the industry. For instance, on commencement
of the application of the Act, the capital base in the industry has moved from a minimum of
ninety million Naira to three hundred and fifty million Naira for composite insurance and re-
-
insurance companies, two hundred million for general insurance business, while life insurance
companies require a minimum of one hundred and fifty million Naira as paid up capital.

* F.O. Iyoha is in the College of Business and Social Science, Covenant University, Ota, ·ogun
State.

Oguma Richard is in the Department of Accounting, Ambrose Alii University, Ekpoma.

. I
/ tt
 F.O. Iyoha And 0. Richard

Insurance companies being specialized institutions in the financial system are set up to
provide compensation against different kinds of risks in the public and private sectors of the
economy. In addition, they are also expected to be a source of supply of funds to a variety of
financial and non-financial organizations. In the light of the numerous functions of the industry,
this study seeks to assess the evidence in respect of their contributions to the growth of Real
Gross Domestic Product in Nigeria .
• THE PROBLEM
The economic environment in which companies operate in Nigeria has been very
competitive and volatile. This has affected the performance and growth of many firms within the
economy. The insurance industry in Nigeria is not an exception. The industry is expected to
provide compensation against risk, which may be suffered due to death, loss of property and
casualty. It is also expected to be a source of long-term finance for development. However, it has
not been clear as to what extent the industry has met these obligations.

OBJECTIVE, SCOPE AND RELEVANCE OF THE STUDY.

The objective of this study is to examine the contribution of the insurance
industry to the economic development of Nigeria as measured by the Real Gross Domestic
Product. The study covers the period 1970 to 2002. The study is thought to be relevant because
it would provide reference materials for policy makers, analysts, as well as researchers and all
those that are interested in seeing that the industry grows and matures.

METHODOLOGY
The paper employs a non-survey method of data collection for analysis. The main
sources of data for this study are: the Central Bank of Nigeria (CBN)'s Statistical Bulletin;
Central Bank of Nigeria's Economic and Financial Review (various issues) and the annual
financial reports of some selected insurance companies. The actual data collected were the
nominal income of the insurance companies and the Gross Domestic Product of the country for
the study period. The nominal income and the GDP were converted to real terms to eliminate the
effect of inflation. A model was developed, and using the statistical method of Ordinary Least
Square (OLS), the data was analyzed.

LITERATURE REVIEW.

Conceptofinsurance
Insurance arises from a contract between an insurer and an assured whereby the former
undertakes to provide against a risk on behalf of the assured. The insurer undertakes such risks at
a price called 'a premium.' When an assured pays such premium to the insurer, he purchases a
security for the future. According to Adesanya and Oloyede (1972), the subject matter of
insurance varies considerably from life insurance to anything capable of being insured, like real
and personal property. There is also educational and industrial insurance.
Generally, there are two types of insurance companies in Nigeria: Life insurance and
non-life. The non-life companies comprise property and casualty firms. The principal event,
which life insurance companies insure against, is death. Upon the death of a policy holder, a life
insurance company agrees to make either a lump sum payment or a series of payments to the
beneficiary of the policy. In contrast, property and casualty insurance companies insure against a
wide variety of occurrences like automobile and home insurance.

50
 The Insurance Industry And Nigerian Economic Development

From the foregoing, it can be seen that Insurance companies are financial intermediaries.
According to Fabozzi, eta/ (1997), the insurance companies function as 'risk bearers'. In this
capacity, they provide compensation against different kinds of risks associated with the conduct
of business.

The Insurance market in Nigeria

The insurance market in Nigeria is highly regulated. This is as a result of the volatile
nature of the industry. It is an industry in which the concept of 'utmost good faith' is practiced
and seen to be practiced. There are various laws regulating the industry in Nigeria. These
include:
(a). The Insurance Act 2003;
(b). The National Insurance Commission Act 1997;
(c). T.he Motor Vehicle (Third Party) Insurance Act; (2003)
(d). The B8nks and Other Financial Institution Act (1991)
(e). The Companies and Allied Matters Act, 1990.

Role of the insurance industry

The role of the insurance industry in economic development of any nation is pivotal. This
is because economic development focuses attention upon the development and use of resources
to increase supply and improve the distribution of economic goods (Hiliard, 1969).
As noted by Madura (200 1), the insurance industry plays a vital and pivotal role in
financial markets as well as in economic development by supplying funds to a variety of
fmancial and non-financial organizations as well as government agencies. The Nigerian capital
market would not be complete without a mention of the insurance industry. The reason is the
pivotal role of banking and insurance in the economy. Banking provides the safe custody and
organizes the means of exchanges. These exchanges involve risks. Insurance provides against
these risks by spreading the losses of the unfortunate few over many.
Vane and Thompson (1993) indicate that insurance companies are involved in the
management of pension funds. In this regard, they accept premiums now in return for the
promise to pay a pension at a latter date.
The business of insurance in Nigeria has witnessed substantial growth in the recent past.
The industry now occupies a unique position in the socio-economic development of the country.
The growth of the industry is evidenced in the increase in premium income of over 10 billion
Naira in the last decade, and the large number of insurance companies that are quoted on th~
Nigerian stock exchange (Bisi, 2004)
This growth came about partly as a result of the promulgation by the Federal Government
of two decrees in 1997 aimed at strengthening the industry. The National Insurance Commission
(NAICOM) was established to replfice the National Insurance Supervisory Board (NISB)
through NAICOM Degree No. 1 of i997. The NAICOM is mandated to ensure the effective
administration, supervision, regulation, and control of insurance businesses in Nigeria,
conferring regulatory and supervisory power over insurance companies.
As a result of the inadequacies of the industry prior to 1997, and the changes brought
about by Decree No. 1, the Insurance Decree No. 2 of 1997 was promulgated to replace the
-
Insurance Decree No. 58 of 1991. The new Decree classified insurance business into life and
general insurance and further sub-divided life insurance into two categories for purposes of
registration, capitalization and operation. There is also the 2003 Insurance Act. The major issues
addressed by the decrees or acts are highlighted below:

51
 F.O. Iyoha And 0. Richard

(a) The 1997 decree No.2 increased the minimum paid up capital from NS million'to N20
mfilion for each of the life arid general insurance business. However, where the general
insurance business includes:
(i) Oil and gas insurance
(ii) Credit insurance, bonds and suretyship
(iii) Contractors' all risk and engineering risk
(iv) Marine and aviation, other than goods-in-transit business by road, water, air and
rail, an additional paid-up capital of not less than N80 million was required. In the
case of re-insurance businesses, a minimum capital ofN150 million was required.

With the commencement of the 2003 Insurance Act, any insurer intending to commence
or continue to carry on insurance business in Nigeria is expected to deposit the equivalent of
50% of the paid up share capital with the Central Bank of Nigeria. The minimum amounts
required under this Act are as indicated above. In the case of existing companies, an equivalent
of 10% of the minimum paid up capital shall be deposited with the Central Bank. This, no doubt,
is a confidence booster for the public who have generally been skeptical about the patron~ge rof
insurance businesses and their services.
(b) In furtherance of the desire to strengthen the financial position of the. insurance
companies, the 1997 decree No.2 mandated the establishment and maintenance of
technical reserves in respect of each class of insurance in addition to solvency margin.
(c) Under the two decrees (1997) cited above, an advance insurance policy document which
gives evidence to the contract of insurance shall be delivered to the insured not later than
30 days after payment of the first premium.

Problems of the industry

In-spite of the growing prospects of the insurance industry in Nigeria, there are still
problems militating against the realization of its full potentials. For instance, the level of
awareness of insurance business in Nigeria is still very low. This is, however, not peculiar to
Nigeria. It is a worldwide phenomenon. In 1975, there was a survey carried out in the United
Kingdom to ascertain the level of awareness of insurance business among the populace. It was
discovered that only 23 percentage of policy holders actually knew what they were carrying
about as insurance policy or cover (Omirin 2004). Apart from the lack of awareness among the
populace, there are other problems which include: high level poverty, low capital base of the
operators in the industry, perceived unwillingness to pay legitimate claims, and low level of
enforcement and compliance with insurance laws.

DATA ANALYSIS
This section formally examines the contribution of the insurance industry to the economic
development ofNigeria. In doing this, we specify the following model:

RYIC =flo+ {J 1RGDP+ {J2 RYIC_ 1 ............................... ('1)

Where:
RYIC =aggregate real income of insurance companies.
RGDP = real gross domestic product
~o , ~ 1 and ~2 are constants and
-1 = lagged real income of insurance companies.

52
 The Insurance Industry And Nigerian Economic Development

For the purpose of estimating equation (1) above, the Ordinary Least Squares estimation
techniques is adopted. The data used for this regression are presented in Table 2 while the result
of estimates of equation ( 1) are shown in table 1.

Table I. Estimates of Regression Equation (2)

Dependent Variable: RYC

Method: Ordinary Least Squares
Sample(adjusted): 1971 2002
Included observations: 32 after adjusting endpoints
Variable Coefficien Std. Error t-Statistic Prob.
c 19.74604 134.2788 0.147053 0.8841
RGDP 0.002744 0.001658 1.654395 0.1088
RYC(-1) 0.579223 0.132219 4.380792 0.0001
R-squared 0.563196 Mean dependent var 610.1448
Adjusted R-squared 0·.533072 S.D. dependent var 225.0380
S.E. of regression 153.7733 Akaike info criterion 12.99790
Sum squared resid 685741.0 Schwarz criterion 13.13531
Log likelihood -204.9663 F-statistic 18.69567
Durbin-Watson stat 1.686443 Prob(F -statistic) 0.000006

From tables 1 and 2, it can be observed that a positive relationship exists between the
aggregate real income of companies in the industry and the level of real gross domestic product.
This is evident from the coefficient of correlation (R- squared) of 0.583. The regression results
also indicate that though a positive relationship exists between the level of real gross domestic
product and real income of these companies, this relationship is insignificant. This means that
since 1970, the contribution of insurance companies to the level of RGDP has been insignificant.

53
 F.O. Iyoha And 0. Richard

Table 2: .. . Nominal and Real Income of Insurance Companies and Gross Domestic Product
(=N=m) 1970-20002 . ---r----, -- -
Year Ufe Non-life ~L- TYIC RGDP CPI RYIC
·-· l t

1970 6.852 9.968 16.82 1 54148.90 10.80 I 155.7407

-- -· --
1971 12.584 15.864 28.448 65707.00 12.50 227.584
•
1972 13.878 25.585 39.463 l 69310.60 '
- 12.901 305.9147-
r---
1973 15.468 30.346 I
45.814 1 73763.10 13.60 336.8676
1974 23.592
-- --- --- - - - - - ·--
39.749 - ~3.341 ! 82424.80 15.40 411.3052
1975 29.706 70.685 100.391 79988.50 20.70 484.9807
1976 39.909 104.968 . 144.877 r 88854.30 25.601 565.9258
-- --
1977 49.685 164.308 ' 213.993 96098.50 29.60 722.9493
-r- - - -
1978 1 64.662 169.368 234.03 89020.90 34.50 678.3478
- - -237.206
- - - 00
-
~.so 1 61~ 1195
1980
1979 81 .834
100.915
155.372
188.233 - -
289.148
91190.70
-
96186.60
- 42.30 683.565
,---- - 1981 i -·
126.889 240.694 367.583 70395.90
t
51.20
t
1 717.9355
I- --
1982 142.613 259.374 401.987 i 70157.00 1 55.10 729.559
400.46- 00389.52 ~ 67.90
1
1983 171 .827 228.633 - 589.7791
1984 168.083 237.595 405.678 63006.40 94.80
--
427.9304
-386.987._,
1985
1986
181.901
212.783
205.086
263.69
386.987
476.473
68916.30 !
71075.90! . 105.40
100.00
--
452.0617
-
1987 219.887 419.958 639.845 70741.40 116.10 551.1154 i

1988 276.228 506.675 . 782.903 ms2.50 181.20 432.0657 i

1989 330.294 806.164 • 1136.458 83495.20 272.70 416.7429 i
1990 414.068 1048.444 : 1462.512 90342.10 293.20 498.8104 '
1991 487.836 1334.237 • 1822.073 94614.10 330.90 550.6416
1992 732.003 2617.901 3349.904 97431.10 478.40 700.2308
------·-- - 1 - - - - - -
1993 1327.039 5901.257 ' 7228.296 100015.20 751.90 961.3374
··---- -· --
1994 2515.92 14671.68 17187.6 ' 101330.00
-+
118o.1o I 14ss.112
1995 2813.021 14587.55 17400.57 103510.00 • 2040.40 852.8019
~996 2416.892 13150.56 15567.46 107020.00 1
-
2661.10 585.0008
1997 3162.381 16519.02 19681.4 110400.00 2863.20
-
687.3917
--r-·- -·-· --- - ·--···-· ··-···- -· --
1998 3803.334 17846.47 21649.81 112950.00 3149.20 687.47
---- -
1999 3814.5 18594.4 : 22408.9 116400.00 3357.60 667.4083
2000 3832.16 21870.43 • 25702.59 120640.00 3590.50 715.8499 '
2001 3956.123 25845.06 i 29801.18 125351.00 4268.00 698.2469
2002 4077.924 26923.53 i 31001.46 129830.00 4270.20 725.9955
Note: (i) Life and non-life denote the income oflife and non-life insurance companies.
(ii) TYIC = total income of insurance companies
(iii) RGDP = real gross domestic product
(iv) RYIC = aggregate real income of insurance companies.
Source: Central Bank ofNigeria -Annual Report and Statement ofAccounts (various issues)

54
 The InsUrance Industry And Nigerian Eeonc;»tnic Development

To ascertain the authenticity of the above findings, we analyze the various diagnostic statistics
such as the Durbin-Watson (D.W) statistic and the adjusted -R2 • The adjUsted -R2, from table 1
is 0.533. This means that more than 53 percerit of the variation in the aggregate real income ~f
insurance companies in Nigeria is explained by changes in the current real level of gross
domestic product and past level of real income of insurance companies in Nigeria The high
coefficient of adjusted multiple correlation indicates that the model specified in equation (1) has
a good fit.
To test for the existence of serial correlation in the residual of the estimated model we
analyze the D.W statistic. From tablet, it is= 1.7. The closeness of this statistic to 2~0 means that
the regression results is free from the problem of serial correlation. The result obtained showed
that this industry has not actually contributed significantly to the level of real _gross domestic
product between 1970 and 2002. This implies that drastic measures have to be taken to improve
the performance of the industry as a whole.

CONCLUSIONS
Insurance is a non-bank financial industry whose main functioQ. is to proVide
compensation against different kinds of risks affecting the induStrial and commercial Sectors of
the economy as well as private individuals. Apart from this, it also plays a vital role in the
financial markets as well as for the economic development of a nation by providing cover and
assistance to a variety of financial and non-financi"al corporations and government agencies. The
insurance business is however still not well developed in Nigeria.
In the light of the importance of the industry, the study investigated the extent of itS
contribution to the economic development ofNigeria. The result obtained showed that it has not
contributed significantly to the country's real gross domestic.product between 1970 and 2002.

RECOMMENDATIONS
The main recommendations from this study are:
(i) Government needs to create an enabling environment for effective functioning of
insurance companies in Nigeria.
(ii) A lot of Nigerians need to be sensitized about the importance of insurance services.
(iii) There is the need to further increase the capital base of the insurance companies to
match the current increase in the capital base in the banking sector

REFERENCES

Adesanya, M.O and E.O, Oloyede.(1972): Business Law in Nigeria, University of Lagos Press.

Anao. A R and Uche C.U. (2002): Research Design and Implementation in Accounting and
Finance, Benin. University of Benin Press.

Bisi, 0 . (2004):-"Has Insurance Reaped from Democracy?" Business Times, Vol.. 22, No. 77.

---------- (2004): "Will Under Capitalized Insurers Go Under" Business Times vol. 22 No 80.

Central Bank of Nigeria (2000): "Development in the Insurance Industry in Nigeria in 1998".
Statistical Services Division, Research Department. ·-

Central Bank of Nigeria-Annual Report and Statement ofaccounts (various issues).

55
 F.O. Iyoha And 0. Richard

Fabozzi, et al (1997): Foundations of Financial Markets and Institutions, Prentice Hall.

Hilliard T'J (1967): "Towards an Integrated Manpower Policy for Accelerated National

Development" in T M Yusuf (ed.): Manpower Problems and economic Development in Nigeria.

lbadan University Press.

Madura, Jeff (2001): Financial Markets and Institutions, South -Western, Thomson Learning
Publisher 5/e

Nwankwo, 0.0,(1980): The Nigerian Financial System. Macmillan publisher.

Oladipo, B. (2004): "Life Companies Told to Develop Aggressive Marketing Strategy" Business
Times, Vol. 27 No. 76.

Omirin E (2004): "The New Capital Base Will Enhance Public Confidence In Insurance"
Business Times vol. 27 No 74.

Vane, H.R and J.L, Thompson (1993): An Introduction to Macroeconomic Policy, 4/e, Harvester
Wheatsheaf.

56