University of Nigeria Role of...Students' Association. UNILAG. 2(2): 4-6 Osisioma, B. C. (1984) Investment Strategies in Nigerian Capital Market. Journal of the Insurance Institute
Post on 29-Sep-2020
0 Views
Preview:
Transcript
University of Nigeria Research Publications
SMART, Tope
A
utho
r
PG/EMBA/98/0033
Title
The Role of Investment as a Survival Strategy to the Insurance Industry in Nigeria
Facu
lty
Business Administration
Dep
artm
ent
Management
Dat
e
August, 2000
Sign
atur
e
THE ROLE OF I N V E S T M E N T AS A SURVIVAL STRATEGY TO THE INSURANCE INDUSTRY I N
N I G E R I A
TOPE SMART
%' MATRIC NO: CMD/UNN/PG/EMBA/0033
BEING
A RESEARCH PROJECT SUMBITTEb I N PARTIAL FULFILMENT OF THE REQUIREMENTS
FOR THE AWARD OF A POST GRADUATE MASTERS DEGREE I N BUSINESS ADMINISTRATION (M. 8. A)
FROM THE UNIVERSITY OF NIGER1 A, NSUKKA
AUGUST, 2000
SUPERVISOR: PROFESSOR E. U. L. I M A G A
CERTIFICATION
Tope SMART, a post-graduate student in the Department of Management with
Matriculation Number CMD/UNN/PG/EMBA/0033 has satisfactorily completed
the requirements for the course and Research work for the award of Master of
Business Administration in Management.
I hereby state that the work embodied in this Project is original and has not been
submitted in part or in ful l for any other diploma or degree of this or any other
University.
................................... DR. U. J. I?. EWURUM Head of Department Supervisor ('
DEDICATION
This research work is dedicated to rny Darling wife, Tonia for the support and
encouragement she gave me throughout the duration of this programme, and to
my lovely children; Yemy, Bukky and Dammy for their understanding during the
course of this programme.
Gad bless you all (Amen).
ACKNOWLEDGEMENT
I give all glory to God for giving me the grace to complete this work. His name
will forever be magnified.
Special thanks go to my Supervisor, Prof. E. U. L. Tmagn of the Department of
Business Administration, Unh t'rsity of Nigeria, Nsukka for his inspiration and
usef~rl suggestions which helped greatly in ensuring the early completion of this
work.
I also C V ~ I I ~ to thank a11 members of my staff for showing understanding when
this work was being undertaken. Special mention must be made of my
wonderful Secreta~y, Miss. Stella Ajaero who took time to go through the work,
and did all the typing. God will bless her abundaotly (Amen).
Finally, I take the bIame for the shortcomings of this work while I give God all
the glory Por the strength in undertaking this work.
TABLE OF CONTENTS
TITLE PAGE
C1':IWI FICK'I'ION
DEDICATION
ACKNOWLEDGEMENT
LIST OF TABLES
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study
1.2 Statement of the Problem
1.3 Purpose of Study
1.4 Formulation of Hypothesis
1.5 Significance of the Study
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction 9
2.2 Principles of Insurance 10-22
2.3 Classification of Insurance Policies . 22-23
Classes of Life Policies
Special Features of Life Assurance .
Non-Life lnsurarlce
Nature of lnvest~nent
State Supelvision of Insurance
State Legislation Concerning hvestment
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction 47-48
3.2 Sources of Data 49
3.3 'ThePoplation 50
1 ..I Sample Size Determination 50
3.5 Tools for Data Analysis 5 1
3 .G Scope of Study 5 1-52
CHAPTER FOUR: ANALYSJS.OF RESEARCH DATA
4.1 Sources of investi ble kuncis 53-58
4.2 Testing of Hypothesis 5 8-64
vii
4.3 Investment Constraints of Insurance Companies . 65-66
CHAPTER FIVE: DISCUSSION OF RESULTS 67-69
CHAPTER SIX: SUMMARY OF MAJOR FINDINGS, RECOMMENDATIONS AND CONCLUSION
6.1 Summary of Major Findings 70-73
6.2 Recommendations and Conclusion . 73-77
APPENDIX
Aigbokhan B. E. (1 998)
Rekindling Investment for Economic Development In Nigeria,
Ibadan. The Nigerian Economic Society
Akhigbe, Alex (1 992)
Insurance: The Nation & You: Myths, Misconceptions and the
Facts, Lagos.
Alice, Galenson (1 984)
Investment Incentives For Industry
Bello, A. 0. (1982)
Insurance Lndustry and the Nigerian Economy, Unpublished
Manuscript, Department of Finance Unilag: 1 1 - 17.
CappielIo, I;. A. (1 997)
Investment problems and Policies of Small & Medium Size Life
Assurance Companies. In Investment Activities of Life Insurance
Companies. S.A. Curnrnins. (Ontario) 268-289.
Dickson, G. C. A. (1980)
Risk and Insurance, C.I.I.; London
Hansel D. S. (1 970)
Elements of Insurance; London. Macdonald & Evans
Falegan, J. 1. (1 982)
The Insurance Industry and the Barriers to entry into the Capital
Market. Journal of the Management Students' Association, Faculty
of Business Administration, UNILAG. 3: 20-30
Falegan, J. 1. (1 985)
The Insurance Funds and the Choice of Investments. In the Bullion.
Central Bank Publication, January/March: 3( 1 ): 30-3 1
Jones, L. D. (1 977)
hivestment in Income Property Mortgages by Life Insurance
Companies. In Investment Activities of Life Insurance Companies.
J. 1). Curnrnins (Ontario) 59-103
Oyeka, C. C. (1 980)
'I'he Investment of Life Assurance Funds. Journal of the Nigeria
Reinsurance Corporation: 1 (3): 22-25
Okafor, F. 0. (1983)
Investment Decisions. Evaluation of Pro-jects and Securities, London.
CasseIl Limited
Oknfor, F. 0.
Instruments of Business Finance In Nigeria. Unpublished
Manuscript, Dept. of Finance, University of Nigeria.
Okafor, F. 0.
Overview of the Nigerian Financial System. Unpublished
Manuscript, Dept. of Finance, University of Nigeria
Okwor, E. ( 1 984)
Government Participation in Insurance since the 70s and its impact in
the Insurance Market. Journal of the Actuarial Science and Insurance
Students' Association. UNILAG. 2(2): 4-6
Osisioma, B. C . (1984)
Investment Strategies in Nigerian Capital Market. Journal of the
Insurance Institute of Nigeria, Dec. 1984
Olowoyo, B. J. (1998)
Basic Elements, Principles and Practice of Insurance. Lagos
Principles and Practice of Insurance 1984 Edition C.I.I. Tuition Service
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
A typical Insurance Company receives premiums from its various insureds
and promise to indemnify them (insureds) in the event of happening of the
contingency insured against. Usually, there is a time lag between when
premiums are collected by Insurance Companies and wheri claims are paid
to the Insureds, and in the case of life assurance, it may take up to twenty or
more years. It is therefore not necessary for such money to be held by the
Companies, instead, they are invested in various instruments in order to
yield additional income to the Companies.
Investment requires first, a willingness to sacrifice todays' consumption for
the sake of increase production in the future.
Henning defined investment as the process of capital formation. He
distinguished between 'Real' and 'Financial' Investments. According to
hun, the existing stock of capital depreciates over time and that the net
investment is the net addition to the stock of capital occurring over a periotl
of time. These additions to the stock of capital are real investment. He
continued by referring to financial investment as the acts of acquiring claims
to wealth or liquidation of debt.
According to Osisioma, investment is a commitment of fimds in real
property or financial asset with the objective of obtaining an income over
time. To him, financial asset investment means placing some money in the
hands of other people for their own use and in return the lender is promised
fixed income payments.
From the above, we can see that the issue of investment is very important to
insurance companies and investment decisions are often carefully taken.
?'he importance, according to Osisinma, rests on the fact that it influences
the total amount of assets held by the firm, the composition of these assets
and the business risk complexion of the finn.
3
From various angles, therefore, the investment of its constantly
accu~nulating finds has always been a vital part of any Insurance
Company's task.
1.2 THE STATEMENT OF THE PROBLEM
Most Insurance Companies operating in Nigeria are finding it increasing1 y
difficult to make profit from their normal business i.e. Underwriting. The
reason for this is not unconnected with the increase in cost of operation as a
result of inflation and dwindling revenue.
Also, premium rates have become so low that it is no longer commensurate
with the risk being undertaken. For example, the premium paid to cover a
vehicle whose value is =N=2m is about =N=100,000.00. In other hands, an
insurance company wiIl collect =N=100,000 from a proposer and pay
=N=2m in the event of happening of an event insured against.
Another reason for this situation is the increase in claims cost as a result of
increasing awareness on the part of the insureds as well as high cost of
replacement of equipments.
The consequence of the various reasons highlighted above is the erosion of
any form of profit from underwriting. The implication of this is that
insurance firms must look for another source of revenue in order to remain
alloat. 'I'his is where the issue of investment comes in. '1 he issue has
consequently become so important that decision made on same can either
make or mar an insurance company.
However, there are many problems confronting the investment of the surplus \
fund in the hands of insurance companies. The problems include the
following-
a. Low investment income which may be due to lack of expertise
b. Stringent Government regulation, concerning where and how investment
should be done.
c. Bad investment decisions which can arise as a result of an insurance
company's inability to recover both the principal capital as well as the
interest payable on the investment.
d. lnability of an insurance company to invest its' fbnds in proper investment
outlets.
1.3 PURPOSE OF STUDY
The importance of investment of insurance company funds cannot be over
emphasised. It is even more important for the companies to invest their
funds in proper channels especially during this period of economic
recession. As a result, investment decisions are crucial decisions which
must be taken by experts in order to avoid investment loss which m y arise
as a result of bad investment decisions. Problems are often faced in making
investment decisions either because of rigid investment guideline by the
Governtnent or because of lack of expertise on the part of the investment
managers of insurance companies. It is therefore, the purpose of this study
to research deeply into the various investrnerlt outlets opened to insuratlce
companies and their associated companies in order that companies will be
able to appreciate the importance of this subject.
This becomes necessary because if bad investment decisions are made which
subsequently results in financial loss, the implication of this could be
devastating as the companies concerned may find it difficult to meet their
financial obligations to their clients. It is also the purpose of this study to
1.5 THE SlGNIFICANCE OF THE STUDY
The way and manner investible funds are treated is key to the s~~rvival of the
i~lsurance industry in Nigeria. The target of this study is therefore to look at
the way insurance companies in Nigeria channel their investible Funds with a
view to highlighting various invest~nent problems and ~nade some
I-ecommendations. This study will therefore act like a guide for insurance in
order to plan their investment strategies.
The study will also be of immense benefit to the supervisorylregulatory body
of the industry. Through this study, some new inspirations will emerge that
will help lo enhance the achievement of the goals for which these institutions
were established.
In addition, this study will also be useful to investors as well as policy
holders.
Finally, students, scholars and those who have interest in one lvay or the
ohes in Nigeria insurance i tidustry will also find this study very u s e M .
REFERENCES
Falegan J. 1. ( 1 991 )
An Lntroductory Text, Lagos. University of Lagos Press
Henning C. M. (198 I )
Financial Markets and the Economy, New Jessy, Prentice-Hall.
Englewood N. J.
Irukwu J. 0. (1977)
Insurance Management in AErican, Lagos. The Caxton Press (West
Africa Limited)
Osisioma B. C. (1984)
Investment Strategies In Nigerian Capital Market. Journal of the
Insurance Institute of Nigeria, Dec. 1984
CHAPTER TWO
LITERATURE REVIEW
INTRODUCTION
Insurance can be defined as a social device providing financial
compensation for the effect of misfortune, the payment being made from the
accumulated contribution of all parties participating in the scheme.
The basic purpose of insurance is to establish a degree of certainty with
respect to the plans and activities of individuals and institutions. Tlu's
certainty is provided not through the elimination of the hazards that face the
insured but by protection against financial loss that may result from such
hazards.
Investment, on the other hand, as stated earlier requires first a willingness to
sacrifice today's consumption for the sake of increased production in the
fi~ture.
The process of insurance is such that various pretniums are received fiom
the insureds and there is always a time lag between when such premiums are
collected and when claims arise. It is therefore not wise for such monies to
be left in the accounts of the companies, instead they are better invested in
safe and good instruments.
2.2 PRINCIPLES OF INSURANCE
Insurance represents a special type of contract, quite distinct fiom other
types of contracts. For a proper understanding o f the peculiar nature of
insurance contract, it is essential therefore to know the princes which govern
insurance contracts. These principles are peculiar to insurance contracts.
They are as follows:
2.2.1 Insurable Interest
Insurable interest is the legal right to insure arising out of a relationship
recognised at law between the insured and the subject matter of insurance.
One may ask the question: what is it that is insured by a policy of insurance?
Most people will provide an answer to this question probably along the lines
of some physical object. In the case of a fire policy on a shop, people might
I 1
say that the building of the shop and its contents. In case of a motor
insurance policy, one might also say the vehicle or the insured's liability to
third parties, etcetera are what has been insured.
In a similar vicw, the owricr of a ship might say that it. is the ship, the cargo
or his potential liability to third parties, which is insured. All the above
descriptions relate to the subject matter of insurance which may be defined
as any form of property, right or an event capable of being insured.
To locate insurable interest in all these, it is necessary to grasp one
f~rndatnental fact that it is not the house, shop, machinery, potential liability
or life that is insured but the pecuniary interest of the insured in that house,
ship, machinery etc that is insured.
From our definition, the following are the essentials of an insurable interest:
There must be some property, rights, interest, limbs or potential
liability capable of being insured.
Such property, right, interest, etc must be the subject matter of
insurance.
The insured must stand in a relationship with the subjcc'! n ? ~ ! l ? ~
insurance whereby he benefits from its safety, well being or
freedom from liability and would be prejudiced by its damage or
the existence of liability.
(d) The relationship between the insured and the subject matter of
insurance must be recognised at law.
2.2.2 Utmost Good Faith
All commercia! contracts are subject to the doctrine of caveat emptor i.e. let
the buyer beware. Although certain legislations have over the years been
promulgated mainly to protect parties to commercial contracts from
unreasonable exploitation and unfair tenns, nevertheless it is stif1 the duty of
every party to a contract to make as good a bargain as possible.
However, in insurance contracts, the nature of the subject matter of
insurance and the circumstances pertaining to it are facts particularly within
the knowledge of the person who is privileged to have such information.
Only the proposer knows or should know all the facts, which are relevant
about the risk being proposed for: insurance. Therefore, in order to tnake the
situation more equitable, the law imposes a duty of "uberrima fidei" or
utmost good faith on the parties to an insurance contract. In its simplest
13
fom, it says that the insured must disclose to the insurer all material facts
reIating to the risk. A material fact is a fact, which would influence the
judgement of a prudent insurer in deciding whether to accept a risk for
insurance, and on what terms.
Despite the duty placed on the insured, it should he noted that he is not
under any obligation to disclose all facts. A look at the facts, which are to
be disclosed, and the ones which need not be disclosed will make the
position clearer.
Facts which must be disclosed
Facts which show that the particular risk being proposed is greater I
internally than would be expected from its nature or class.
Similarly, if external factors mak: the risk greater than normal.
Facts which would make the likely amount of loss greater than
normally expected.
Previous losses and claims under other policies.
Previous declinations or adverse terms imposed on previous proposals
by other rllsurers.
14
(f) Full facts relating to and description of the subject matter of
insurance.
Facts which need not be disclosed
(a) Facts of law: everyone is deemed to know the law.
(b) Facts which the insurer is dezmed to know e.g. facts of common
knowledge.
(c) Facts about which the insurer hs s been put on enquiry.
(d) Facts which lessen the risk.
(e) Facts which the proposer does rot know.
2.2.3 Indemnity
Another important principle of insurar~ce is indemnity.
Itldemnity may be defined as a mechanism by which insurers provide
firlancial compensation in an attempt to place the insured in the same
pecuniary position after the loss as he enjoyed immediately before it.
The intention of indemnity is to ensur: that the insured does not make profit
out of his insurance while at the sarnt: time he should not be worse off. He
should just be placed in the exact position he was before the loss occurred.
Indemnity may be provided by cash payments, repair of the damaged
property, replacement of the lost property or reinstatement of the damaged
property.
It should however be noted that them are a number of factors, which may
restrict the insured to recovering less than a full indemnity in the event of
claim. They are as follows:
i) The sum insured: The maxinlum amount recoverable under any
policy is limited by either the suin insured or the limit of indemnity
ii) Average: The application of werage is a means whereby insurers
seek to defeat under-insurance. Where there is under-insurance, the
insurers are only receiving a premium for a proportion of the entire
value at risk and any settlement will take this into account.
i i i ) Excess: An excess is an arnormt of each and every claim, which is
borne by the insured. For exi~mple, under a private car policy, the
insured might agree to bear the first =N=1000 or each and every loss.
This will therefore make the insured receiving less than full
indernni ty.
iv) Franchise: As with excess, a franchise is a fixed amount, which is to
be paid by the insured in the event of a claim. However, once the
amount of the franchise is exceeded, the insurers pay the whole of the
loss including the value of the franchise.
v) Limits: Many policies limit th: amount to be paid for certain events
by the wording of contract itself. The household contents policy
normally has a wording that sa:ls "No one curio picture work of art is
deemed to be of greater value than five percent of the sum insured on
conterr ts.
vi) Deductible: This is the name given to a very large excess. This is
normally done to receive a discount fiom the premium.
In all the above cases, the insured will definitely received less than fidl
co~npensation (indemnity) when a loss occurs. It is important to understand
this principle as lack o r i ts knowledge results in controversy in the event of a
claim.
There are two principles of ialwrance which are related to indemnity in the sense
that they ensure that the insured does not receive more than what is due to him.
They are called the corollaries of inde '~ity. They are as follows:
Subroga tion
Subrogation can be defined as the right of one person having indemnified another
under a legal obligation to do so, to stand in the place of that other and avail
himself of aII the rights and remedies of that other, whether already enforced of
not. Subrogation is applied to only insurance policies that are contracts of
indemnity as it serves to ensure that the insured does not make a profit fiom his
misfortune by claiming under his policy and receiving compensation from other
sources.
In exercising the subrogation rights, the insu-ers are not entitled to more than what
they have paid the insured.
How subrogation may arise
Subrogation rights may arise in any of the ways discussed below:
i) Ri&s arising out of Tort: A tort is defined as a civil wrong and it
includes negligence, nuisance, trespass, defamation etc. Where the
insurer compensates the insured for fortuitous actions of some other
persons he is entitle to recovler the outlay fiom the tort feasor
(wrongdoer).
ii) Rights arising out of contract: Common examples are found in many
tenancy agreements where tenants agrees to make good any damage to the
property they occupy. Prudent property owners would also maintain a
policy of insurance and in the event of damage to the property, may find it
easier to recover under that in the first instance. Where they do recover,
they are not also entitled to the compensation from the tenant. The insurers
assume the rights to any money from that source.
iii) Rights arising out of the subject matkr of insurance: Where an insured has
been indemnified in the case of a total loss, he cannot also claim the salvage,
as this would give him more than indemnity.
Contribution
l'his is another corollary of indemnity. It is defined as the right of an insurer to
call upon others similarly but not necessarily equally liable to the same insured to
share the cost of an indemnity payment. Where an insured has more than one
policy covering the same interest, the insured can choose to claim fiom one
insurer. FIaving paid the loss, the insurer is entitled to recover from other insurers
after making the payment. However, there may be a policy condition which makes
the insurer liable for only his share of the 1om and the insured is at liberty to claim
against the other insurer(s) if he so wishes. The loss will be shared by the insurers
in their rateable proportion. The essential point here is that the insured does not
receive more than an irldemnity through having several policies covering the same
incident.
How contribution may arise
Under common law the following conditions must exist before contribution may
arise.
i) Two ormore policies of indemnity must be in existence.
ii) The policies must cover common interest or there is an overlap hetween
one policy and another.
iii) The policies must cover a common peril.
iv) Each policy must be liable for the loss.
The Bags of Contribution
The ratio of contribution creates problems in practice and has very little authority,
b~tt where the sum insured with each insurer are the same, the rate of contribution
would be 50:50 i.e. on equal basis. Where the sums differ the rate of contribution
may be based on the maximum liability approach i.e. the proportion which the sum
insured bears to the total sum insured.
2.2.4 Proximate Cause
Proximate cause is defined as "the active, efFicient cause that sets in motion
a chain of events which brings about a result without the intervention of any
force started and working actively fiom a new and independent source.
In an insurarice contract, it is necessary to state the perils against which
cover is given so that the intervention of the parties is dearly defined. It
would appear to be a simple matter to understand what is meant by an
insurance against fire or accident or maritime perils, but when does the
operation of those perils start and when does it end?
In an insurance contract, the conditions will state that certain causes of loss
are excluded or that certain results of an otherwise insured peril are
excluded. In other words, it is necessary to state the losses that are covered
under the policy and the ones that are specifically excluded.
Generally, proximate cause must be established by common cause. There
must be direct linkage between the cause which is efficient, active and
strong enough that at each stage of all the events involved one can logically
see the next event until the final result. Where many causes are involved,
the proximate one is the dominant or most forceful that brings about the
result.
It is necessary to classify the perils relevant to an insurance claim into the
following classes.
i) Insured perils: These are the perils named in the policy as insured
such as fire and lightning.
ii) Excepted or excluded peril?: Those stated in the policy 3s cxcl&ci
e.g. riot, earthquake.
iii) Unit~sured 7- nther peri!-- Those not mentioned at all in the policy but
not specifica' :eluded
CLASSIFICATION OF LNSURANCE POLICIES
A very important consideration is that investments made by insurance
companies should correspond with the nature of their liabilities. This
implies that premiums derived from short tern contracts should be invested
in short term instruments while premiums derived Fom long term contracts
should be invested in long term irlstn~rnents for the purpose of income
maximisation.
The above comment brings to mind the nature of insurance contracts.
Basically, insurance business can be classified into two major headings i.e.
a. Life Insurance Business; and
b. Non-Life Insurance Business.
Lire insurance gives cover to individuals or groups of people and provide
them or their dependants income at the end of a given period or on the
happening of the event insured against. A11 life insurance contracts are
mostly of a long terrn nature.
Non-life business on the other hand is concerned with insurance o f
properties such as buildings, motor vehicles, marine cargo e. kc. where
cotnpensation is paid to the insured in the event of loss of or damage to the
property insured by the policy. Most non-life policies are of a short terrn
nature.
For the purpose of perfect understanding of this research, it is important to
go into the details of the various classes provided under the life and non-life
policies.
2.4 CLASSES OF LIFE POLICIES
2.4.1 Term Assurance
Term assurance which is also known as temporary assurance is the oldest
and the cheapest form of life assurance. Policies issued under this type of
lire assurance range from a few months to a number of years. Tertti
assurance provides compensation for death, provided the death occurs within
24
the period in which the policy is still in force. ShouId the life assured
survive to the end of the term the cover ceases and no compensation will be
paid to the insured by the insurance company.
This policy is very suitable Tor a young married man with medium or low
income who wants to provide reasonable insurance cover for his wife in the
event of his death. It can also be used for other purposes, such as business
trips that i~ivolves special hazards or for short trips abroad.
Decreasin~ Term Assurance
This is a modification of term assurance because ordinary term assurance
can be arranged so that the sum assured will reduce yearly or by regular
amounts to meet the assured's requirements. This policy is used to cover
loans that is being gradually repaid such as building society mortgage loans.
Whole Life Assurance
This type of policy provides for payment of the sum assured on the death of the life
assured. Premiwn are payabIe through out the life of the assured. On the death of
the Iife assured, the benefits are paid to hisher dependants.
Endowment Assurance
The sum assured is payable when the life assured reaches a specified age or
at his death whichever occurs first. It is a combination of a life assurance
and investment. This is a popular form of assurance because of the eventual
payment of a capital sum to the assured or his representatives.
2.5 SPECIAL FEATURES OF LIFE ASSURANCE
Before we look at the various classes of non-Iife insurance it is important at
this stage to highlight some special features of life assurance that distinguish
them from non-life pdicies.
a, Participation In Profit
Life insurance contracts are long term contracts. The funds are held
by the companies to meet up claims when they occur. So as not to
keep the funds idle, insurance companies invest life assurance funds
in areas of the economy where the maximum returns can be obtained.
Such investment yields must be able to match the securities promised.
Policy holders are therefore encouraged to participate in any profits
which the fiinds can yield.
b. Surrender Values
This is an option which can be exercised by the policy holder in
discontinuing policy cover under life assurance. Usually, this opt ion
is being exercised when the assured can no longer pay premium.
Such policy holders can ask for the proportion of the sum assured.
c. Tax Relief
Premium paid on life assurance policies are usually treated as a tax
concession in which amount paid wiIl be deducted from annual
income and be treated as taxable.
2.6 NON-LIFE INSURANCE
This can also be called General Insurance business, which can be divided
into the following classes for clarity and simplicity: Fire and Special Perils;
General Accident; Marine and Aviation; Motor Vehicle; Liability Insurance;
and Engineering I nsusance.
Fire and Special Risks
This sub-class is sub-divided into fue and special perils; housel~older/owner
comprehensive and consequential loss.
Fire PoIicy: The basic intention of the fire policy is to pay compensation to
the insured person in the event of loss or damage to the property insured.
The periIs covered under frre policy include fire, lightning and explosion.
The special perils added to fire policy but which the insurers are prepared to
cover on certain conditions at the payment of additional premium include
such perils as explosion, riot and civil commotion and malicious damage
e. tc.
Householder/owner insurance: This is a policy which covers loss or
damage to insured's building or contents as a result of fire, theft and other
insured perils.
Consequential Loss: This is a comparatively new development in insurance being
only introduced and developed in the middle of the nineteenth century. It covers
consequential loss following fire.
General Accident Insurance
Policies considered to fall within the accident class include the following:
Burglary and Housebreaking: This is a form of protection against loss or
damage by theft of property belonging to the insured or for which the insured is
responsible. In insurance, theft is defmed as the actual entry or exit from the
premises by forcible and violent means.
From this definition, losses brought about by the dishonesty of employees or
members of the insured's household or by trick or by a key whether original or
duplicate is not covered.
Fideliw Guarantee: This policy covers dishonesty acts of empIoyees against their
employers in the course of their duties. It covers stealing of money or stock,
falsification of account e.t.c.
29
The act must be carried out by the empIoyees in connection with their occupation
during the period of the guarantee and discovered while the fidelity guarantee
policy is still in force or within a particular period.
Goods in Transit: This is a type of insurance policy effected to cover moveable
property wlde in transit by land, sea or air. Losses incurred as a result of loading
and unloading risks are excluded, unless they are specifically stated as covered.
Money Insurance: This policy is designed to provide cover against loss of money
through theft, frre and other causes while in transit or in a locked safe.
Money here means coin, bank and currency notes, cheques, postal and money
orders.
Transit means from the time the money is handed over at the insured's bank
counter until arrival at the premises and white there until disbursed. The policy
can also be arranged to cover cash in safe and cash in personal custody of the top
management.
Group Personal Accident: The policy gives cover to the person(s) insured
against the risks of death, permanent disablement or injuries resulting from
external and violent means occurring anywhere in the world.
The cover can be written
a. on full twenty-four hour basis
b. in respect of occupational accidents only
c. restricted to non-occupational accidents.
There are four benefits under the policy viz: death, permanent disablement,
temporary and total disablement and medical expenses.
Death and permanent disablement are either for fixed sums insured or based on
multiple of salary earnings. Temporary total disablement is also for either a fixed
sum or earning per week. However, the medical expenses limit is for a fixed sum
per accident.
Workmen's Compensation: The relevant statutory regulation guiding employers
liability insurance in Nigeria is the Workmen's compensation Decree of 1987.
Workmen compensation insurance is concerned with legal liability to pay damages
as a result of death, bodily injury or diseases sustained by any person under a
contract of service or apprenticeship with ,he employer, ar;-kg whilst performing
his employer's work.
Engineering Insurance: There are basically four types of cover available under
engineering insurance. They are
a. Erection all risks, which protects the insured who manufactures or erects
plants and machinery against financial loss due to sudden and unforeseen
damage to property, machine, structures on the site while being stored,
erected, tested and maintained.
b. Machinery Breakdown Policy, which is designed to indernnifjr the insured
against damage to the machinery caused by breakdown.
c. Plant All Risks Policy, which covers loss or darnage to the insured from any
cause outside the machinery. E.g. fire, impact, explosion.
d. Contract Works Policy, provides protection for the insured against loss,
liability and damage that occur during the buildhg of a slrocture.
Marine Insurance: There are two types of policies:
a. Marine Cargo Insurance: This is the cover provided for importers and
exporters in respect of the movement of their goods from one country to the
other. Types of cover available include All Risks Policy or restricted cover.
b. Marine IIulI Insurance: The intention of this policy is to provide
compensation to the insured against loss or damage to vessels listed in the
policy.
Aviation Insurance Policv: This is effected by an aircrafi owner or operator
against loss or damage to the aircraft itself when it is in flight, taxiing and on the
ground. Disappearance of the aircraft is also covered.
Motor Vehicle Insurance: The scope of cover provided include the following:
a. Act Only: This is the minimum motor insurance cover required by law to
provide insurance in respect of legal liability to pay damages arising out of
injury to any person.
3 3
b. Third Party Only This policy is required by law in Nigeria to cover the
insured in respect of legal liability arising out of bodily injury or death and
damage to third party property.
c. Third Party, Fire and Theft: This policy covers loss of or damage to the
insured vehicle and or accessories while thereon caused by fire, external
explosio11, burglary, housebreaking or theft; and insured's legal liability to
third parties in respect of any damages to the property of such third parties
and for any injury or death to third parties.
d. Comprehensive: This provides the widest type of cover. In addition to the
cover provided under "c" above, it covers damage to the insured's vehicle
and or its accessories by accident, fire or theft.
Liability Policies
Insurance of liability provide indemnity to an insured for his legal liability
which may arise at common law, under statutes or under contract to other
persons including employees. The main types of policies under insurance of
liability include employer's liability, public liability, product liability and
personal liability.
2.7 Having examined the principles of insurance and the various classes of
insurance available, there is the need to examine how the surplus fund of
insurers are invested. J Iere the various investment outlets will be examined,
what determines where to invest, how to invest, the problems and
restrictions imposed by the state will also be analysed.
Investment can be defined as a sacrifice of an immediate and certain
satisfaction in exchange for a fbture expectation whose security lies in the
capital invested.
2.7.1 Nature Of Investmer~t
Investment refers to economic activities designed to increase, improve or
maintain the productive quality of the existing stock of capital. Investment
occurs whenever there is an addition to capital stock. Thus, the purchase of
machinery or factory buildings represents investment for the individuaI
investor just as rnuch as the purchase of equity shares, bond or other
securities.
However, fmm the mo-economic point of vkw, ody ~?ddTfbm rm!
assets can correctly be described as investments.
From what has been said above about investment, it is necessary to examine
some features which are peculiar to investment for a proper understanding of
the subject.
2.7.2 SpeciaI Features Of Investment
2.7.2.1 As d e h e d above, investments are undertaken in anticipation of benefits
which are not expected to accrue concurrently with the investment
outlay.
As a result of this speculative element involved in investment, there is
always the element of risk in the sense that anticipated benefits may not
ultirnately be realised.
2.7.2.2 As we will see later, all investments can be classified into two broad
categories i.e. real and financial investment. They are measured in
terms of total outlay of funds.
2.7.2.3 Investment involves the foregoing of some current capability for
consumption. As a result of this, an identity between the level of
savings and investment is usually expected.
2.7.2.4 Since itivestrnent benefits accrue over time, there is the expectation that
the asset in which any investment is denominated shall be retained by
the investor for a reasonable period of time.
2.7.3 Classification Of Investment
Generally speaking all investments could be said to be alike in the sense that
they all involve an initial outlay with the expectation of a future benefit.
Inspite of this similarity, investment can be classified into two broad
headings, namely real investment (real assets) and financial investment
(financial assets).
This distinction is very import because various types of investment raise
different problems.
Attempt will now be made to distinguish between real and financial
investment.
2.7.4 Investment I11 Financial Assets
Financial assets can be described as the promissory notes of various
economic units which represents claims on the productive assets of the
issuers. The benefits derivable from such investments can either be fixed or
variable.
Fixed benefits financial assets are very liquid and risk free because their
money values do not change with time. Examples are investment in
governrnerlt securities and deposits in banks. Though the returns are low but
they are safe.
The risk involved in variable benefit financial assets on the other hand is
higher but the returns too are higher than the fixed benefit assets.
The reason is that security prices fluctuate in response to changes in the
environment. Such fluctuations create opportunities for potential capital
gains or losses when owners sell their securities. Examples are corporate
securities.
Apart fkom the above two types of financial assets, there is also the Hybrid
Securities. They are hybrid because sucll securities have some features
which are comtnon to both the fixed benefit financial assets as well as the
variable benefits financial assets. For example, while the expected income is
a fixed, percentage of the value of the security, such income invariably
depends on tllc yrvllt porl'orrnance of thc issuer. An exatnple o f this is
preference shares.
Aside the above classification, Bonds can equally be classified on the basis
of whether they are secured or not.
Secured bonds are bonds covered by the pledge of specific assets of a firm in
addition to the general security represented by the credit worthiness of the
issuing firm. Unsecured bonds, otherwise known as Debenture Stocks on
the other hand are corporate bonds not covered by the pledge of any specific
asset of a firm but rather by its general credit standing.
2.7.5 Real Assets Investment
'I'his form of investment takes three form i.e. investment in business fixed
assets, inventory investment, and investment in residential construction.
2.7.5.1 Investment l n Business Fixed Assets
This takes the form of purchases of plants, equi pments, machinery,
buildings e.t.c. This form of investment is the most dominant form of
Real Assets investment.
2.7.5.2 Inventory Investment
UsuaIly, the type of inventory required depends on the type of
productive activity an organisation is involved in. Generally speaking,
manufacturing f m s invest in three types of inventories. They are stock
of raw materials, stock of goods in process of production and stock of
finished goods.
2.7.5.3 Investment In Residential Construction
Some firms invest in residential buildings. They do this by building
estates and residential complexes. Like all investments, it provides
regular future benefits to owners.
2.7.6 Factors Affecting Investment Behaviour
The factors that affect the rate at which fims invest can generally be
classified into, namely: endogenous and exogenous factors.
Endogenous factors are factors within the control of individual firms while
factors outside the control of firms are described as Exogenous factors. As
will be seen later, what determines where and how to invest by insurance
companies are mostly exogenous factors such as Government guidelines.
Also, Government can influence where it wants to direct investment. A
government could also decide to exercise a monopoly over investment in
certain sectors or the ecotwmy, where that happens, privnle business
investment is not only discouraged but also eIiminated in the affected
sectors.
Endogenous factors include the need to keep abreast with technological
development, profit expectation, state of capital market, interest rate, stage
of development of a firm and possession of excess h n d .
2.7.6.1 Impact Of Technoloey
Constant changes in production teclmotogy necessitate constant
investment in order to keep in touch with modem technology. This is
more prevalent in manufacturing firms. Also, a change frotn a labour
intensive to a more capital intensive production technique increases the
need for investment in capital assets.
2.7.6.2 Profit Expectation
In most cases, private investment is mostly influenced by profit
expectation. A highly profit expectation influences a firms investment
behaviour positively, and vice versa.
2.7.6.3 State Of The Capital Market
The capital market provides the facility for the exchange between
investors of long-term investment funds. Where the market is effective,
investors will be able to raise hnds for capital projects. In addition, an
effective capital market ensures adequate investment in financial assets.
2.7.6.4 Interest Rate
Changes in rate of interest influences investment behaviout. Where the
rate of interest is high, finds will be very expensive and this will lend to
low investment. However, where interest rate is low, credit will be
encouraged and consequently investment will increase.
2.7.6.5 Stage Of Development Of a Firm
This is another factor that influences investment behaviour. Generally,
there are four stages in the life cycle of a firm. They are the take off
stage, expansion stage, stabilisation stage and stage of decline.
During the take off stage, the rate of investment is always high because
at this stage effort is concentrated on increasing the market share of the
firm. During the expansion stage, the resultant increase in market
output forces up the investment schedule of the firm. During the last
two stages, the rate of investment is generally low.
2.7.6.6 Possession Of Excess Fund
Where the profit expectation is high, the capital market is very efficient,
and all other indices favour investment, a firm may not be able to invest
if it does not have excess fund. This therefore means that possession of
excess firnd has a lot of influence on investment behaviour.
2.8 STATE SUPERVISION OF INSURANCE
Before we conclude this chapter, there is the need to examine the level of
control and supervision which the Government exercise on the insurance
companies in Nigeria. The intention is to critically examine the investment
behaviour of insurance companies in Nigeria with a view to determining the
level of flexibility which the companies can adopt in their investment
behaviour. For example, some of the factors that influence investment
behaviour as stated above include profit expectation, interest rate and
possession of excess fund. Assuming the expected profit fiom a given
investment such as property is very high when compared to other forms of
investment, are the insurance companies fi-ee to invest in such profitable
ventures? This and other issues will be examined. However, before this is
done, it is important to look at the motives for state supervision of insurance.
The motives include the following:-
2.8.1 Consumer Protection
Insurance transaction involves the payment of premiums in return for
the insurer's promise to pay a sum on the happening of the event insured
against. If premiums are too low, it may lead to failures by the
insurance companies. Thus, the intention to protect policyholders and
sometimes third parties from the insolvency of insurance companies is
one of the motives behind state supervision.
2.8.2 Avoidance Of Wasteful and Destructive Competition
When insurance started in Nigeria, there were very few companies in
operation. By 1966, the number of insurance companies operating was
about 50. By 1975 it had climbed to 75. The flourishing of over 70
unregulated companies let to proliferation of insurers, a situalion which
created intensive competition. This forced the insurers to charge low
premiums in order to attract business. The result was that many
con~panies were unable to meet their obligations in terns of claim
payment.
2.8.3 To encourage the development of an indigenous insurance industry
In the early 191;0s, the insurance industry was dominated by foreign
companies with very little participation by indigenous companies. This
led to some legislations that encouraged local participation in insurance
industry.
2.9 STATE LEGISLATlON CONCERNING INVESTMENT
The Insurance Companies Act of 1961, the Insurance (miscellaneous
provisions) Act of 1964 and the Insurance Companies Regulations of 1968
have been consolidated with suitable amendments and additioris in the
Insurance Act of 1976 as amended in l99O,l?9l and 1997. The main
provision concerning investment is as follows:-
That all assets in respect of insurance business transacted in Nigeria are to be
invested in the stocks of the Federal and State Governments and Semi-
government bodies, equities, mortgage Ioans on real estate, industria t
debethures and msecur-ed loans, Treasury Bills and Treasury Certificates
and cash on deposit account.
In addition, the companies are required to invest al least 25 percent of their
finds in government securities and not more than 10 percent of the funds in
real property.
This law which has been subject of criticism over the years have not been
amended. With this provision, insurance companies are made to tie their
investible f h d s in low income yielding government instruments while high
income yielding hvestment such as real estate should not be more than 10%.
Though the intention of government is to ensure that the insurance
companies are liquid at all times, whether or not this legislation is good for
the industry will be examined in the subsequent parts of this study.
CHAPTER THREE
IWSEARCM METHODOLOGY
3.1 INTRODUCTION
The topic of the research rqpires an indepth knowledge and information for
the eficient ar~alysis of lindings. The intention is to find out the role of
investment in the insurance industry - with a view to determining whether or
not investment plays any role in the survival or growth of insurance
companies in the industry. Since the focus is on the insurance industry, the
first step was to find out the number of insurance companies operating in the
industry in order to determine the population. The research revealed that
there were about 105 Insurance Companies operating in the industry.
Out of this figure, about 35% are composite companies i.e. companies that
underwrite both life and non-life insurance business while the remaining
65% are specialised companies i s . they specialise in the underwriting of
only life business or purely non-life business.
Before going ahead to discuss the sources of data collection, i t is important
at this stage to highlight some of the limitations of this study.
The greatest problem that confi-onted the researcher was that of time. The
researcher had to pay several visits to the companies gotten through
sampling before he was able to get the necessary responses. Even then, not
all the companies chosen responded as some of them have their head ofices
outside Lagos. In order to keep with the deadline for the submission of the
research work, some companies whose responses were not received after a
particular date were Jefi out.
Apart from the problem of time, another problem faced by the researcher
was the un-cooperative attitude of many officials of the companies. Many of
them did not want to respond to the Questionnaires sent as they felt the
information being requested were confidential. It took a Jot of persuasion
before they were persuaded that any information received from them will not
be revealed to members of the public.
3.2 SOURCES OF DATA
Two methods of data collection were used. The first is primary method and
the administration of Questionnaire was the only instrument of primary
method of data collection used. The researcher sent out questionnaire to the
sample size chosen. The response rate was quite impressive. The response
rate which is 86% is determined as follows:
Number of questionnaires distributed - 50
Number of questionnaires returned - 43
Number of questionnaires rejected - 2
Number of questionnaires used - 41
Response rate - - 43 x - 100 = 86% 50
Effective response rate = - 41 x 100 = 82% 50
The second method of data collection used is secondary method. The
researcher was able to get the annual reports and accounts of some of the
insurance Companies and was therefore able to extract some information
that were useful it] the analysis of data. A copy of the Questionnaire is
attached as Appendix I.
--
3.3 THE POPULATION
The population being considered is the entire insurance industry with
particular reference to the insurance companies. It is pertinent to mention
here that there are four major components that make up the insurance
industry. They are the insureds, (i.e. policy holders), the intermediaries (i.e.
the insurance brokers), the insurers (i-e. the insurance companies) and those
that perform ancillary services such as loss adjusters and marine
superintendents. However, for the purpose of this research, our focus shall
be on the insurance companies since they are the primary risk bearers and all
the other arms of the industry are dependent on them. As at end of February
2000, there were about 103 registered insurance companies in Nigeria which
f irm the population being analysed.
3.4 SAMPLE SIZE DETERMINATION
Because it might not be feasible to use the entire population, the researcher
resolved to reduce the size to 50 insurance companies. In order to avoid bias
in the determination of sample size, a systematic method of non-random
sampling was used.
3.5 TOOLS FOR DATA ANALYSIS
The nature of the study being carried out as well as the hypotheses to be
tested support the use of tables and simple majority as tools for data
analysis. These were the tools used, and they made the analysis very
3.6 SCOPE OF STUDY
The study is limited to the analysis of the importance or otherwise of
investment in the insurance industry.
As stated earlier, the intention is to determine whether or not the income
realised fiom invest~nent plays a major role in the operation of a typical
insurance company. The need for this comes against the background of
failures of insurance companies in the past as well as decline in the profit
being realised flom underwriting result.
The study is also limited to the insurance companies because as stated
earlier, they are the primary risk bearers. They accept premiums from
various insureds with a promise to indemnifl them whenever they sustain a
loss as a result of the event insured against.
The other arms of the industry play a complementary role as they are
dependent, one way or the other on the insurance companies ibr survival
hence, they are not considered in this study.
CHAPTER FOUR
ANALYSLS - OF RESEARCH DATA
Generally, the analysis of this research data takes the fonn which allows clear cut
inferences to be drawn and meaningful deductions made.
Some of the companies used for this research are composite companies i.e. they
underwrite both life and non-life business while the others are specialist companies
i.e. they underwrite either only non-life business or only life business.
Before going into the analysis proper, it is important to look at the principal
sources of the companies' investible funds. They are as follows:-
4.1 SOURCES OF INVESTIBLE FUNDS
4.1. I Reserve For Unexpired Risks
This constitutes the premium which an insurance company has collected but
which has not been earned on current policies. Under the Insurance Act
1976 as amended by the Insurance Act of 1997, it is provided that this
amount shall not be less than "45 percent of the total net premiums with
respect to non-li le business".
4.1.2 Reserve For Outstanding Claims
This is the reserve meant for claims that have not yet been settled.
In addition, it is also meant for losses which have accrued but yet to be
reported to the office.
4.1.3 Contingency Reserve
This is a reserve set against catastrophic losses which may otherwise force
the insurance company to wind-up. This reserve is designed "to reduce the
company's exposure to delinquency".
4.1.4 Share Capital
This constitutes the capital provided by the owners of the company.
At present, insurance companies operating in Nigeria are classified based on
their share capital.
The minimurn share capital requirement is =N=20million. Insurance
Companjes in this category are required to write general business risks only.
If an insurance company is interested in writing special risks such as oil and
aviation in addition to general business, the share capital requirement is
=N=70million. If life business is to be added to the above, then the share
capital requirement is =N=90million.
It is obvious that there will be a lot of investible finds from the share capital
of insurance companies.
Source of Fund Amount at end of 1997 =N=(Million)
Source: Compiled fium Insurance Companies' annual reports 1997
%J of total
Reserve for outstanding claims
Reserve for Unexpired risks
Contingency Reserve
185.28
174.15
73.24
22.37
21 .03
8.84
Table 4.1 above shows the principal sources of investible hnds of ten
insurance companies operating in Nigeria. As could be seen, the bulk of the
investible h i d is mainly fkom the share capital of the companies. For
instance during the period under review, out of a total investible funds of
=N=828.17million, share capital accounted for =N=395.50miIlion or
47.76%.
It is also important to note that reserve for outstanding claims represents
about 22.37% of the investible fbnds. This demonstrates why non-life Rmds
should be invested mostly in short term assets such as treasury bills and
treasury certificates.
Before going ahead to analyse the hypotheses, it is important to see the
distribution of the investment of the companies considered.
TABLE 4.2 mirT Investments =N=(MiIlion)
Government Securities
Rankers Acceptance 62.82
Debenture Stock 55.10
-
Ordinary Shares 33.41
Leasehold Property 28.42
L Source: Compiled fiom lnsurance companies Annual Reports.
From the above table, it would be seen that the companies utiIised five major
types of inveslrnerlt outlets.
Also, Federal Govemnent Securities account for highest form of
investment. The average percentage for the three years period was 32.94%.
This is despite the fact that the return on the securities is very low. l'he
reason for this concentration is not unconnected with the provision of the
law which compels every insurance company to invest a minimum of 25%
or their investible fwds on Federal Government Securities. This same law
prohibits insurance companies from investing more than 10% of their fimds
in high income yielding investment such.as real estate. As we can see from
the table above, the average percentage invested in leasehold property was
1 1.29%. Though the intention of Government is to ensure asset-liability
matching, how far this can be justified will be seen later.
4.2 TESTING THE HYPOTHESIS
With the above background the stage is now set for the testing of the
hypothesis which were made at the introductory stage of this study.
Ho:
13,:
Government guidelines and regulations of investment are not
material as to influence the income derivable fiom investment.
Government guidelines and regulations are very material and are
regarded as too stringent as they influence the income derivable
fiom investment.
From the schedule of questions attached as appendix I, the questions
relevant to this hypothesis are questions 2, 3, 4 and 13. From the responses
received 27 or 66% concluded that Government regulations are too stringent,
and that such stringent regulations affect the income derivable from
investment. An analysis of their answers shows that many of them would
have preferred to invest more in real property and maintain substantial
deposit with batlks because of the huge investment income derivable Rom
these outlets but have to concentrate their investment in Government
Securities, not because they desire to do so but to comply with investment
guidelines of the Government. For instance, in response to question 3, many
of them who indicated that their major investment outlet is in Government
Securities stated that they do so because they have no choice.
In view of the above, majority of the companies in response to question 13,
concluded that they do not support a State control of investment. They
canvassed for a more liberal policy that will enable each company determine
where and how to invest. Though this is the view of majority, a few
supported State control because, according fo them it will ensure asset-
Iiability matcling. Tcl this set of respondents, there is nothing wrong in
government guidelines regarding investment. Since, according to them,
what the government i~ interested in is basically security of the fund.
Despite the above argument, one can conclude that since the study
revealed that majority of the respondents do not support State
regulation of investment, Hypothesis Ho should be rejected while HI should
be accepted.
Ho: Investment income of Insurance Companies does not have a significant
impact on the total income and survival of the Companies, therefore, less
importance should be attached to it.
Hz: Investment income of Insurance Companies have a significant impact on the
total income and survival of the companies, therefore, more importance
should be attached to it.
To test this hypothesis, the income derived from investment will be compared with
underwriting results from operations for the period 1995 - I 997.
TABLE 4.3
Year
1995
1996
1997
Sub Total
% of total
Total
Total
168.2
141.9
100.5
4 10.6
lnvcsltnent Income A%-r expenses =N- (Million)
I Source: Complied from Insurance Companies Annual Reports
As can be seen tiom table 4.3 above, investment income represent a significant
proportion of the total income. During the period under consideration, investment
income represent about 42.4% of the total income.
This confms the importance of investment to the growth and survival of
insurance industry. In a particular year, i.e. 1997 the total income realised from
investment (i.e. (=N=ll3.8rn) is even more than total underwriting profit recorded
for that year (i.e. =N=lOOSm). This analysis further goes to confirm the
significant effect of investment. Apart from this anaIysis of the annual accounts of
Underwriting Profit =N= (Million)
Fire & General Accident
Marine & Aviation
Motor & Others
Insurance Companies, question 5 in the schedule of questions is relevant to the
hypothesis being tested.
In response to the question, nearly all the respondents answered in the affumative.
As a matter of fact, 40 out of a total of 41 respondents or 98% confirmed that
investment income has a significant bearing on the total income.
In view of the foregoing, it is quite clear that investment income of Insurance
Companies have a significant impact on the total income of Insurance Companies.
Therefore, Ho should be rejected while we accept Hz.
Ho: Where investibie funds are placed is not important as long as investments
are made.
H3: Where investible funds are placed is important to the companies making
such investments.
From the questionnaire, the questions relevant and whose answers will be used to
test this hypothesis are questions 6, 7, 8 ,9 and 10.
The study revealed that though none of the companies has a separate investment
department, majority of the companies have sound investment experts who take
many factors into corlsideration before finds are invested. One of the factors is
that of Asset-Liability Matching. The intention here is to ensure that funds in
respect of short term Iiabilities are invested in short tenn instruments and vice
versa.
Companies that have been following this principle have not been experiencing any
problem. However, the study revealed about two Insurance Companies who are
now in distress simply because they failed to take into consideration this vital
principle. For instance, finds collected in respect of short term liabilities are
invested in long term projects such as real estates. The effect is that they are
unable to hlfil their obligations to their insureds.
The study further revealed that majority of the Companies surveyed do not have a
clear investment policy and as such, they have suffered some losses which many of
them cannot quantify. For instance in answer to question 9, many of the
respondents who belong to this class confirmed that they suffered losses due to
failure of finance houses between 1992 and 1993. Because of the high interest
rate offered by the finance houses, many of them took their funds to these finance
houses and when they collapsed, millions of naira went with them. The reason for
this loss was attributed to lack of a clearly laid down investment policy by many of
the respondents.
From another angle, 25 out of the 41 respondents or 61% confirmed that they
follow to the letter, Government guidelines on investment. To this set of
respondents because of the need to comply with Government regulation, they have
a clearly laid down investment poIicy. About 13 of this set or 52% confirmed that
they have not suffered any loss on their investments.
In view of the above, one can conclude that majority of the Insurance Companies
are concerned with where their investible fbnds are placed. Therefore, Ho should
be rejected while I13 should be accepted.
4.3 INVESTMENT CONSTRAINTS OF INSURANCE COMPANIES
It is necessary before ending this section to highlight some of the investment
constraints of Insurance Companies. These constraints were discovered in
the course of this study. They are as follows:-
One major constraint is lack of hnd. The study revealed that most times,
there might be some investment opportunities, but because of limited hnd,
the Companies are unable to take advantage of such opportunities.
Another constraint is that Insurance Companies have to comply with section
18 of the 1976 Insurance Act as amended by the Insurance Act of 1997.
Investment in real estate is lucrative and the income derived fiom such
investment is very high, but the Company cannot invest more than 10 per
cent of its fmds in such assets in compliance with the act.
Absence of a separate investment department is a major problem of the
Insurance Industry. Most investment decisions are made in the Accounts
Department. These decisions are therefore made by non-specialis t in the
field and this problcnl on its own may lead to other investment problems
such as low investment income and inability to determine a better
investment outlet out of two or more alternatives when the Company is
faced with limited fund.
Finally, inflation is another investment problem. The investment outlets of
most of the companies surveyed are futed interest securities such as Federal
Government Securities, State Government Securities and Bankers
Acceptances.
Generally, during inflationary period, operation cost, claims cost and
administrative cost of Insurance Companies are mostly on the increase,
but this might not translate to increase in interest rates notwithstanding the
increase in operation cost. Also related to this problem is that the amount of
investible funds is reduced during inflationary period.
CHAPTER FIVE
DISCUSSION OF RESULTS
The result derived from the analysis of data presented in Chapter Four of this
Study shall form the basis of this discussion.
The first hypothesis revealed that most Insurance Companies are not comfortable
with Government regulation of investment. For instance, the Study revealed that
36% of the sample population preferred a liberal policy concerning investment so
that each Company can decide where and how to invest their surplus hnd. It was
also discovered that one major criterion that would have influenced the placement
of fund by Insurance Companies assuming there is absolute freedom, is the level of
income derivable from such investments. It is certain that most of the Companies
would have concentrated their investible finds in high yielding iristruments
without consideration for Asset-Liability Matching Principle. For instance, the
study revealed that a lot of find would have been channeled intn real estate
because of its high income potential.
The second hypothesis, concerned with the relevance of investment income also
revealed that a lot of importance should be attached to the issue of investment
since the income derivable from this source plays a major role in the survival of
hsurance Industry in Nigeria.
The Study revealed dwindling underwriting income owing largely to increased cost
of business acquisition, increased commission rates, increased claims cost as well
as increase in rate of inflation. As a result of this decrease in underwriting results,
it is therefore imperative that if the Industry must survive it must look at another
source of revenue. This is where the issue of investment income comes in. This is
why the issue of investment should be given the importance which it deserves, and
as we can see from the analysis of data in Chapter Four, a lot of importance should
be attached to it because of the income derivable from it.
The third hypothesis brings out the issue of asset-liabibty matching principle.
It is clear that one of the principal reasons why Government regulates the
investment of Insurance Company finds is to ensure that the Companies are able to
meet their obligations as and when due. The Government is doing this to prevent
failure by Insurance Companies.
It was discovered by the Study that most Insurance Companies comply with
Government regulations not because they are convinced that it is the best but
because they do not want to incur the wrath of the law. By complying therefore,
they are indirectly working against their own failure. The Study revealed that two
of the Companies surveyed are now experiencing distress as a result of bad
investment policy. It was revealed that one particular Company, in deference of
the law invested well over 70% of its investible hnds in real estate. The effect of
this is its failure to meet its liabilities.
The case of the Company is particularly worse because the project on which the
fimds were committed is yet to be hlly completed. Therefore, no revenue is made
from this investment outlet.
In view of the foregoing, one can therefore see that no matter how stringent
Government regulations concerning investment are, they have their own merits.
CHAPTER SIX - SUMMARY OF MAJOR FINDINGS, RECOMMENDATION
AND CONCLUSION
6.1 SUMMARY OF MAJOR FINDINGS
The importance of the concept of investment to the survival and growth of
the Nigeria Insurance Industry has been revealed by this Study.
The major findings of this Study are hereby sumrnarised as follows:-
The Study has revealed that a lot of importance should be attached to the
concept of investment. The Study revealed that without the income realised
fiom investment, it will be difficult for Insurance Companies to survive.
Many Insurance Companies would probably have died if not because of
investment income which they rely on for survival.
Secondly, the Study revealed that the bulk of investibk hnds is derivable
from the Share Capital of Insurance Companies. This implies that an
increase in the Share Capital of an Insurance Company is most likely going
to lead to an increase in its investible funds.
The Study hrther revealed that Insurance Companies in Nigeria basically
utilise five major investment outlets, as described in table 4.2. Out of the
five outlets, Federal Government Securities accounted for more than 32%.
This is a short term investment outlet and is in conformity with the
provisions of the law which compels Insurance Companies operating in
Nigeria to invest a minimum of 25% of their investible knds in Federal
Government Securities.
I t was also fout~d that the 1976 Insurance Act as amended by the ltisuratice
Act of 1997, particularly the aspect that relates with investment, is too
stringent and therefore should be amended. Many of the Companies
surveyed complained that they would have realised more income from their
investments if not for the stringent law. Many of the Companies are seeking
for the amendment of this aspect of the law, so that they can maximise their
income.
The Study m h e r revealed that most of the Insurance Companies are cotlscious of
where their funds are invested. Consideration is given not only to the income
derivable from the investment but also the security of the fund. The Study
revealed that after the collapse of the Finance Houses in the early 1990q, most
Insurance Companies changed their consideration fiorn income to security of the
find. In addition, most of the Companies surveyed confirmed that the Principle of
Asset-Liability Matching is another major consideration. It was found that hnds
collected in respect of short term liabilities are invested in short term projects while
that of long term liabilities are invested in long term projects. This, they have been
doing to avoid failure. It was revealed that few Companies who have riot been
bllowing this principle have ran into troubled waters and are now finding it
difficult to stay afloat.
The Study hrther revealed that none of the Companies surveyed have a separate
investment department. The implication of this is that investment decisions are left
with non-experts with the effect that most often such decisions do not have the
touch of expertise, and as such maximising the gains of investment might be
difficult.
Finally, during the course of this research, some constraints relating to
it~vestrnent which militate against maximising the benefits of insurance were
discovered. They include Iack of h d , inadequate information about
companies issuing debentures, Government poficy and high inflation rate.
6.2 RECOMMENDATION AND CONCLUSION
As stated during the introductory stage of this Study, most Insurance
Companies are finding it increasingly difficult to make profit from their
underwriting business. The reasons for this situation include increase in cost
of operation, increase in claims cost etc. I t is therefore imperative that other
means of generating income must be explored, hence the importance
attached to the issue of investment. This issue has acquired a lot of
significance such that in some cases, the level of profitability of some
companies is dependent on investment income. At times, the income
realised fiom investment is even more than the profit realised fiom normal
business operations. For instance, in 1997, the Study revealed that out of a
total profit of =N=214.3 million, investment income accounted for
=N=I 13.8 or 53.1%.
In view of the foregoing, the folfowing recommendations are hereby made.
It is hoped that if the recommendations are implemented, it will go a long
way in solving the distress problem in the Industry.
Jn the first pIace, Insurance Companies are advised to set up a separate
investment unit to handle investment decisions. The existing
system whereby investment decisions are made in the accounts department
should be jettisoned as it is not only inefficient but also counter-productive.
The unit should be equipped with expertise who have good foresight and are
also competent to make good investment decisions. In the words of
Cappiello, (1977) that "in order to do a superior job, one needs superior
people."
The findings have shown that an unsatisfactory income is realised !?om
underwriting. Some of the reasons for this include increased claims cost and
increase in cost of operation. This low income, no doubt, is affecting the
amount that can further be invested. The increment in cost of settling cIairns
can be as a result of so many factors amongst which are inadequate
underwriting or incompetence of employees, increase in awareness and
fraud.
It is therefore recommended that every company should employ
professionals to man the various units of its operations in order to reduce the
cost of meeting cfaims. If a good profit is made from underwriting, it will
provide more fuunds for hrther investment and the present shortage of k n d
for investment when there are investment opportunities will be a thing of the
past.
In view of the complaints against the strict regulations concerning
investment by Insurers, it is hereby recommended that the existing law
should be modified. While the intentio~l of the legislation is quite laudable,
a little amendment to make it more flexible while not losing sight of the
asset-liability matching principle should be considered.
In view of the revelation that some Insurance Companies, try tb circumvent the law
by investing anywhere it pleases them, it is hereby recommended that the
supervisory authority should fiom time to time send their oficials to conduct
inspection of books of Insurers. This will ensure strict compliance with the
provisions of the law. For instance, it was found that some Insurance Companies
are now in distress because they invested over 75% of their investible funds on
property. The result is that they are unable to meet their obligations as and when
due. If the above recommendation is complied with, it will eliminate this kind of
incident.
Finally, the issue of Asset-Liability Matching Principle must be given thr
prominence which it deserves. Premiums generated from short term liabilitie
must be invested in short term assets or instruments while premium generated fro!
long term liabilities must be invested in long term instruments to realise maximu
benefits.
in conclusion, this Study has been able to reveal the way insurance is be
practiced in Nigeria, the importance of investment, the various sources
SCHEUDLE OF QUESTIONS
1 . Do you have R separate investment department? If Yes, Why? If No, Why
not?
2. Out of the options stated below, tick the major investment outlet(s) of your
Company
(a) Deposit with Banks
(b) Investment in Government Securities
( c ) Investment in Real Property
(d) Investment in Stock
(e) Others
3 . Why is your Company showing much interest in the one you picked?
4. Do you think the provisions of 1976 Insurance Act as amended by the
Insurance Act of 1997 particularly the aspect relating to investment is
favourable to your Company? IfYes, Why? Jf No, Why not?
5 . Do you think the income you realise from investment has a significant
impact on the total income?
6. Do you normally take into consideration the nature of your Company's
liabilities when deciding investment outlets? If so why do you consider it so
important?
7. Do you have a clearly laid down investment policy?
8. State your reason@) for having (or for not having) an investment policy?
9. Have you ever suffered any loss in respect of your investment? If so state
the reason
10. What was the effect of the loss (in question 9) on your total income?
11. What are the major investment decision problems faced by your
organisation?
12. Ilow would you rate your investment performance when cornpared with the
total company performance?
13. In view of Question 10, 1 1 & 12 (above) would you support a state control
of investment'?
14. In view of the answers given to the questions mentioned above, would you
consider investment income as material to insurance companies operating in
the industry?
1 5. Pick one of these statements to describe investment
(a) With or without investment, Insurance Companies will still do very well
(b) insurarlce Companies with good investment do better than the ones
without investment
(c) investment is not material to the survival of insurance companies as the
income der.ivable fiom this source is insignificant.
BLBLOGRAPHY
BOOKS
Aigbokhan, B. E. Rekindling lnvestment for Economic Development In
Nigeria. ( I badan, the Nigerian Economic Society, 1 998)
Akhigbe, Alex Insurance: The Nation and You: Myths, Misconceptio~
and the Facts (Lagos, 1992)
Alice, Galenson lnvestment Incentives for Industry (London, 1984)
Dickson. G. C. A. Risk and Insurance (London, Chartered I~isurance
Falegan, J. 1.
Hansel, D. S.
Menning, C. M.
Irukwu, J. 0.
Institute, 1980)
An Introductory 'Text (University of Lagos Press, Lagos,
1991)
Elements of Insurance (London, Macdonald and Evans,
1970)
Financial Markets and the Economy (Prentice-l la11
Englewood N. J. New Jessey, 198 1 )
Insurance Management In Africa (The Caxton Press-
West Africa Limited-Lagos, 1977)
Okafor, F. 0. Investment Decisions. Evaluation of Projects and
Securities, (Cassell Ltd, London, 1983)
Olowoyo, B. J. Basic Elements, Principles and Practice of Insurance
(Relate Clornmunications Ltd, Lagos, 1998)
I'ERIODICALS AND JOURNALS
Bello, A. 0. "lnsurance Industry and the Nigerian Economy".
Unpublished manuscript, Dept. of Finance
Unilag: 1 1-1 7, 1982
Bello, A. 0. "Investment Behaviour of Insurance Companies in
Nigeria". Unpublished manuscript, Dept. of Finance:
Unilag: 2
Cappiello, F. A. "Investment Problems and Policies of Small and
Medium Size Life Assurance Companies".
In Investment Activities of Life Insurance Companies,
J. A. Curnmins (Ontario) 268-289, 1977
Falegan, J. 1. "The Insurance Industry and the Barriers to entry into
the Capital Market". Journal of the Management
Students Association, Faculty of Business
Administration, UNLLAU, 3: 20:30, 1982
Falegan, J. I. "'l'he Insurance Funds and the choice of Investment".
In the Bullion. Central Bank Publication,
JanuaryIMarch: 3(1): 30-3 1, 1985
Jones, L. D "Investment in Income Property Mortgages by Life
Insurance Companies". In Investment Activities of Life
Irlsurance Companies J. 1) Curnmings (Ontario) 59- 100
1977
Osisioma, 13. C. "lnvestment Strategies In Nigerian Capital Market".
Journal of the Insurance Institute of Nigeria, Dec. 1984
Oyeka, C. C "The Investment of Life Assurance Funds7'. Journal
of the Nigeria Reinsurance corporation: 1 (3):22-25,
1980
Okafor, F. 0. "Instruments of Business Finance in Nigeria".
Unpublished manuscript, Dept. of Finance,
University of Nigeria.
Okafor, F. 0. "Overview of the Nigerian Financial System".
Urlpublished manuscript, Dept. of finance, University of
Nigeria
Okwor, E. "Government Participation in Insurance since the 70s
and its impact in the Insurance Market". Journal of
Actuarial Science and Insurance Students' Associatic)tl
UNILAG: 2(2) : 4-6
top related