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

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

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UNILAG: 2(2) : 4-6