Effect of insurance development on economic growth in Nigeria

ABSTRACT

The purpose of this study is to show the relationship between insurance and economic growth in Nigeria. The 10 years data of the premium of non-life and life insurance and the annual gross domestic product proxy for economic growth are analyzed using Ordinary Least Square Regression Analysis.The findings of the Ordinary Least Square analysis show there exists a positive relationship between non-life insurance and Gross Domestic Products and negative relationship between life insurance and economic growth. This means that while non-life insurance and economic growth move in the same direction, the life insurance premium and economic growth on the hand move in different directions. The unexpected relationship found between life insurance and economic growth in this study might not be unconnected to the fact life insurance has not been well developed in the country. The study therefore concludes that while life insurance has negative effect insurance on the economic growth, the non-life insurance positively influence economic growth in Nigeria. These findings are important to the policy maker as the insurance sector (especially the life insurance sub sector) is still at the developmental stage in the country.Based on the findings, this study recommends that insurance policies be made mandatory for individuals and business organizations to encourage and protect investors as well as ensure sustained economic growth.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Insurance is a social contract that manages the transfer of risk between two or more parties. The emergence of modern insurance has played important role not only to economy as a whole but also in the social wellbeing of the individuals.  At  micro  level,  insurance  raises  individual  confidence  and  sense  of  assurance  of  financial reinstatement in  case of  loss. Ubom (2012) observed that the main objective  of insurance  is ensuring protection of customers against the insured risks. The social benefit of this is that jobs are sustained after  major loss,  losses of jobs and  sources of  income, inability to continue  to produce social amenity, losing purchasing power are averted by the insurance reinstatement of the business after a major loss. Also, premium from insurance constitute a large segment of the capital market which may be difficult for an individual to produce. Thus insurance generate large fund to the capital market from the  premiums paid  by  all  individuals  insured.  The importance  of  insurance  cannot  be overemphasized considering the role of the capital market to the economy. Insurance in the non-banking sector provides  additional  capital  to finance  economic  activities toward  the  desired growth.

Insurance business plays an important role in economic growth by mitigating business loses occasioned by sudden and devastating occurrences in both developed and developing economies. The sector provides risk management and risk adjustment services to other sectors of the economy such as industrial, transportation, agricultural, mining, petroleum, banking, etc. It also contributes to economic growth by acting as financial intermediary through capital formation and provides business funding for deficit sectors of the economy. According to Akinlo (2015) many studies in the past have pointed out the contribution of the insurance sector to economic growth and development. These studies both empirical and theoretical have shown that insurance industry contributes to economic growth by providing a comfortable investment climate in the economy.

Arena  (2006)  asserted  that  insurance  may  contribute  to  the  economic  growth  by channeling domestic saving into productive investments. The development of insurance business is closely linked to the founding of British trading companies and the subsequent increase in inter-continental trade resulting to increased activities in shipping and banking. This created the need for some foreign firms to handle business risks locally for some multinational establishments. In Nigeria, the first of such firms began in 1918 when the East and West African trade companies introduced the Royal Exchange Assurance Agency (Jegede, 2005). Other firms include Patterson Zochonis, Liverpool, London and Globe, BEWAC’s legal and General Assurance, and the Law Union and Rock.

The pace of growth of the industry in Nigeria was initially slow, particularly between 1921 and 1949 due to the effect of World War II on global trading activities. After the war business activities gradually picked up and the insurance sector in Nigeria recorded significant growth; and the first indigenous company (African Insurance Company) was established in 1958. At Nigeria’s independence in 1960 only seven of the twenty five insurance businesses were indigenous and their share of the market was below 10% (Usman, 2009).

Following the introduction of the Structural Adjustment Programme (SAP) in mid-1986, and the involvement and control of insurance business by government leading to the setting up of the National Insurance Corporation of Nigeria (NICON) in 1989, the number of insurance companies in Nigeria increased. The number of insurance companies increased from 70 in 1976 to 110 in 1990. Over the years several steps have been taken to modernize and strengthen the insurance industry (Yinusa & Akinlo, 2013). First the capital base of insurance companies was increased from 1 million to 2 million naira when only 57 out of 152 companies qualified for registration. A second round of recapitalization introduced in the 2003 Insurance Act had the capital base increased to 150 million naira from 20 million for life insurance business, from 70 to 300 million Naira for non-life and 150 to 350 million naira for reinsurance business.

Thus, 14 insurance companies were forced out of business. Another round of recapitalization, in 2005, increased insurance companies’ capital base to 2 billion naira for life business, 3 billion for non-life and 10 billion for reinsurance business. The 2005 reforms brought about a number of mergers in the industry and witnessed a drop in the number of insurance firms from 103 to 49. In the whole government regulation and control of insurance business upheld a lot of prospects for the insurance industry in Nigeria.

In terms of insurance business contribution towards job creation in Nigeria, mainstream insurance companies accounted for 61% of jobs in the industry, with the large establishments employing 250 or more workers, while agencies, brokers and providers of related services in the sector accounted for 39% of jobs (de Vos, Hougaard & Smith, 2011). Different  studies  have  attempted  to  establish  the  relationship  between  insurance  and  the economic growth (e. g. Yinusa & Akinlo, 2013). Research effort in the impact of financial sector on economic growth has recently been shifting toward the relationship between insurance and  economic growth (Mojekwu, Agwuegbo & Olowokudojo, 2011). This study intends to findout the contributions of insurance development to the economic growth from the perspective of both Life insurance premium and Non-life insurance premium

1.2 STATEMENT OF THE PROBLEM

Several studies have in the past examined the contribution of the insurance sector to economic growth, but there are mixed findings. Where some studies revealed significant positive link between insurance investment and economic growth, others argued that the sector does not contribute to economic growth. For example, Ching, Kogid and Furuoka (2010) in their study established that the response by economic growth indicators to life insurance variables like risk management, savings mobilization and investment do not influence economic growth. Agwuegbo, Adewole and Maduegbuna (2010) suggest in their findings that the insurance sector does not only boost output levels of goods and services, but also enhance the performance of the risk management function of insurance and therefore contribute to economic growth and economic stability. The study of Nwinee and Torbira (2012) on insurance investment-economic growth link also concluded with mixed findings. Fashagba (2018) noted this in very clear terms that the link between insurance sector development and economic growth has been widely researched but with contradicting findings. These mixed findings of past empirical studies on this subject indicates the existence of a study gap justifying the need for more studies, and this present study on insurance sector development and economic growth in Nigeria is meant to narrow to that gap in literature

1.3 OBJECTIVES OF THE STUDY

The main objective of this study is to find the relationship between insurancedevelopment and economic growth in Nigeria. The specific objectives are however given as following:

1. To determine the effect of life insurance premium on economic growth in Nigeria
2. To determine the effect of non-life insurance premium on the economic growth in Nigeria.

1.4 RESEARCH QUESTIONS

This study seeks to provide answers to the questions stated below:

1. Does life insurance premium affect the rate of economic growth in Nigeria?
2. Does non-life insurance premium affect the rate of economic growth in Nigeria?

1.5 SIGNIFICANCE OF THE STUDY

The study has made significant contribution in the sense that it has added to existing literature as well as provided further support for the role of the insurance sector in the financial system-economic growth nexus. The researcher hopes too that entrepreneurs, the academia, consultants and the general public would find this work useful in further studies and in making investment decisions.

1.6   SCOPE OF THE STUDY

The study is limited to finding the relationship between insurance development and economic growth in Nigeria. It intends to cover the extent life and non-life insurance premium affect the rate of economic growth in Nigeria using secondary data for the period from 2010 to 2020. The independent variable for the study is insurance proxy with life insurance premium, non-life insurance premium and the gross premium while the economic growth as the dependent variable is measured through the annual gross domestic product.

1.7   OPERATIONAL DEFINITION OF TERMS

Insurance is a social contract that manages the transfer of risk between two or more parties

Economic growth is the process by which the productive dimensions of an economy rise over time, leading to an upsurge in its national income

Insurance Development is an enabler for people to take risks and as a way to allow individuals minds and assets to be productively and confidently invested in the economy.

Pages:  69

Category: Project

Format:  Word & PDF         

Chapters: 1-5                                 

Material contains Table of Content, Abstract and References.