THE ROLE OF REINSURANCE IN THE PERFORMANCE OF INSURANCE INDUSTRY IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND TO THE STUDY

Generally, Insurance plays a pivotal role in the transfer of risk across all spheres of life. The concept of insurance refers to a contract between two parties where one party promises to indemnify the other party for the occurrence of any risk covered under the contract in exchange for a monetary consideration called premium (Ogwo, 2000). The party who makes this promise is referred to as an insurer and is a limited liability company. This company also faces several risks and this necessitates the ceding of these risks with a larger insurance company. This process is conceptualized as reinsurance.

By definition and explanation, one can describe ‘Reinsurance’ as the practice of insurers transferring portions of risk portfolios to other parties by some form of agreement in order to reduce the likelihood of having to pay a large obligation resulting from an insurance claim. The intent of reinsurance is for an insurance company to reduce the risks associated with underwritten policies by spreading risks across alternative institutions. Overall, the reinsurance company receives pieces of a larger potential obligation in exchange for some of the money the original insurer received to accept the obligation. The party that diversifies its insurance portfolio is known as the ceding party. The party that accepts a portion of the potential obligation in exchange for a share of the insurance premium is known as the reinsurer.

In developing and emerging economies, reinsurance companies spring up back bone to support the insurance business. They serve as a supportive factor to establish confidence policy holding in insurance companies, reinsurance also allow the direct insurer to free themselves from the part of a risk that exceeds their underwriting capacity, or risks which, they do not wish to bear alone. However, the situation in Nigeria seems different. Despite the existence of reinsurance in insurance sector in Nigeria, the development of the sector remains poor.

 

1.2       STATEMENT OF THE PROBLEM

The contributions of reinsurance industry to the growth and development of Insurance across the globe cannot be overemphasized. This is because Reinsurance is the foundation upon which Insurance is built (Olugbemi 2016).

The business environment and lives of individuals is characterized with high risk resulting from the dynamism associated with life as a whole. The essence of Reinsurance is to preserve value to ensure strong and detailed protection in the event of casualties that arise unexpectedly. This extra mile gone in the provision and assurance of safety is known as Reinsurance.

The primary objective of reinsurance is to protect the primary insurer or the ceding company from being crippled by land losses beyond its financial capacity. Where the risk assumed by the reinsurer from the ceding company is so large that it cannot comfortably handle alone, the reinsurer can reinsure or retrocede part of the risk to another reinsurer. They also help to avoid possible financial strain due to rapid growth of the portfolio and from the part of view of young insurance companies.

Reinsurance companies have added stability to the insurance industry and to the local economies by declining out the results of the insurance companies as they continue to absorb the impact of large losses which would have led to very damaging results to the individual insurance companies. In Nigeria, reinsurance was introduced in the insurance in 1977. The reinsurance companies in playing their role in the sub sector attempts to support the effort of huge claims to restore confidence of the policyholders in the business. In spite of the existence of reinsurance and their effort to underwrite for the primary insurers, member of the public still double the ability of primary underwriters. Especially in areas that require huge claims, such as aviation, oil and gas. These areas sparingly patronized in Nigeria. Thus this study is set to determine the role of reinsurance in the performance of insurance industry in Nigeria.

 

1.3       OBJECTIVE OF THE STUDY

The main objective of this study is appraising the contributions of reinsurance to the performance of insurance companies in Nigeria. Specific objectives include:

1.     To evaluate the strength of the Nigerian Reinsurance Industry.

2.     To examine the relationship between Insurance and Reinsurance companies in Nigeria.

3.     To appraise the contributions of reinsurance to the Nigerian insurance Industry.

4.     To assess regulations and policies of reinsurance in Nigeria.

 

1.4       RESEARCH QUESTIONS

1.         What is the strength of the Nigerian Reinsurance Industry?

2.      Is there any relationship between Insurance and Reinsurance companies in Nigeria?

3.      What are the contributions of reinsurance to the Nigerian insurance Industry?

4.      What are the regulations and policies of reinsurance in Nigeria?

 

1.5       RESEARCH HYPOTHESIS

Hypothesis 1

Ho:      There is no significant relationship between insurance company and the reinsurance company in Nigeria

Hi:       There is significant relationship between insurance company and the reinsurance company in Nigeria

Hypothesis 2

Ho:      There is no significant contribution of reinsurance to the Nigeria insurance industry

Hi:       There is significant contribution of reinsurance to the Nigeria insurance industry.

 

1.6       SCOPE AND LIMITATIONS OF THE STUDY

This study will take a critical look at the role of reinsurance in the performance of insurance industry in Nigeria, with particular emphasis on the contribution of reinsurance in the insurance industry, the gross premium of non-life insurance and non-life reinsurance companies. A range of time is taken from (1987 – 2011). The study however suffered an initial and usual constraint of time, finance and relevant data needed.

 

1.7       SIGNIFICANCE OF THE STUDY

This study to a great extent has potentials of harnessing the position of Nigerian economy with regards to insurance. This is because businesses of various sorts are the main stay of any developing economy like Nigeria. Reinsurance as an extended insurance structure for business and life risks ensures these demands- thus the significance of this study. This work will be of significant contribution to the body of knowledge in this area of study, and it will also be a reference point for future researchers.

 

1.8       ORGANIZATION OF STUDY

This research study is arranged into five chapters, chapter one includes the general introduction, statement of the problem, objective of the study, research hypotheses, scope and limitations of study, significance of study as well as the definition of terms. Chapter two is the literature review, chapter three focuses on the research design, method of data collection and method of data analysis as well as statistical techniques used for data analysis. Chapter four centers on data presentation, analyzes interpretation and discussion of findings.

Finally, chapter five is the summary, conclusion and recommendations.

1.9       DEFINITION OF TERMS

The following terms are duly defined;

1.   REINSURANCE: The practice of insurers transferring portions of risk portfolios to other parties by some form of agreement in order to reduce the likelihood of having to pay a large obligation resulting from an insurance claim. The intent of reinsurance is for an insurance company to reduce the risks associated with underwritten policies by spreading risks across alternative institutions (Ogala 1992).

2. DEPRECIATION: The gradual conversion of the cost of a tangible capital asset or fixed asset into an operational expense over the asset’s estimated useful life (Mishra, 2007).

3. BROKERAGE: An organization that buys and sells foreign money, shares in companies, etc. for other people (Irukwu, 1991).

4. BROKER: A person who serve as a trusted agent or intermediary in commercial negotiation or transactions. Brokers are usually licensed professionals in fields where specialized knowledge is required, such as finance, insurance, and real estate (Remi 1999).

5.   OUTSTANDING CLAIM: - A summary of unsettled claims at the end of the financial year (Akpan, 2004).

6.   PREMIUM: - Premium is an amount paid periodically to the insurer by the insured for covering his risk (Isimoya, 2003).

7. UNEARNED PREMIUM: This an insurance premium that is paid by the customer in advance and which the insurance company has not earned (Ajayi, 2000).

8. CEDING COMMISSION: A fee paid by a reinsurance company to the ceding company to cover administrative cost and acquisition expenses.

9. INSURANCE: The act of providing against risks in business, property ownership and other life endeavors.

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