Insurance is one of the cornerstones of modern day financial services sector. In addition to its traditional role of managing risk, insurance market activity, both as intermediary and as provider of risk transfer and indemnification, may promote growth by allowing different risks to be managed more efficiently through promoting long term savings, encouraging the accumulation of capital, serving as a conduit pipe to channelling funds from policy holders to investment opportunities as well as mobilizing domestic savings into productive investment. Insurance is an indispensable aspect of a nation’s financial system and theoretical conceptions explain that financial systems influence savings and investment decisions through lowering the costs of researching potential investments, exerting corporate governance, trading, diversification and management of risk, mobilization and pooling of savings, conducting exchange of goods and services and mitigating the negative consequences that random shocks can have on the economy. However, the level of insurance market activity which should be commensurate with Nigeria’s huge potentials has not been attained. Insurance by reducing uncertainty and volatility, smoothen the economic cycle and reduce the impact of crisis situations on the micro and macro level. But, the demands for protection against losses of life, property caused by natural disaster, crime, violence, accidents, fire are not met in Nigeria. It is against this background that this study examined the impact of life-insurance penetration, non-life insurance penetration, total insurance penetration and insurance density on economic growth in Nigeria. The study adopted the ex-post facto research design and annualized cross sectional data for 26-year period 1987-2012 were collated from the Central Bank of Nigeria statistical Bulletin, National Insurance Commission and Nigerian Insurers Association. Four hypotheses were proposed and tested using the Ordinary Least Square (OLS) regression model. Descriptive statistics and graphs were also used to complement the regression results. The results emanating from this study indicate that while life insurance penetration and insurance density had positive and significant impact on economic growth in Nigeria, both total insurance penetration and non-life insurance penetration had positive but insignificant impact on economic growth in Nigeria under the period of this study. The study therefore recommends among others, that for the insurance industry in Nigeria to exert more positive impact on the Nigerian economy, government policies concerning insurance should focus more on attracting rural communities into the insurance bracket. This will assist at enhancing savings therefore providing funds for investment into the Nigerian real sector.
TABLE OF CONTENTS
Title Page. . . . . . . . . . i
Approval Page. . . . . . . . ii
Declaration. . . . . . . . . iii Dedication. . . . . . . . . iv
Acknowledgments. . . . . . . . v
Abstract. . . . . . . . . vii
Table of Contents. . . . . . . . . viii
List of Tables. . . . . . . . . . xi
List of Figures. . . . . . . . xii
CHAPTER ONE INTRODUCTION
1.1 Background of the Study. . . . . 1
1.2 Statement of the Problem. . . . . . 4
1.3 Objectives of the Study. . . . . . 5
1.4 Research Questions. . . . . . . 5
1.5 Research Hypotheses. . . . . . . 6
1.6 Scope of the Study. . . . . . . 6
1.7 Significance of Study. . . . . . 7
1.8 Operational Definition of Terms. . . . . 8
References. . . . . . . . . 10
CHAPTER TWO REVIEW OF RELATED LITERATURE
2.1 Theoretical Review. . . . . . . . 11
2.1.1 Theories of Economic Growth. . . . . . 11
2.1.2 Theoretical Review of the Nigerian Insurance Industry. .19
2.1.3 Theories of Reinsurance in Nigeria. . . . 25
2.1.4 Classifications of Insurance Business in Nigeria. . . 30
2.1.5 The Nigerian Financial System. . . . . . 43
2.1.6 Theories of the Financial System. . . . . 46
2.1.7 Theories of the Role of Insurance in Financial Intermediation. 48
2.1.8 Environmental Factors affecting Insurance Market in Nigeria 57
2.2 Empirical Review. . . . . . . 68
2.2.1 Financial Structure and Economic Growth. . . . 68
2.2.2 Financial Intermediation and Economic Growth. . . 73
2.2.3 Insurance Industry and Economic Growth. . . 79
2.2.4 Life Insurance and Economic Growth. . . . . 86
2.2.5 Non-Life Insurance and Economic Growth . . . . 88
2.2.6 Insurance Penetration and Growth. . . . 91
2.2.7 Insurance Density and Growth. . . . . 92
2.2.8 Insurance Sector Development and Capital Market Growth. 92
2.3 Review Summary. . . . . . . . 94
References. . . . . . . . . 96
CHAPTER THREE RESEARCH METHODOLOGY
3.1 Research Design. . . . . . . 110
3.2 Nature and Sources of Data. . . . 110
3.3 Model Specification . . . . . . . 110
3.4 Description of Variables. . . . . 113
3.4.1 Dependent Variables. . . . . . . 113
3.4.2 Independent Variables. . . . . . 113
3.4.3 Control Variables. . . . . . . 114
3.5 Techniques of Analysis. . . . . . 115
References. . . . . . . . . 116
CHAPTER FOUR PRESENTATION AND ANALYSIS OF DATA. .
4.1 Presentation and Interpretation of Data. . . . 117
4.2 Test of Hypotheses. . . . . . . 126
4.2.1 Test of Hypothesis One. . . . . . 126
4.2.2 Test of Hypothesis Two. . . . . . 126
4.2.3 Test of Hypothesis Three. . . . . . . 129
4.2.4 Test of Hypothesis Four. . . . . . 130
4.3 Implication of Result. . . . . . . . 132
References. . . . . . . . 134
CHAPTER FIVE SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS. . . . . .
5.1 Summary of Findings. . . . . . . 135
5.2 Conclusion. . . . . . . . . 136
5.3 Recommendations. . . . . . . 137
5.4 Recommendation for Further Studies. . . 138
5.5 Contribution to Knowledge. . . . . . 139
Bibliography. . . . . . . . . 140
Appendix. . . . . . . . . 154
LIST OF TABLES
Table 4.1 GDP per capita and Life Insurance Penetration. .
Table 4.2 GDP per capita and Non-Life Insurance Penetration.
Table 4.3 GDP per capita and Total Insurance Penetration. .
Table 4.4 GDP per capita and Insurance Density. . .
Table 4.5 Regression Result for Hypothesis One. . .
Table 4.6 Regression Result for Hypothesis Two. . . .
Table 4.7 Regression Result for Hypothesis Three. . . .
Table 4.8 Regression Result for Hypothesis Four. . . .
LIST OF FIGURES
Figure 1: GDP per capita and Life Insurance Penetration. . .
Figure 2: GDP per capita and Non-Life Insurance Penetration. .
Figure 3: GDP per capita and Total Insurance Penetration. . .
Figure 4: GDP per capita and Insurance Density. . . . .
1.1 BACKGROUND OF THE STUDY
Insurance is one of the cornerstones of modern-day financial services sector. In addition to its traditional role of managing risk, insurance market activity, both as intermediary and as provider of risk transfer and indemnification, may promote growth by allowing different risks to be managed more efficiently, promoting long term savings and encouraging the accumulation of capital, serving as a conduit pipe to channeling funds from policy holders to investment opportunities, thereby mobilizing domestic savings into productive investment (Skipper, 1997; Arena, 1998).
Insurance is often defined as the act of pooling funds from many insured entities in order to pay for relatively uncommon but severely devastating losses which can occur to these entities (Omoke, 2012). The insured entities are therefore protected from risk for a fee, with the fee being dependent upon the frequency and severity of the event occurring (Encarta dictionary, 2009) hence, it is a commercial enterprise and a major part of the financial services industry. Adebisi (2006) argues that insurance is an intricate economic and social device for the handling of risks to life and property. It is social in nature because it represents the cooperation of various individuals for mutual benefits by combining together to reduce the consequence of similar risks. As every new area of risks, and since with every passing day, a new insurance package amount to take care of more and more areas of risks and this increases insurance booms consequently, Vaughan (1997) expresses insurance as an arrangement with a company in which you pay them regular amounts of money and they agree to pay the costs if it occurs.
Agbaje (2005) defines insurance as the business of pooling resources together to pay compensation to the insured or assured on the happening of a specified event in return for a periodic consideration known as premium, therefore, an insurance contract is usually evidenced by a document called the insurance policy which is usually signed at the foot by the insurer or assurer or his agent. Gollier (2003) argues that insurance involved the transfer of risk from an individual to a group, sharing losses on an equitable basis by all members of the group.
As opined by Dickson (1960), insurance is designed to protect the financial wellbeing of an individual, company or other entity in case of unexpected loss. According to him, some forms of insurance are required by law; while others are optional agreeing to the terms of an insurance policy creates a contract between the insurer and the insured. Thus, insurance acts as a promise of reimbursement in the case of loss, paid to people or company so concerned about hazards they have prepayments to an insurance company (Ajayi, 2002). According to Osoka (1999), the insurance industry is vital to the wellbeing and smooth functioning of a modern economy and as such for developing country like Nigeria; it can also act as a catalyst of economic growth by helping to accelerate the process of qualitative structural transformation. Bowers et al. (1997) views insurance system as a mechanism for reducing the adverse financial impact of random events that prevent fulfillment of reasonable expectations and Osipitan (2009) argues that the insurance business is vital to the financial system due to its role in helping people and businesses to manage their resources and mitigate risk efficiently.
Agbakoba (2010) states that insurance practice has come a long way since the time when Lloyd’s sent runners to the water front to pick up news of ship movements and later would send policy around London for subscription by anyone with sufficient means. The origins of modern insurance are intertwined with the advent of British trading companies in the region and the subsequent increased inter-regional trade. Increased trade and commerce led to increased activities in shipping and banking, and it soon became necessary for some of the foreign firms to handle some of their risks locally (Uche and Chikeleze, 2001). This origin was influenced according to Ujunwa and Modebe (2011), by two factors; first, the expansion of cash crop production for exports, and the upward surge in economic activities in the 1890s; second, the British desire to protect its interest and properties in the protectorate of West Coast of Africa.
This view of origin of the Nigerian Insurance industry was supported by Badejo (1998) who confirmed origin of insurance in its modern form was introduced into Nigeria by the British in the closing years of the 19th century with the establishment of trading posts in what is now known as Nigeria towards the end of the 19th century by European trading companies mostly British. These foreign companies started effecting their insurance with established insurers in the London insurance market. However, as time went on, some British insurers appointed Nigerian agents to represent their interest in the country. These agents later grew into full branch offices of their parent companies in Britain. Osunkunle (2002) opines that the first branch office in Nigeria was the Royal Exchange Assurance in 1921, later followed by other British companies.
Hausell (1990) submits that historically, only one insurance company operated in the country between 1914 and 1948. This was the overseas branch office of the Royal exchange assurance company operating from its head office in the United Kingdom. The first indigenous company to be established in Nigeria was African insurance company in 1950 by Dr. Kingsley O. Mbadiwe; this was to be followed by the Nigerian general insurance company in 1951 and the lion of Africa insurance company in 1952. Since then, the Nigerian Insurance industry has continued to grow, both in number as well as in business.
Insurance is an indispensable aspect of a nation’s financial system and theoretical conceptions explain that financial systems influence savings and investment decisions and hence long-run growth rates through the following functions; lowering the costs of researching potential investments; exerting corporate governance; trading, diversification, and management of risk; mobilization and pooling of savings; conducting exchanges of goods and services, and mitigating the negative consequences that random shocks can have on capital investment (Levine, 2004). Financial intermediaries support development through the improvement of these functions (i.e., the amelioration of market frictions such as the costs of acquiring information, making transactions, and enforcing contracts and allowing economies to more efficiently allocate resources (savings) across investments). However, the positive effects of financial development are tailored by the macro policies, laws, regulations, financial infrastructures and enforcement norms applied across countries and time.
The importance of the insurance industry as an aspect of the financial system has been neglected over the years as most studies on the interaction between the financial sector and economic growth has focused mainly on the banks and the stock market. However, recently, growing attention has shifted to the interaction between the non-bank financial intermediaries such as the insurance companies because of the work of King and Levine (1993a, b) where it was revealed that non-bank financial intermediaries such as the insurance companies have over the years played important roles in enhancing the efficient functioning of the financial system through its intermediation function.
From the foregoing, it could be observed that the number of empirical studies is relatively small, especially in relation to those on banking contribution to economic growth. In order to contribute to filling the gap, the study focused on examining the insurance-growth nexus using Nigerian data from 1987 to 2012.