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THE INSURANCE INDUSTRY RECAPITALIZATION PROSPECT AND PROPOSED PROBLEMS

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CHAPTER ONE

 

  • INTRODUCTION

Government reforms in the insurance industry through the current process of recapitalization and consolidation are to restore confidence of the public in the market and enhance international competitiveness of local operators.

Consequently, the principal objective of the reform is to have emergence of bigger and stronger players in the industry with enhanced capacity. The Nigeria insurers in time past had operated on marginal scale and that accounted for the reason why the market had not benefited much, especially in the oil and energy business. The country is much more likely to experience sustained growth if her insurance market develops properly.

Insurance market development is related to improve financial sector performance and insurance markets do not develop adequately without both public and private sector development in their infrastructure. The reform is made to develop an insurance sector that drives and protects the economy through effective and efficient market structure.

 

  • BACKGROUND OF THE STUDY

Today the insurance industry consists of 103 insurance companies, five Reinsurance companies and 350 insurance brokers in Nigeria. The industry has underperformed its role in the financial sector of the economy when compared with its counterparts in other parts of the world.

The history of insurance business can be liked to the olden days. Before the advent of the British merchants in Nigeria, there was no organized insurance business as we know it in recent days. But, there existed some traditional system of risk sharing, which could be described as crude or primitive forms of mutual and social insurance schemes. Age grade association, extended family system, town or clan unions were some of he mutual insurance-like schemes for showing benevolence to their members who had suffered some misfortunes such as death, ill-health, fire ravages or court cases.

However, it was these British merchants who established trading posts, on west coast of Africa that introduced modern insurance business into Nigeria in the 19th century. They arranged insurance for their trading concerns on the London insurance market. By 1900, at least two insurance companies were known to have appointed agents in Nigeria. At that time, the development of Nigeria insurance market patterned the British way. It had sluggish growth and a number of factors were responsible for it.

It was after this that the insurance Act of 1961 which was enforced in 1968 came out. This Act however, did not regulate the investment of insurance funds. Not long afterwards, it became evident that many of the companies licensed under insurance Act 1961 were not investing their funds in Nigerian securities. This situation was corrected by insurance (Miscellaneous provision) Act 1994, which provided that every insurer should invest two-fifth of its previous year’s premium in Nigeria securities.

The post independence insurance business in the country was characterized by low capital requirement of N50,000 for registration, relatively loose pre-registration condition, and little or no post-registration control. These led to proliferation of inadequately capitalized indigenous insurance companies often managed by inexperienced and poorly qualified personnel. Such state of affairs gave rise to the use of the term “mushroom” insurance companies to describe poorly capitalized and ill-managed insurance companies.

In September 2005, the minister of finance announced new capital requirements for insurance companies in Nigeria. The share capital for life business N2billion, Non-life N3billion, Re-Insurance N10billion and composite company N5billion. Insurance companies are expected to meet this new capital requirement by February 2007.

The recapitalization process will lead to consolidation of the insurance industry. This will invariably increase the financial stability and capacity of the insurance companies within the industry. It will also raise the entry barrier and create mega players. The consolidation will herald the emergence of solid and professional institutions that can play their role effectively both in the local and international market.

1.2    STATEMENT OF THE PROBLEMS

There are several problems associated with this recapitalization exercise in the insurance industry and these are the following:

  • Stress associated with merger and acquisition: Re- capitalization is a corollary of consolidation and consolidation   exercise entails the process of merger or acquisition. When two          or more companies are merging, they integrate their IT Pattern of working assets etc.

The integration of these things involves expenses and it  consumes time that would have been used for other income  generating activities.

  • Risk of reinsurance protection: the newly prescribed capital base of the insurance company when fully implemented may tempt the insurers to assume unnecessary risk in the name of   corporate strength and neglect the benefits they can derive         from reinsurance or retrocession transaction as the case many
  • Expertise service: The recapitalization process will require the services of the professionals such as the accountants, lawyers        etc because the process is tailored towards the general or      entire national development and this would also constitute   further expanses on the part of insurance companies.
  • Development of social vices: The process of recapitalization could lead to the emergence of some social vices such as  falsification of records, illegal business practices, money laundering etc. people who engage in illegal business like hard drugs might cease the opportunity to transfer their money. They      might invest the money in buying shares from the capital market, thereby encouraging such acts.
  • RESEARCH QUESTIONS

The problem of insurance business in this country has ever remained a complex one. The following research questions are proposed for the purpose of this study:

  1. What are the factors that hindered the effective performance of insurance companies?
  2. Will the on-going recapitalization exercise change the operation of insurance sector positively?
  3. What is being the fate of insurance companies that were unable to meet up with that minimum paid-up capital before the deadline?
  4. Would this consolidation exercise constitute a problem to the merging companies?
  5. Considering the high rate of inflation in the country, would the prescribed minimum paid-up capital be suitable?
  6. What are benefits of recapitalization of the insurance sector on the Nigerian economy?
  7. Can the capitalization process restore back the lost public confidence in insurance sector of the economy?

 

  • OBJECTIVE OF THE STUDY

Insurance companies play crucial role in the Nigerian economic development like the bank does which is through the provision against the various risks that often arise within the economy.

In the course of this study, it is the researcher’s wish to examine the role of the proposed recapitalization exercise in the Nigerian insurance industry to the economic development of the nation.

This study is therefore designed towards achieving the following major objectives:-

  1. To review the effect of the recapitalization exercise on the Nigerian economic
  2. To analysis and review the prospects of the recapitalization to the existing and potential insurance companies in the Nigerian economy.

iii.      To identify the challenges faced during the course of the recapitalization exercise.

  1. To disclose those factors or problems that are likely to hamper these insurance companies’ reformation.
  • RESEARCH HYPOTHESIS

The main research hypotheses considered for the purpose of this study are:

  1. Ho: The recapitalization of the insurance sector will not have   impact on the Nigerian economy.

Hi:     The recapitalization of the insurance sector will have   impact on the Nigerian economy.

  1. Ho: The on-going recapitalization exercise will not positively  change the operations of the insurance sector.

Hi:     The on-going recapitalization exercise will positively     change the operations of the insurance sector.

  • SIGNIFICANT OF THE STUDY

The study shall be of great significance to educational institutions, insurance companies, corporate and government bodies, the insuring public and the nation at large.

The researcher’s motive of embarking on this intensive research process is to contribute his quota to the already developed work on the issue.

In order to provide the basis of recommendations for improvement of insurance business on the Nigerian economy, the researcher had made it a task upon him to review the activities of insurance companies and the benefit of its recapitalization to the Nigerian economy as a whole.

It is also possible for the insurer, through this study, to know the prospects, challenges and problems associated with recapitalization of the industry.

The insuring public through this study will understand the purpose and importance of insurance in our economy and also develop more confidence in our insurers.

Conclusively, it will be useful or important for academic purposes; it will also serve as a data base for students who will carry out research regarding this in the future

  • SCOPE AND LIMITATION OF THE STUDY

The scope of this study is based on the introduction of new capitalization for insurance industry in Nigeria as announced by the honorable minister of finance which is in accordance with sector 9 (4) of insurance act, of 2003.

The study revealed some of the prospects, challenges and problems that might emanate from the recapitalization exercise.

The researcher will use the regressional analysis (ordinary least square regression) to analyses the effect of consolidation exercise on the Nigerian economy. The recapitalization process would be fully represented with the revenue or realization from the insurance sector of the economy while the Nigerian economy will be fully represented with the Gross domestic product of the nation.

It is very crucial to state at this juncture that the secondary source of data will be used on which the ordinary least square regression analysis test would be carried-out.

Moreover, the issue of inadequate funds cannot be over looked as a constraint during the course of this study. Funds at the researcher’s disposal for the conduct of this study may not be sufficient. Closely linked to this the insufficient time to carry-out detailed analysis on the study. Through, there exist limitations but the researcher had made it a priority to come out with reasonable and useful conclusion on the study.

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