ABSTRACT

Insurance is a veritable sub-sector in the financial system that plays a critical role in growth and development process in an economy. Against this backdrop, the study examined the impact of insurance industry on economic growth in Nigeria between 1986 and 2016. The study precisely investigated the impact of life insurance and non-life insurance penetration on economic growth in Nigeria. The ordinary least square technique was employed in the analysis of data. The result revealed that life insurance penetration and non-life insurance penetration positively and significantly impacted on economic growth within the estimated period. Furthermore, a 1% increase in life-insurance penetration would produce about 17% increase in economic growth and 1% increase in non-life insurance penetration would generate approximately 40.8% increase in economic growth. The study maintained that insurance industry contributed enormously to Nigeria’s economic growth between 1986 and 2016. The study suggested amongst others that there should be proper enlightenment of people in school, churches, markets, offices, social gatherings and they should be enlightened as to why taking an insurance is important. By so doing, new markets will be created and insurance penetration will be deepened.

                                                CHAPTER ONE

1.1                          Introduction

Insurance is one of the bedrock of modern-day financial services sector. Being known for the management of risk, insurance industry acts as intermediary and provider of risk transfer and indemnification, promotes growth by allowing different risks to be managed more efficiently, promotes long-term savings and encourages the accumulation of capital, serves as a linkage to channeling of funds from policy holders to investment opportunities, thereby mobilizing domestic savings into productive investment (Arena, 2008; Oluoma, 2015).

Insurance is often defined as the act of pooling funds from insured entities in order to pay for relatively uncommon but extremely devastating losses which can occur to these entities (Omoke, 2012). The insured entities are therefore protected from risk for a fee, with the fee dependent on the frequency and severity of the event occurring. Adebisi (2013) argued that insurance is a delicate economic and social device for handling 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 consequences of similar risks. Agbaje (2007) defined 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. Gollier (2013) argues that insurance involves the transfer of risk from an individual to a group, sharing losses on equitable basis by all members of the group. Insurance is expected to protect the financial wellbeing of an individual, company or other entities in case of unexpected losses. 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 prepaid to an insurance firm (Adebisi, 2013; Oluoma, 2015).

The insurance industry is vital to the wellbeing and smooth functioning of a modern economy and as such for developing country like Nigeria. It acts as a catalyst of economic growth by helping to fasten the process of qualitative structural adjustment. Bowers (2007) viewed insurance system as a mechanism for reducing the adverse financial impacts of random events that prevents fulfillment of reasonable expectations. Insurance industry is equally vital to the financial system of any country due to its role in helping people and businesses to manage their resources and mitigates the risk efficiently.

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 Levine (2004) where it was revealed that non-bank financial intermediaries such as the insurance companies have over the years played important roles in the enhancing the efficient functioning of the financial system through its intermediation function.

1.2                          Significance of the Study

The study is of paramount to policy makers, academia and the general public. The study serves as an eye opener to policy makers by revealing the current level of insurance awareness/habit in Nigeria. The study also guides them in the formulation and implementation of appropriate insurance policies and enactment of insurance laws that will bring insurance services nearer to the people at grassroots and inculcate good insurance consciousness and habit into the Nigerian populace. The study will assist policy makers in formulating policies that conforms to the objectives of enhanced growth and productivity of the Nigerian economy.

To the academia, the study will be of much use to students and lecturers particularly in economics, insurance, actuarial science, business administration and banking and finance who may wish to carry further studies on the impact of  insurance companies/industry or insurance funds or other related topics to insurance. The study contributes to knowledge in the areas of insurance, banking, finance and national economic development. It will be particularly useful to foreign academic and researchers who may need to study the development of insurance business in Nigeria as one of the leading developed countries of Africa and the investment opportunities available.

The study is also very significant because of the effect the findings will have on the Nigerian populace in general. By encouraging the development of good insurance culture, awareness and penetration of insurance in rural and urban areas, the study will help to increase the level of patronage of insurance products, understanding of the benefits of insurance as financial solutions to risks, and deepening of the density of insurance, and as an efficient savings, credit and investment mechanism. This will in turn lead to increase in the number of insurance policyholders, increase in the volume of insurance business, gross premium income, increased contribution to economic growth and living standard of the Nigerian populace.

1.3                          Statement of Problem

The level of growth and development which should be commensurate with Nigeria’s huge potentials has not been attained since independence (Oluoma, 2015). Thus as opined by Oluoma (2015), several factors have been advocated for this lack of growth of the Nigerian economy and among such notable factors is inadequate funding for investment purposes which have limited insurance penetration in the economy. The major role of an economy’s financial sector is helping to channel resources from surplus unit to the deficit units for investment. Therefore, the financial sector improves the screening of fund seekers and the monitoring of the recipients of funds, thus improving resource allocation, mobilizes savings, lowers cost of capital via economies of scale and specialization, provides risk management and liquidity. Insurance companies could play a major role in these functions if properly managed thus, supporting economic growth. However, in Nigeria, based on the nation’s experience of stunted growth; the insurance sector has not actually contributed meaningfully its role of effectively mobilizing funds for productive investment which could lead to growth.

The major functionality of the insurance on the client side is risk transfer. Usually the insured pays a premium and is secured against a specific uncertainty. By reducing uncertainty and volatility, insurance companies smoothen the economic cycle and reduce the impact of crisis situations on the micro and aggregate macro level. However, the demand for protection against loss of life and property caused by natural disaster, crime, violence, accidents, are not so demanded in Nigeria thus the purchase, possession and sale of goods, assets and services which are often facilitated by the indemnification of the insurance thereby not enhancing growth. Therefore, the assured safety of life and property which enhances trade, transportation and capital lending and many sectors are not heavily reliant on insurance services.

It is against the background of insufficient funding from major financial sectors of the economy that could drive Nigeria’s economic wellbeing, alternative sources of funding becomes imperative that it behooves researchers and policymakers to attempt at examining the role of insurance in enhancing economic growth. However, there seems to be paucity of studies especially in developing economies that this study examined the impact of the Nigerian insurance market on economic growth.

1.4                          Research Questions

The questions of interest to the study are:

1. To what extent does life insurance penetration drive economic growth in Nigeria?
2. To what extent does non-life insurance penetration drive economic growth in Nigeria?

1.5                          Research Objectives

The broad objective of the study is to examine the impact of insurance companies on economic growth in Nigeria. However to achieve this, the specific objectives are:

1. To assess the impact of life insurance penetration on economic growth in Nigeria.
2. To evaluate the impact of non- life insurance penetration on economic growth in Nigeria.

1.6                          Research Hypotheses

Based on the research questions raised above, the following hypotheses are formulated:

1. H01: Life insurance penetration does not exert significant impact on economic growth in Nigeria.
2. H02: Non-life insurance penetration does not exert significant impact on economic growth in Nigeria.

1.7                          Justification for the Study

Various studies such as Omoke (2012); Adebisi (2013) and Oluoma (2015) to mention few, examined the impact of insurance industry to economic growth in Nigeria. Their studies were limited to the year 2014, and it is necessary to extend these studies to recent years (2015 and 2016), especially in this period when the policy focus of the government has shifted from the oil sector to non-oil sectors.

Furthermore, in previous studies, insurance was proxied by the percentage contributions of insurance industry to GDP. However, this study takes different dimension by representing insurance industry by its market activities namely life insurance and non-life insurance.

1.8      Scope of the Study

The study examined the effect of insurance companies on economic growth in Nigeria between 1986 and 2016. The reason for this time period is due largely to the liberalization of the Nigerian economy as a result of the introduction of the structural adjustment programme (SAP) in 1986. With the liberalization of the Nigerian economy, functioning of the insurance sector allowed private and foreign insurance companies to increase their cooperation with international insurance standards.

---

---