IMPACT OF INSURANCE COMPANIES ON ECONOMIC GROWTH IN NIGERIA (1986-2016).
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IMPACT OF INSURANCE COMPANIES ON ECONOMIC GROWTH IN NIGERIA (1986-2016).
Chapter one
1.1 Introduction.
Insurance is one of the foundations of today’s financial services industry. The insurance industry, which is known for risk management, acts as an intermediary and provider of risk transfer and indemnification, promotes growth by allowing different risks to be managed more efficiently, encourages long-term savings and capital accumulation, and serves as a linkage to channelling funds from policy holders to investment opportunities, thereby mobilising domestic savings into productive investment (Arena, 2008; Oluoma, 2015).
Insurance is frequently characterised as the process of pooling funds from insured companies to compensate for relatively unusual but exceptionally destructive losses that may occur to these entities (Omoke 2012).
As a result, the insured entities are protected from risk in exchange for a cost, which is determined by the frequency and severity of the incident. Adebisi (2013) contended that insurance is a delicate economic and social tool for managing risks to life and property.
It is social in nature since it symbolises the collaboration of multiple individuals for mutual gain by pooling resources to mitigate the repercussions of similar risks.
Agbaje (2007) defined insurance as the business of pooling resources to pay compensation to the insured or assured in the case of a specific event in exchange for a periodic payment known as a premium.
According to Gollier (2013), insurance is the transfer of risk from an individual to a group, with all members sharing losses on an equitable basis. Insurance is designed to protect an individual, business, or other entity’s financial well-being in the event of an unforeseen loss.
Some forms of insurance are mandated by law, while others are optional. Accepting the conditions of an insurance policy establishes a contract between the insurer and the insured.
Thus, insurance serves as a promise of compensation in the event of a loss, provided to individuals or businesses who are so concerned about risks that they have pre-paid an insurance company (Adebisi, 2013; Oluoma, 2015).
The insurance industry is critical to the health and smooth operation of a modern economy, particularly for emerging countries such as Nigeria. It stimulates economic growth by speeding up the process of qualitative structural adjustment.
Bowers (2007) saw the insurance system as a means for mitigating the negative financial consequences of random events that preclude the fulfilment of reasonable expectations.
The insurance industry is equally important to any country’s financial system since it assists individuals and corporations in effectively managing their resources and mitigating risk.
Insurance is an indispensable aspect of a nation’s financial system, and theoretical conceptions explain that financial systems influence savings and investment decisions, and thus long-run growth rates, through the following functions:
lowering the costs of researching potential investments; exercising corporate governance; trading, diversification, and risk management; mobilisation and pooling of savings; conducting exchanges of goods and services, and mitigating the ne Financial intermediaries support development by improving these functions.
However, the positive consequences of financial development are shaped by the macroeconomic policies, rules, regulations, financial infrastructures, and enforcement norms that are implemented across countries and time.
The importance of the insurance industry as a component of the financial system has been overlooked over the years, with most research on the relationship between the financial sector and economic growth focusing mostly on banks and the stock market.
However, growing attention has recently shifted to the interaction between non-bank financial intermediaries such as insurance companies as a result of Levine’s (2004) work
which revealed that non-bank financial intermediaries such as insurance companies have over the years played important roles in improving the efficient functioning of the financial system through its intermediation function.
1.2 Significance of the study
The study is critical to policymakers, academia, and the general public. The report informs policymakers about the present level of insurance awareness/habit in Nigeria.
The study also assists them in developing and implementing proper insurance policies, as well as enacting insurance legislation, which will bring insurance services closer to the people at the grassroots level and instill excellent insurance consciousness and habits in the Nigerian population. The report will help policymakers develop policies that align with Nigeria’s economic growth and productivity objectives.
In academia, the study will be very useful to students and lecturers, particularly in economics, insurance, actuarial science, business administration, and banking and finance, who may want to conduct additional research on the impact of insurance companies/industry or insurance funds, or other related insurance topics.
The research advances knowledge in the fields of insurance, banking, finance, and national economic development. It will be especially valuable for international academics and researchers looking to examine the evolution of the insurance industry in Nigeria, one of Africa’s leading developed countries, as well as the investment prospects available.
The study is especially notable because of the impact its findings will have on the Nigerian population as a whole. By encouraging the development of a 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 a financial solution to risks, and deepening the density of insurance
as well as as an efficient savings, credit, and investment mechanism. As a result, the number of insurance policyholders will expand, as will the volume of insurance activity, gross premium income, contribution to economic growth, and Nigerians’ living standards.
1.3 Statement of the Problem
Since independence, Nigeria has not achieved the degree of growth and development that is appropriate for its enormous potential (Oluoma, 2015).
As Oluoma (2015) points out, numerous causes have been cited as reasons for the Nigerian economy’s slow growth, one of which is a shortage of investment finance, which has hindered insurance penetration in the country.
The primary function of an economy’s financial sector is to help channel resources from surplus units to deficit units for investment. As a result, the financial sector enhances fund seeker screening and fund receiver monitoring, so enhancing resource allocation, mobilising savings, lowering capital costs through economies of scale and specialisation, and providing risk management and liquidity.
Insurance businesses could play a significant part in these functions if properly managed, hence aiding economic growth. However, based on Nigeria’s experience with stunted growth, the insurance sector has not made a significant contribution to its function of effectively mobilising funds for productive investment that could lead to growth.
The primary role of insurance on the client side is risk transfer. Typically, the insured pays a premium and is protected against a specified uncertainty. Insurance businesses smooth the economic cycle by lowering uncertainty and volatility, as well as the impact of crisis events on the micro and macro levels.
However, the demand for protection against loss of life and property caused by natural disasters, crime, violence, and accidents is not as high in Nigeria, resulting in the purchase, possession, and sale of goods, assets, and services that are frequently facilitated by insurance indemnification, which does not promote growth.
As a result, the assured safety of life and property benefits trade, transportation, and capital lending, and many industries are not overly reliant on insurance services.
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