INSURANCE SECTOR ACTIVITIES AND ECONOMIC DEVELOPMENT IN NIGERIA (1981-2016)

INSURANCE SECTOR ACTIVITIES AND ECONOMIC DEVELOPMENT IN NIGERIA (1981-2016)

The aim of this study is to assess the effect of insurance sector activities on economic development.

OTHER RELATED PROJECT TOPICS 

CHAPTER ONE

INTRODUCTION

1.1   Background to the Study

Economic growth and development take place when society succeeds in increasing its average productivity, defined as per capita output of goods and services. When sustained growth has occurred over time and with appropriate policies for savings, investment, and more equitable distribution of national income among a progressively larger percentage of the population, economic growth and development would follow. Economic growth means more output. Growth may well involve not only more output derived from greater amounts of inputs but also greater efficiency, i.e. an increase in output per unit of input.

Economic development occurs with the reduction and elimination of poverty, inequality, and unemployment within a growing economy. Economic development implies both more output and changes in the technical and institutional arrangements by which it’s produced and distributed.

Improved financial activities trigger economic growth and development. In every nation, economic development is a great concern to the government, stakeholders, financial analysts and economists. The financial system in every nation consists of bank financial institutions, non- bank financial institutions, and financial intermediaries.

Non- bank financial institutions include insurance companies, mutual and pension funds, etc. Insurance is defined by Okereke (1995) as a contractual agreement between two parties, the insured (assured) and the insurer (assurer) whereby one party (the insurer or assurer) agrees to provide protection against the happening of an event upon payment of a consideration (called a premium) to him by the second party ( the insured or assured) over a given period.  Insurance which is a financial activity creates a pool of investable funds through mobilization and investment of the fund in the money and capital markets or through a direct investment to achieve allocation efficiency in the economy. Insurance companies together with pension and mutual funds invest in stocks, bonds, and real estate markets. These investments serve as protection against unavoidable losses.  (Agwuegbo, Adewole & Maduegbunna, 2010).

Insurance represents a promise of future compensation relating to specific losses in exchange for periodic payments. Insurance is similar to banks and capital markets as they solve the need for business units and private households in financial intermediation. This can be achieved by repositioning the organizations and businesses to meet with the demand of the period, create more awareness about the industry, training, and retraining of staff, minimization of the wastage, and maximization of gains in the interest of the economy.

The modern insurance business was introduced in Nigeria in the late 20^th century by the British merchants who established trading posts on the West coast of Africa. Before the advent of the Europeans to Nigeria, organizations similar in purpose to the insurance companies were in existence known as traditional social insurance schemes. They include Isusu, social clubs, age-grade, etc. The first insurance company to register its presence in Nigeria was Royal Exchange Assurance with its office in Lagos in 1921. (Okonkwo,1998). The need for control and timely intervention of government led to the formation of the National Insurance Corporation of Nigeria (NICOM). In 1986, the structural adjustment programme (SAP) brought about the emergence and proliferation of financial institutions especially deposit-taking institution and insurance companies. In Nigeria, we have two types of insurance business life and non-life insurance which results in the accumulation of funds by insurance companies.

Among financial intermediaries, insurance companies play important roles by being the main risk management tool for companies and individuals. The importance of insurance is growing due to the increasing share of the insurance sector in the aggregate financial sector in almost every developing country. Insurance companies are similar to banks and capital markets as they serve the needs of business units and private households in intermediation. The availability of insurance activities is necessary for economic stability.

Theoretical studies and empirical have shown that countries with better developed financial systems enjoy faster and more stable long-run economic growth and development. Merton (2004) noted that due to the absence of a financial system that can provide the means of transforming technical innovation into broad implementation, technological progress will not have a significant and substantial impact on economic growth and development.

1.2   Statement of the Problem

The glaring picture of a ravaging economic downturn has propelled policymakers to delve into financial areas that can knee-jerk the economy into life. The role of the insurance sector in mitigating sudden and devastating occurrences which consequently stimulates economic growth cannot be over-emphasized.

While emphasizing the importance of the topic in the past, there is a large concentration of research studies on the effect of total insurance claims, insurance premiums, insurance returns, insurance investments, etc on Gross Domestic Product (GDP).

Given the growing importance of the insurance sector and an increasing number of interlinks to other financial sectors, the evolving role of insurance companies can be adequately complemented by assessing an all-inclusive set of variables that would direct attention profitably to areas that can be stimulated to bring about the desired change in the economy.

Researches have been done on the relationship between insurance sector activities and economic growth and different results have been gotten from the analysis. Oke (2012) from his result stated that the extent of influence insurance sector growth had on economic growth was limited and direct. While kjosevki (2011) findings show that development of total insurance sector positively affects economic growth, and life insurance negatively affects economic growth. Sandra and Lime (2009) analysis show that insurance sector development positively and significantly affects economic growth. Adams, Anderson, Lindmark (2005) findings show that the insurance sector seem to be more driven by economic growth.

The controversy surrounding the insurance sector and economic development has not been settled, research is still ongoing and that has resulted in the need for this research. Also, the direction of the effect is yet to be ascertained, is it from economic development to insurance sector or the other way round. Does economic development cause insurance sector activities to improve or does the improvement in insurance sector activities lead to economic development?

There is a need therefore to ascertain the extent of effect insurance sector activities has on economic development. What really drives the economy? Does insurance sector activity lead to economic development or is it the other way round? Is it bi-directional in nature?

1.3   Aims and Objectives of the Study

In retrospect, lack of access to a variety of data that captures various insurance sector activities has made way for a lopsided focus on insurance sector activities and investments in Nigeria. This has created a wide disparity in terms of truly identifying factors that can significantly influence the economy. As noted by Wachtel (2001), Favara (2003), and Levine (2004), research efforts so far have not examined the impact of other financial markets or instruments on economic growth in certain depths.  Nonetheless, information technology has bridged such gaps by providing real-time access to all kinds of data which would be considered valuable to this study.

The aim of this study is to assess the effect of insurance sector activities on economic development. The following objectives will be considered to achieve this aim:

• Investigate empirically insurance sector investment contribution in Nigeria relative to the human development index.
• Determine the influence of insurance sector assets on the human development index.
• Determine the contribution of insurance sector claims to the human development index.
• Examine the causal relationship between insurance premiums and the human development index.

1.4    Research Questions

1. What is the relationship between the insurance sector investment and human development index?
2. What is the relationship between the insurance sector asset and the human development index?
3. To what extent do insurance claims contribute to changes in the human development index?
4. To what extent do changes in insurance premium explain changes in the human development index?

1.5    RESEARCH HYPOTHESES

The following hypotheses were designed in the null forms:

:   There is no significant relationship between insurance sector investment and human development index.

:    There is no significant relationship between the insurance sector asset and the human development index.

:    There is no significant relationship between insurance sector claims and the human development index.

:    There is no significant relationship between insurance sector premium and human development index.

1.6   SIGNIFICANCE OF THE STUDY

The study will be significant to the following:

• The study will be essential to policymakers as it will enlighten them more about insurance sector activities and economic growth and development (using human development index).
• It will contribute to the existing literature by enhancing the understanding of the contribution of insurance sector activities to the growth and development of the economy.
• This study will be a reference point and guide for further research in the related fields/topics. It will also add to empirical knowledge in this area of study.

1.7     SCOPE OF THE STUDY

The content scope covers a careful investigation into the relationship between insurance sector activities and economic development in Nigeria. The geographical scope of the study is Nigeria and the time scope runs from the year 1981 to 2016. In the year under review, the researcher will work on the relationship that exists between insurance sector activities using insurance premium, insurance asset, insurance investment, insurance claims on economic growth, and development ( using human development index).

1.8      Limitation of the Study

The study is limited to secondary data as such validity/ accuracy of the data used are not within the researcher’s control. Data collection from the central bank of Nigeria statistical bulletin is quite difficult and the information gotten cannot be 100% relied on.

1.9       DEFINITION OF TERMS

• Insurance: is defined as a contractual agreement between two parties, the insured (assured) and the insurer (assurer) whereby one party (the insurer or assurer) agrees to provide protection against the happening of an event upon payment of a consideration (called a premium) to him by the second party (the insured or assured) over a given period.
• Economic development: is defined as improvement in material welfare, especially for persons with the lowest income; the eradication of mass poverty with its correlates of illiteracy, disease and early death; changes in the composition of inputs and outputs that generally include shifts in the underlying structure of production away from agricultural toward industrial activities; the organization of the economy in such a way that productive employment is general among the working-age population rather than the situation of a privileged minority; and the corresponding greater participation of broadly based groups in making decisions about the directions, economic and otherwise in which they should move to improve their welfare.
• Human development index: measures a country’s average achievements in three basic dimensions of human development; life expectancy, educational attainment, and adjusted real income (per income).

1.10   Organization of the Study

This study has analyzed the various chapters of this work. Chapter one consist of introductory parts which also captures the background of the study, statement of the problem, objectives of the study, significance of the study, scope, hypotheses of the study. Chapter two deals with the literature review which includes conceptual, theoretical, empirical, and the gap in the literature. Chapter three is the methodology that captured the research design and the various tests used in this study such as augmented dickey fuller test (unit root), co-integration test (engle-granger) and autoregressive distributive lag model. Chapter four deal on data presentation, analysis, interpretation, and discussion of findings. Chapter five consists of the summary, conclusion, and recommendation.