CHAPTER ONE

INTRODUCTION

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
(Cole & McCullough, 2016).

Insurance company to reduce its heavy obligations does not have way except transfer part of
its commitment to other insurance company. This transfer is done in different ways, which is
called reinsurance. As the insurer insure their property and assets in insurance companies.
Insurance companies also insure themselves in other insurance company in front of the great
heavy losses that may threaten their financial situation (reinsurance insurer). In fact,
insurance companies will share third party called reinsurance insurer in the financial results
of its obligations (Gilaninia, 2014)

Reinsurance is the practice whereby insurer contribute other person called reinsurance insurer
on the financial results of its insurance obligations in various ways. With reinsurance, risk
among several insurance companies inside and outside the country will be divided. So in the
event of large losses from financial situation an insurance company will not face a risk, in
simple terms reinsurance means division and distribution of risk.

According to Pitselis (2018), primary insurers adopt the usage of reinsurance as a means for
business improvement, and thus, curtail the chances of losses in order for more business to be
underwritten without an increment in its own capital. Mayers & Smith (2015) earlier
reiterated that direct insurers are often benefitted from expert services of professional
reinsurers, majorly in the aspect of policy underwriting and pricing, claims adjustment, and
handling of special risks.
Another area of focus according to Froot (2011) is the reinsurance cost; and this may lead to
the generation of insurance by the primary insurer at a higher cost. As suggested in an earlier
work of Derrig & Ostaszewski (2017), an adequate handling of corporate taxes and the
attainment of the minimum solvency boundary would ensure proper reserving and asset-
liability management in the insurance industry.

In the modern times, risk-conscious individuals and organisations with high-risk profile seek
adequate protection against the negative outcomes that may arise due to the presence of risk.
Insurance company too, in order to reduce its heavy obligations, seeks to transfer part of its
risk burden to other organisations, the reinsurers (Garven, Hillard & Grace, 2014; Jirsarael,
Kalantari, Kalantari, Jalah & Nozari, 2013).

Obonyo (2016) scholarly expressed that Insurers offer policies and collect premiums from
policyholders with a promise of paying claims in future when the insured events occur.
According to the author, the time of settlement of losses for a number of types of insurance
may take long periods of time which can stretch to several months or even years after the
insured incident or accident occurs. The author stressed further that in case this risk was
reinsured and during this period of waiting for settlement of the claim the insurance company
defaults paying premiums to the reinsurer, or in case the insurer defaults, policy holders may
lose all or part of their claims.
There are many factors that can be expected to relate to the sustainability and financial
performance of insurance companies as a result of reinsurance embracement. These include
profitability of the firm, which would be expected to be positively related, that is the higher
the profitability rate of growth, the higher the financial performance (Obonyo, 2016).

Reinsurance is an integral part of the insurance market and plays the vital role regarding the
financial stability of the global insurance markets (International Association of Insurance
Supervisors, 2012). Therefore, the concept of sustainability and financial performance in
Nigeria insurance industry has received significant attention from scholars in the various
areas of financial institutions. It is imperative for all business stakeholders in any sector since
financial performance is a major ingredient to organizational survival and ultimately its
existence. High performance reflects management effectiveness and efficiency in making the
use of a company’s resources and this contributes to the economy at large (Chibuike, Uche &
Chikeleze, 2012).
The insurance industry in Nigeria is a vital part of the entire financial system. Apart from
banking business, insurance industry contributes significantly to financial intermediation of
the Nigeria economy. As such, their success means the success of the economy; their failure
means failure to the economy (Agiobenebo & Ezirim, 2014).

1.2 STATEMENT OF THE PROBLEM

The level of growth and development which should be commensurate with Nigeria’s huge
potentials has not been attained and may never be attained since independence (Oluoma,
2010). Thus as opines by Oluoma (2010), 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 contributions of reinsurance industry to the growth and development of Insurance across
the globe cannot be overemphasized. This is because Reinsurance is the foundation upon
which Insurance is built. The business environment and lives of individuals is characterized
with high risk resulting from the dynamism associated with life as a whole. The essence of
Reinsurance is to preserve value to ensure strong and detailed protection in the event of
casualties that arise unexpectedly. This extra mile gone in the provision and assurance of
safety is known as Reinsurance.

The primary objective of reinsurance is to protect the primary insurer or the ceding company
from being crippled by land losses beyond its financial capacity. Where the risk assumed by
the reinsurer from the ceding company is so large that it cannot comfortably handle alone, the
reinsurer can reinsure or retrocede part of the risk to another reinsurer. They also help to
avoid possible financial strain due to rapid growth of the portfolio and from the part of view
of young insurance companies.

Reinsurance companies have added stability to the insurance industry and to the local
economies by declining out the results of the insurance companies as they continue to absorb
the impact of large losses which would have led to very damaging results to the individual
insurance companies. In Nigeria, reinsurance was introduced in the insurance in 1977. The
reinsurance companies in playing their role in the sub sector attempts to support the effort of
huge claims to restore confidence of the policyholders in the business. In spite of the
existence of reinsurance and their effort to underwrite for the primary insurers, member of the
public still double the ability of primary underwriters. Especially in areas that require huge
claims, such as aviation, oil and gas. These areas sparingly patronized in Nigeria.

1.3 AIM AND OBJECTIVES OF THE STUDY

The main objective of this study would be to appraise the role of reinsurance to the
performance of insurance companies in Nigeria. Specific objectives would include:
i. To examine the relevance of Re-insurance to the insurance sector.
ii. To appraise the contributions of Re-insurance to the Nigerian insurance Industry.
iii. To investigate the relationship between Re-insurance and the financial performance of
insurance companies.

1.4 RESEARCH QUESTIONS

The following research questions would be raised:
i. What is the relevance of Re-insurance to the insurance sector?
ii. To what extent does Re-insurance contribute to the Nigerian insurance industry?
iii. How does Re-insurance relate to the financial performance of insurance companies?

1.5 RESEARCH HYPOTHESIS

As a result of the of the research questions raised above, the hypothesis for this study is:
Ho: Reinsurance has no significant contribution to the Nigerian insurance industry
Hi: Reinsurance has significant contribution to the Nigerian insurance industry

1.6 SCOPE AND LIMITATIONS OF THE STUDY

This study would take a critical look at the role of reinsurance in the performance of
insurance industry in Nigeria, with particular emphasis on the contribution of reinsurance in
the insurance industry, using AIICO Insurance, a non-life insurance company and FBN Life
Insurance, a life insurance company.

Although this study is on the role of reinsurance in the performance of insurance industry in
Nigeria, it is limited to only two insurance companies within Lagos state. This is because of
time and resource, had it been that time and resource were available similar studies would
have been done in other part of the country so as to ensure a more embracing result.
Human errors and biasness are other anticipating limiting factor of this study. This is because
some data would be obtained through discussions and interviews therefore there is the
possibility of human error of omitting some vital information and respondent may also
exaggerate important information. Time and finance is also a limiting factor.

1.8 SIGNIFICANCE OF STUDY

This study would be very significant first because of its expected usefulness to formulators of
insurance policy in Nigeria. Since the enactment of the first insurance legislation in 1961,
several insurance policies and guidelines have been formulated, and new insurance
regulations enacted to encourage the development and sustenance of insurance consciousness
and awareness and ensure the penetration of insurance in Nigeria.

Most of these policies and laws have failed to achieve the desired objectives. This study
would serve as an eye opener to policy makers by revealing the current level of reinsurance
awareness and factors influencing or militating against the cultivation of reinsurance
awareness/habit in Nigeria.

It would also guide 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 the grassroots and inculcate good insurance consciousness and habit into the
Nigeria populace. Thus, this study would assist policy makers in formulating policies that
conforms to the objectives of enhanced growth and productivity of the Nigerian economy.

1.9 STRUCTURE OF THE STUDY

The remainder of the study is structured as follows. The next chapter provides a critical
review of the relevant literatures which would include books, journals, newspapers, articles
and official documents. It will evaluate previous studies that have focused on the role of Re-
insurance to the performance of insurance companies in Nigeria and develop a theoretical
framework for it.

This is followed by Chapter 3: It will identify the research methodology and links it with the
research design. It will also explain and justifies the research methods that will be use to
select the cases, to collect and analyse the data.
Chapter 4: Presents the findings from the analysis of the individual-case studies, while

Chapter 5: provides a discussion of the findings from the cross-case analysis and highlights
the lessons that emerged from the main findings of the study. This final chapter will also
draws conclusions and recommendations for the study. It will end with a discussion of the
limitations of the research and identifies areas for further study.

1.10 DEFINITION OF OPERATIONAL TERMS

Insurance: Is an arrangement by which a company undertakes to provide a guarantee of
compensation for specified loss, damage, illness, or death in return for payment of a specified
premium.
Performance: Is a subjective measure of how well a firm can use assets from its primary
mode of business and generate revenue.
Re-insurance: Re-insurance is the activity consisting of accepting risks ceded by an
insurance company or by another reinsurance company.
Risk: The possibility of loss, injury or other adverse or unwelcome circumstance; a chance or
situation involving such a possibility.
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