Nexus Between Underwriting Operation And Financial Performance Of Non-Life Insurance Companies In Nigeria

INTRODUCTION

1.1       BACKGROUND TO THE STUDY

Insurance is a provision of a system of compensation for loss, damage, sickness, death and other unbearable circumstances in return for regular payment of a pre-determined premium. Insurance companies are important for both businesses and individuals as they indemnify the losses and put them in the same positions as they were before the occurrence of the loss. Insurers also provide economic and social benefits in the society i.e. prevention of losses, reduction in anxiety fear and increasing employment (Omoke, 2012).

Underwriting and financial performance are considered as the two most important aspects in the functioning of insurance company. In the present highly competitive and economically challenging environment, Underwriting can serve as a market differentiator and put insurance companies at the fore front of industry leadership and innovation (The Actuary 2014). The way and manner in which claims are managed by insurance companies determine their level of profitability. Hence insurance company needs to employ the service of highly skilled underwriters who can select good risk as against bad risk (anti-selection) and therefore grow the profitability of the company. This therefore indicates that claims must be properly managed so that profit made by insurance companies will be maximized, therefore, maximizing the wealth and profitability which will in turn enhance the public confidence in insurance industry. Insurance companies need to be profitable in order to be solvent enough so as to make other industries in the economy as they were before even after risk occurred (Yuvaraj, 2013).

According to Iqbal (2005) underwriting can be defined as a financial professional that evaluates the risks of insuring a particular person or asset and uses that information to set premium pricing for insurance policies. Insurance underwriters are employed by insurance companies to help price life insurance, health insurance, property/casualty insurance and homeowners insurance, among others. Underwriters use computer programs and actuarial data to determine the likelihood and magnitude of a payout over the life of the policy. Higher risk individuals and assets will have to pay more in premiums to receive the same level of protection as a (perceived) lower-risk person or asset(Treischmann, Hoyt, and Sommer, 2005).

An underwriter is a professional that has the ability to understand the risks to which the underwritten object is exposed to. This ability is gained not only through theoretical study, but also through the result of years of experience dealing with similar risks and setting claims on these risks (Akinlo, 2013).

Treischmann et al. (2005) assert that the purpose of any risk-selection or underwriting process is to place applicants into distinct groups that have similar expectations of life or risk of death at any time interval. They further mention that each group is charged a premium sufficient to cover costs associated with its expected rate of death. Insured’s in each group have the same expectation of life (risk of death), pay equally, and are self-supporting (Teale, 2008). He further states that no group or person unfairly subsidizes any other group.

The performance of an insurance company depends to some extent on the sort of underwriting services provided. The performance of insurance companies in financial terms is normally expressed in net premium earned, profitability from underwriting activities, annual turnover, return on investment, return on equity (William, 2004). Over-pricing of risk may lead to fewer customers joining the insurer for insurance cover, while under-pricing of risk on the other hand may result to loss or low performance for the insurance industry (Dorfman, 2005; Teale, 2008).

Hence the undertaking of this research study will critically assess the Nexus between Underwriting Operation and Financial Performance of Non-life Insurance Companies in Nigeria.

1.2   STATEMENT OF THE PROBLEM

The goal of an insurance company is to be profitable in order to be solvent enough to pay claims when the events insured against occur. This is achieved by using efficient underwriting and effective claims management administration which contributes to the performance of insurance companies.

The role of the underwriter in selecting and accepting risks that behave similarly or assessing the necessary acceptance conditions to those risks that differ to maintain the homogeneity of the portfolio has been called for proper scrutiny, since the financial performance of any insurance entity depends on the same.

The failure of many insurance companies in Nigeria has been a result of  the underwriter being unable to properly assessed risks and therefore resulting to early claim to the insurance company. As an example, the motor insurance premium varies according to the risk characteristics of the driver and the car. Continuing education is necessary for advancement and independent- study programs for underwriters must be made available. Underwriters must equally analyze information on insurance applications to determine whether a risk is acceptable and will probably not result in an early claim to the insurance company.

In order to manage risks efficiently and effectively, underwriters may face the following obstacles:

• Poor evaluation of risks
• Inefficient and ineffective claims management procedures which have adverse effect on the financial turnover of insurance companies.
• Inability of insurance companies to remain solvent in order to settle claims as at when dues.
• Uneducated people in the society due to the high illiteracy in our society make the insurance companies to have difficult problem enlightening them.
• Government not looking into insurance company problems and providing them with adequate facilities for the detecting of fraud.
• The insurance officials refuse to give enough information due to bias mind to defraud the insurance company.

It is against this backdrop that the researcher was inspired to examine the “Nexus between Underwriting Operation and Financial Performance of Non-life Insurance Companies in Nigeria” with a special reference to Niger Insurance Plc.

1.3       OBJECTIVES OF THE STUDY

The main objective of this study is to determine the Nexus between Underwriting Operation and Financial Performance of Non-life Insurance Companies in Nigeria.Other specific objectives include:

1. To examine the nexus between underwriting operation and financial performance of non-life insurance companies in Nigeria.
2. To determine how risk selection by underwriters affect insurance companies profitability.
3. To investigate the effect of risk selection mechanism on prompt settlement of claims.
4. To find out to what extent profitability might influence underwriting.
5. To suggest plausible recommendations on how to improve the financial performance of the insurance industry in Nigeria.

1.4  RESEARCH QUESTIONS

1. Is there any effect of underwriting operations on claims management of non-life insurance companies in Nigeria?
2. Does proper underwriting and prompt settlement of claims has an impact on insurance companies profitability?
3. There is no effect of risk selection mechanism on prompt settlement of claims?

1.5  RESEARCH HYPOTHESES

The study will test the following hypotheses at 0.5 level of significance.

Hypothesis One

Ho: There is no positive relationship between underwriting operations and loss ratio in non-life insurance companies in Nigeria.

Hi: There is a positive relationship between underwriting operations and loss ratio in non-life insurance companies in Nigeria.

Hypothesis Two

Ho:  There is no relationship between premium growth rate and return on investment in non-life insurance companies in Nigeria.

Hi:  There is a relationship between premium growth rate and return on investment in non-life insurance companies in Nigeria.

1.6   SIGNIFICANCE OF THE STUDY

The research will encourage insurance companies to adopt a proper/effective underwriting process in subsequent insurance transactions. This will enable the Insurers meet their contractual obligations to the insured hence, promoting insurance image in Nigeria. The findings from this study will add onto the existing body of literature on the importance of proper underwriting.

It will also educate the general public about their risk exposure and how to acquire the best cover i.e insure them effectively and efficiently.

It will also aid students pursuing a degree in insurance to carry out further research on related topics in the future.

1.7   DEFINITION OF TERMS

Underwriter: The person who reviews an application for insurance and decides if the applicant is acceptable and at what premium rate.

Underwriting: The process an insurance company uses to decide whether to accept or reject an application for a policy.

Premium: The amount paid by an insured to an insurance company to obtain or maintain an insurance policy.

Perils: A specific risk or cause of loss covered by a property insurance policy, such as a fire, windstorm, flood, or theft. A named-peril policy covers the policyholder only for the risks named in the policy. An all-risk policy covers all causes of loss except those specifically excluded.

Policy: The contract issued by the insurance company to the insured which serves as an evidence of agreement between the insurance company and the insured.

Insured: The person or organization covered by an insurance policy.

Moral Hazard: The attitude and personal characteristics of the prospective insured that might increase or decrease the size or probability of a loss experience.

Physical Hazard: Physical environment which could increase or decrease the probability or severity of a loss.