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D ECEMBER 2010
VOL 2, N O 8

INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS FACTOR ANALYSIS OF INVESTMENT DECISION IN NIGERIAN INSURANCE COMPANIES
ENOMA ANTHONY (Ph.D) Economics Department Ambrose Alli University, Ekpoma, Nigeria ISEDU MUSTAPHA Banking and Finance Department Ambrose Alli University, Ekpoma, Nigeria Abstract

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This paper presents the results of an investigation of those factors that influence managers investment decision making in Nigerian insurance companies. Apart from the economic and risk factors that are common in literatures in assessing assets choice of insurance company in most investment decision making. Other factors, such as political, social, religious and government regulation were among the factors examined. In this study, the data generated were subject to factor analysis to know what the insurance staff and brokers in insurance firm perceived and identified as the possible factors influencing investment decision in insurance companies in Nigeria. Based on their respond and analysis, it was asserted that investment decision making and risk assessment are multi criteria processes that cannot be defined or captured only by rigid mathematical quantitative factors. Qualitative decision making such as political, social religious and government intervention are among those factors that influence manager investment decision making in insurance company in Nigeria. Keywords: Factor Analysis, Nigerian insurance companies, Investment decision. 1. Introduction This paper examines those factors that influence investment decision in Nigerian insurance companies. Attempt is made to evaluate investment decision in Nigerian insurance companies based on both qualitative and quantitative factors. The reason is that qualitative judgment should also take precedence over the reliance on purely quantitative data but should not dominate in investment decision for details on this see Jong, Nigel and Michael (2009). Most investment decisions in financial institution are based on risk analysis, the risk preference of individual and expected returns on investment. For example the work of Tobin and Marwowitz (1952) centred on expected risk and returns on various portfolios in asset choice of financial institution. In particular, an efficient portfolio of assets choice is the one that, for a given expected returns has the lowest possible exposure to risk or for a given level of risk has the highest expected returns. The logic of Tobin and Markowitz (1952) was expanded in the capital asset pricing model (CAPM). The CAPM is based on rational choice of the individual investor. Variances of this model exist in literatures. While not going into the logic and framework of each model, it is pertinent to mention that these models based investment decision on measured risks. Most of these orthodox investment decisions theories based on risk have been criticized for their neglect of organizational framework or behavioural framework on environment in which investment decision are made for details see Akinwale and Abiola 2008.
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These orthodox financial theories have been criticized by most corporate managers like Ihunda and Negerbo (2004). Section (V) Conclude the study based on the analysis.webs. COPY RIGHT © 2010 Institute of Interdisciplinary Business Research 109 .ijcrb. inputs prices and output prices. inflation. Managers are seen as decision-makers who act to promote. They include government regulation. social. strong government institution like the legal system tax structure civil service. N O 8 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS In organizational investment decision making according to Tunde 2007. Osawronyi( 2007). Literature Review Literature on investment decision making in Nigerian insurance company or other financial institution is scanty both in theoretical and empirical studies. These factors could have a profound effect on investment decision in an organization. the economic needs of the people and projected economic situation of the economy in the nearest future. Section (IV) Present data analysis and results. this paper reports on those factors influencing investment decision of insurance companies in Nigeria. the entrenchment of the rule of law. They equally assess the impact of external factor.1 Economic Environment This entails the prevailing gross domestic product. or environmental factors on investment decision of the firm. 2006). dividends of share holders and fund to be retained for future internal investment. political. political. per capital income. the means to achieve them and choice to attain the strategic direction of the company. 2. For easy comprehension this paper is structured accordingly. The selections of those factors in this study are based on empirical literature and outcome of pilot study conducted. level of consumption. A whole lot of factors are considered to affect insurance company investment decision in Nigeria. In the light of the above survey. i. risk factor. like the exchange rate situation. This is prominent in the works of French and French (1997). protect and preserve the organization s value rather than seeking to maximized pay off or utility. section (II) Present the literature review while section (III) is concern with research method. effective electoral process. They see investment decision making as a complex choice about corporate goals. Political Environment: This include factors like good democratic governance. risk factor and environmental influence before concluding on investment decision. personality. investment decision is not just a mathematical selection of expected returns on various risk profile but on a whole range of factors. decisions based upon calculated probabilities are backward looking while managerial decisions are forward looking (Akinwale. For example orthodox financial theory base assets choice of any financial institution on expected utility or returns and the associated risk factor with such choice.com D ECEMBER 2010 VOL 2. production processes etc. However results in most literatures suggest the influence of risks and economic factors dominating investment decision both in developed and developing countries. Top management in most companies are responsible for defining the rate at which companies grow in size. These whole ranges of factor are assumed to affect the investment decision of insurance company in Nigeria. religious and economic factors. In this sense. In particular. Section (I) Present the introduction. Some of the basic environmental factors that require efficient management decision for effective analysis include: 2. managers takes into consideration in their investment decision the influence of cultural.

By 1960 the numbers of companies conducting insurance business rose from three to twenty-three still largely dominated by foreign firms.com D ECEMBER 2010 VOL 2. operational risk i. The reform increases the capital base of life insurance from 25 million to 2 billion and non life from 30 million to 3 billion and reinsurance from 100 million to 10 billion. These two branches of insurance companies are regulated by national insurance commission. By 2005. risk that results from daily transaction such as failure to meet regulatory required. A 24 item likert type instrument was administered on 600 subject of which 485 were correctly completed. Mostly British companies were granted insurance cover. the total registered companies dropped from 118 in 2001 to 27 in 2005. Flowing from this.e. Data from the respondents were analyzed using factor analysis. For this reason the questionnaires were kept short and easy to complete by busy executive. 3 for Agree (A).e.ijcrb. Prior to Nigerian s independent insurance companies in Nigeria were basically foreign. changes in government regulation and changes in public option. By 2001. insurance companies rose from 83 in 1984 to 118. exchange rate. 1 for strongly disagree (SD). insurance companies must seek safety in their investment choice so a not to jeopardize their ability to increase the shareholders profit. as a result of the financial reforms in insurance companies. The objective was to know what insurance workers and brokers perceived and identified as possible assets choice of investment decision of insurance companies in Nigerian. Risk Base Decision: Risk in this light include those predictable uncertainty that could be measured such as market risk. conciseness and attractiveness of design were important in ensuring a high completion rate. acceptable values. N O 8 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS ii. iv.webs. i. Fund from these companies are invested in highly liquid assets to make it easy to promptly meet and settle claims. The data generated were returned by 260 insurance workers and 225 insurance brokers. Their operations were limited to commerce along the West Africa coast. The quality of the overall presentation of the questionnaire in terms of length. The likert type items were scored as follows: 4 for strongly agree (5A). Research Methods The researchers adopted random sampling method in selecting insurances workers and broker in the insurance industries for questionnaire administration. The insurance companies mobilized long term fund and act a financial intermediaries. dislikes. the change in the net asset value due to changes in interest rate. The essence of the reform was to increase the standard of the companies to undertake higher venture and to meet international standard in insurance business. iii. Social cultural religious environment: These include factors like marriage institutions. Government domination and the setting up of national Insurance Corporation of Nigeria (NICON) in 1969 provided a way for more indigenous as well as more foreign owned insurance companies to be establish in Nigeria. COPY RIGHT © 2010 Institute of Interdisciplinary Business Research 110 . religious extremist etc. 2 for disagree (DA). like. Government Environment: Management must be aware of political and regulatory environment of the company in terms of pending regulation. The insurance companies are broken down into life and non life insurance. 3. performance risk those losses due to the failure to properly monitor employee performance on the job for details on this see David (1997). In this light a while lot of factors must be consider in any asset choice.

830 4. The content validity is often achieved through factor analysis (Unagbro and Osawonuyi (2009)). First.550 4.601 4.732 0.550 4. N O 8 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS Two types of validity of instrument were of concern in this study. Table I: Descriptive Statistic Meax(x) 1 2 3 4 5 6 7 8 9 10 11 Component q20 q12 q25 q23 q13 q11 q9 q2 q19 q6 q19 4.7178 for 21 items after three items regarded as poor or do not belong to factors influencing investment decision in insurance companies were sieved out by factor analysis techniques.589 4. The purpose of factor analysis is to summarize pattern of interrelationship among variables and establish levels of variance in decision variable as they influence a given phenomenon.721 0.780 4. This is to test the appropriateness of the sample from the population and the suitability of factor analysis.811 0. the factor analysis by principal component was adopted in the data analysis for the purpose of partitioning of the experimental variable into factors that influence the asset portfolio choice of insurance companies in Nigeria.ijcrb. The questionnaires also contain some demographic characteristics of the respondents. i. the construct validity.281 0.com D ECEMBER 2010 VOL 2.webs. ii. This interaction resulted in the generation of 24 items in the questionnaire.631 0. First. Method of Data Analysis The methods of data analysis are in two stages. Data Analysis and Results We present below the analysis of primary data generated in this study.754 4. 4.521 0.626 0. The reliability of data generated with the questionnaire was estimated using crombach Alpha techniques and this was found to be 0. The following test instruments were used under factor analysis. The content / face validity was ensured by the researcher s initial interaction with some insurance executives experts. Kalser-mayer Olkin (Kmo) and Bartlett s test. iii. Secondly.550 Standard deviation (d2) 0. Communality Total variance explained (Eigen values) Rotated component matrix.790 4. the content/face validity and secondly.631 111 COPY RIGHT © 2010 Institute of Interdisciplinary Business Research . we present the descriptive statistics of the data set which gives the mean and standard derivation of the sample population of each decision variable. iv.653 4. 5.358 0.821 4. It tests the null hypothesis that the population correlation matrix is an identity. The procedure for this is reported in the section of data analysis.414 0.801 0.

150 0. Table II: Kaiser-Mayer-Olikin (KMO) and Bartlett s Test of Sphericity Kaiser-Mayer-Olikin (KMO) Measure of sampling adequate Bartletts Test of Sphericity 0.862 3.863. the kaiser-Mayer-Olikin measure of sampling adequacy gives a value of 0.863 Chi-Square DF Pro Value Sig 2780. The results shown evidence that the economic factors and risk factors are rated higher than other variables that affects asset choice management of insurance companies in Nigeria.945 and a significance level of I percent i.976 1. The KMO is close to 1 which represent a perfectly adequate sample and bartlett s test show a chi-square of 2780.501 4.350 4.281 and 0. 4.604 0. The results from the two test instrument show that we can now apply factor analysis in this study.403 4.webs.492 4.533 0.612 3.753 3.010 0. This is indicated by 4.ijcrb.732 1.630 1.e .358 in the standard deviation in table (1) above.571 1.760 The descriptive statistics given in table (1) gives the mean and standard deviation of the sample population on each decision variable.0000 which is an indication of the adequacy of the sample.945 275 .830.com D ECEMBER 2010 VOL 2.841 0.821 in the mean value and 0.121 q1 q16 q18 q15 3. N O 8 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS 12 13 14 15 16 17 18 19 20 21 22 23 24 q6 q22 q7 q4 q10 q15 4.951 0. COPY RIGHT © 2010 Institute of Interdisciplinary Business Research 112 .0000 From table II.350 4.

770 0.webs.719 0.637 0.666 0.536 0. COPY RIGHT © 2010 Institute of Interdisciplinary Business Research 113 .803 0.567 0.658 Table III shows that the proportion of the variance of a variable is explained by common factor.651 0.ijcrb.813 0.614 0. N O 8 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS Table III: Communalities Extraction 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 0.657 0.com D ECEMBER 2010 VOL 2.736 0.710 0. The values are approximately (1) indicating that the communality common factor extracted explained all the variance in the variable.755 0.820 0.699 0.871 0.734 0.675 0.531 0.

346 70.798 .602 6.413 3.380 92.641 .865 74.853 .578 2.237 1.783 63.573 98.913 .891 2.598 .128 3.533 .431 51.371 96.572 97.010 COPY RIGHT © 2010 Institute of Interdisciplinary Business Research 114 .776 .729 .056 .601 33.861 .735 4.571 .669 89.000 1.899 .609 86.071 94.479 19.011 3.63 55.411 1.186 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 4.ijcrb.811 4.090 3.336 38. Of Square Loading Cumulative Percent 19.151 1.602 26.com D ECEMBER 2010 VOL 2.201 2.201 1.179 4.887 4.199 4.724 100.411 1.300 2.401 80.060 2.999 6.201 1.519 3.800 .970 .859 3.webs.499 .673 . N O 8 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS Table IV: Total Variance Explained (Direct Method of Extraction) Component Initial Eigen Value Total Percentage of Variance Extraction Sum.103 1.097 1.034 47.572 98.783 59.278 77.397 4.223 43.810 3.711 2.519 83.

(c) i. it shows that a maximum of eight factors could be obtained because the initial Eigen value in column 2 is greater or equal to 1. ii. equamax and quatimax and them by oblique transformation by promax. ii.ijcrb. iii. Economic Factors Return on investment Company stocks / shares Welfare (measured by per capital income) Inflation rate Risk Factors Riskness of asset. the following six factors grouping were obtained. iii. It tends to minimize the number of factors used to explain each variable. iii. the principal component matrix (1) rotated by orthogonal transformation by varinax. (d) i.com D ECEMBER 2010 VOL 2. ii. ii. ii. (e) i. We however present the results of quatimax because it produces the best rotation. (a) i. The social science rule stipulate that only factor with Eigen value of 1 and above are considered meaningful for interpretation for detail see Chemeka (2004). Security of asset Performance risk Operational risk Political Factors Democratic governance Nationalist consideration Government regulation Religious factors Religious crisis Religious doctrine Social Factors Marriages Values Others Traditional belief Military dictatorship Government Security COPY RIGHT © 2010 Institute of Interdisciplinary Business Research 115 . In order to achieve a meaningful factor loading. N O 8 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS From the outcome in table IV.webs. iii. iv. iv. ii. (f) i. After a careful examination of the results of orthogonal and oblique rotation. (b) i.

413 .456 .425 .307 323 .712 .707 .webs.321 .ijcrb.469 .476 2 3 4 5 6 7 8 COPY RIGHT © 2010 Institute of Interdisciplinary Business Research 116 .614 .com D ECEMBER 2010 VOL 2.311 .612 .475 .385 -3.699 . N O 8 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS Table V: Rotated Component Matrix 1 Q20 Q12 Q21 Q18 Q23 Q13 Q11 Q17 Q9 Q2 Q19 Q6 Q22 Q3 Q7 Q4 Q10 Q5 Q24 Q14 Q1 .17 .705 .714 .499 .567 485 -.451 356 341 .

24 and 14 had no significant loading under any component. while 4 variable / item in the other component of these. COPY RIGHT © 2010 Institute of Interdisciplinary Business Research 117 .6 and 8 had significant loading under five components . The profit rate determines the level of investment in asset of the insurance companies. iv.Tight government regulation reduces investment decision in insurance companies. vi. five factors are meaningfully related for the purpose of analysis. Table (v) revealed that 6 variable / items converged under factor/component( 1) . Risk Factors Effective internal control and operation can help to determine the level of investment in insurance company.webs. The economic environment as indicated by deregulation determines the level of investment of insurance companies. insurance workers and brokers perceived and identified 21 possible factors.689 .7 and 8.5. Return on investment in insurance companies facilitates further investment. Political Factors i. In thesame vein items 21.ie. Associated risk factors determine the level of investment in asset choice of insurance companies. Insurance investment is based on high risk high returns. iii.2. ii.6. ii. iv.396 . Insurance companies take into consideration risk element in investment decision. Rotation converged after 8 iteration From the factor extraction. It is therefore concluded that 485 insurance workers and insurance brokers sampled were able to perceive 21 out of 24 variables as factors influencing investment decision in insurance companies in Nigeria. Out of the 24 possible factors listed in the questionnaire that influence investment decision in insurance companies in Nigeria. The items were classified into six. (b) i. The inflationary rate in the economy affects the level of investment decision in insurance companies. The economic indicator such as a per-capita consumption influence investment decision in insurance companies. v.439 . Rotation method: Quartimax with Kaiser Normalization. (a) i.com D ECEMBER 2010 VOL 2. However three factors had a discordant loading making a total of (8) for analysis. item 15 have significant loading under two factor / component.422 Extraction method: principal component analysis.A civilian regime is better than military regimes in development of insurance companies. N O 8 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS Q16 Q18 Q15 . 7. iii.ijcrb. ii. (c) Economic factors The level of income in the economy determines the investment decision in insurance companies. It is further revealed that items3.

Policy guideline help to determine the conduct of insurance companies in investment risk taxing in Nigeria. i. political and religious factors are concepts that stand outside the orthodox research approach.com D ECEMBER 2010 VOL 2.webs. risk. iii. Further research into these six factors could add further to the growth and development of a more comprehensive asset portfolio investment decision making especially in developing economy. (d) Religious Factors Religious crisis such as the constant fighting in Northern Nigeria can affect investment decision in insurance companies in Nigeria. ii. COPY RIGHT © 2010 Institute of Interdisciplinary Business Research 118 . iv. Religious institution could help to influence positive behaviour toward insurance companies. The use of factor analysis demonstrate the influence of economic. Conclusion The research presented in this paper shows the richness of influence upon investment decisions in Nigerian insurance companies. Government securities affect investment decision in Nigerian insurance companies. Decision making in business is very vital in the area of management research in both developed and developing economy. ii. Orthodox financial decision making model are mainly based on risk and economic factors. i. Religious education can affect positive attitude toward insurance practices in Nigeria. religious and social factors on investment decision in insurance companies in Nigeria.ijcrb. For example the influences of the competency of social. Military dictatorship influence insurance decision in Nigeria ii. N O 8 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS iii.Strong legal institution determines the level of investment risk taking in Nigerian insurance companies. Others Age of people could determine the investment decisions of insurance companies The cherished values can influence positive attitude torward insurance companies. Traditional belief can affect investment decision insurance company iii. (e) Social Factors i. 6. iv. Religious belief system affect could be relevant in investment decision. political.

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