CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Insurance of individuals and business firms makes up one of the most interesting and important

transactions. Justice Black in the 1943, South-Eastern Underwriters Association decision wrote,

“Perhaps no modern commercial enterprise directly affects so many persons in all walks of life

as does the insurance business. Insurance touches the home, the family and the occupation or

business of almost every person in the United States” (Mark, 2002). In fact insurance affects

almost every person in the world. Insurance basically is a financial arrangement that redistributes

the costs of unexpected losses. Insurance involves the transfer of potential losses to an insurance

pool.

According to the Global Financial Stability Report (2008), The financial crisis and subsequent

recession imposed substantial changes to the institutional and business landscape in which

insurance industry operates. Having taken into the consideration the fact that effects of global

financial crisis has started to the felt in the regional economics with a certain delay, compared to

when they first had been felt in developed western economics with a certain delay, compared to

global insurers.

History shows that other foreign countries have already announced their intentions to change

current regulation and supervision that the financial crisis have proved the adequacy of the

regulation of underwriting activities of insurance industry but reinsurers failures were in the field

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of non-insurance operations and with these operations the change of government oversight of the

insurance industry must be having considered the fact that different constituent entities.

In a financial crisis, asset prices see a steep decline in value, businesses and consumers are

unable to pay their debts, and financial institutions experience liquidity shortages. In a financial

crisis, asset prices see a steep decline in value, businesses and consumers are unable to pay their

debts, and financial institutions experience liquidity shortages. A financial crisis is often

associated with a panic or a bank run during which investors sell off assets or withdraw money

from savings accounts because they fear that the value of those assets will drop if they remain

in a financial institution

The impact of the economic crisis on the insurance industry was less prominent than it was on

the banking industry. However, the financial crisis and subsequent recession imposed substantial

changes to the institutional and business landscape in which insurance industry operates

(Marović, Njegomir, & Maksimović, 2010). Management has an important role in successfully

managing an insurance company and has responsibility for the preparation and objective

presentation of financial statements so that various interest groups could make appropriate

economic decisions. ...

The obligations of the insurance company to the insured persons are mainly related to unearned

premiums and paid claims. The importance of investment results is specially emphasised in the

case of life insurers who provide unit linked policies, life insurance products associated with

investments into funds, as the key incentive for buyers of such products is profit making

(Marović, Njegomir, & Maksimović, 2010). The investments represent the core of efficiency.

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Generally, only a small percentage of insured suffer losses. Thus, an insurance system

redistributes the costs of losses from the unfortunate few members experiencing them to all the

members of the insurance system who pay premiums. It can be safely said that the insurance

system protects individuals and business firms from financial losses by paying them back the

amount of loss. Insurance encourages the investors, lenders and entrepreneurs to engage in

economic activities. The entrepreneurs take the challenge for innovation as insurance is there to

rescue them if lady luck does not smile. Thus, insurance directly affects the level of economic

activities in any economy. Strong insurance system promotes high level of economic activities

which results in a growing economy.

A financial crisis may have multiple causes. Generally, a crisis can occur if institutions or assets

are overvalued, and can be exacerbated by irrational or herd-like investor behavior. For example,

a rapid string of selloffs can result in lower asset prices, prompting individuals to dump assets or

make huge savings withdrawals when a bank failure is rumored. Contributing factors to a

financial crisis include systemic failures, unanticipated or uncontrollable human behavior,

incentives to take too much risk, regulatory absence or failures, or contagions that amount to a

virus-like spread of problems from one institution or country to the next. If left unchecked, a

crisis can cause an economy to go into a recession or depression. Even when measures are taken

to avert a financial crisis, they can still happen, accelerate, or deepen.

As a result of the Global Financial Crisis, management of the global economy was broadened

from a core of developed Western countries to a broader Group of 20, or G-20, comprised of the

world’s 20 largest economies. The G-20’s emergence began when the onset of the financial crisis

prompted the elevation of what had previously been a modest and little-reported meeting of

3
finance ministers and central bank governors to a much more prominent meeting of the heads of

state of the world’s most important economies. Given the inclusion of the BRICS and other key

developing economies, as well as a sample of middle and regional powers, in the G-20’s

membership, the group’s battlefield promotion was a powerful symbol of a changing

international economic order. This upgraded version of the G-20 then proceeded to get off to a

strong start with its first three summits in Washington, London and Pittsburgh, adopting

measures that avoided the worst-case scenarios of protectionist trade wars that can easily follow

a global downturn. Optimists began to imagine a new era of global economic governance.

Insurance affects Banks, Manufacturing Industry, Construction and other industries as almost

everything that has value can be insured. Imagine what will happen if this system fails. The

insurers can go bankrupt. The recent financial upheaval led American International Group (AIG),

world’s largest insurance company, to near bankruptcy. The strategic importance of insurance

led the government to bail out this troubled company. Besides financial support of their families

in case of death etc., individuals get insurance for their financial support in old age, for medical

expenses, for education of their children and even for the marriage expenses of their daughters in

developing countries like India. Business enterprises take insurance for almost every aspect of

their business such as: manufacturers insure their factory; exporters insure the goods being sent

from one country to another, Banks insure the loan they lent, business organizations buy liability

insurance such as Director’s liability insurance, so as to say every aspect having value and facing

risk is insurable. Property can be insured against the risk of fire, theft earthquake etc.

The global financial crisis that rocked the economies of nations was an extremely troublesome

issue. In terms of origin, the phenomena is said to be traceable to the United States of

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America. As far back as August 2007, the financial institutions in the United States (US) were

experiencing immense difficulties raising funds (Esezobor, 2008). Financial institutions

gradually became illiquid and runs, bankruptcy, take-overs, job losses and bailouts thus

weakened the financial system. Lax financial regulation ensued with the hope that the market

would regulate itself, an event that never took place. With the loose market regulation, available

credits went to consumer lending rather that to the real sector that drives production and the

economy at large.

Apart from the aforementioned, the financial crisis resulted in widespread unemployment,

affecting every sector of the economy. The global financial crisis had a number of features

including weak macro-economic fundamentals, high inflation rates, exchange rate

crisis, devaluation of currency, decline in gross domestic product and difficulties in balancing

international payment on current account (Esezobor, 2008; and Sampson, 2009). To prevent the

adverse impact of the global financial crisis on Nigeria business development has been seen by

many scholars and practical business individuals as a critical challenge (Sampson, 2009).

Whether these and other measures can be instrumental in controlling the adverse impact of the

global financial crisis on the Nigerian economy is a question, which can best be answered, in an

empirical sense. Although the effect of the crisis on business growth and development in Nigeria

might not be as pronounced as it was in USA, Britain, France and so on, it would be futile about

its possible short and long-run influences. Hence, the need to embark on a study of this nature

hoping it would give rise to meaningful schemes, plans and strategies that would eventually help

the economy to tide itself over the possible difficulties that might crop up. For business

organizations in Nigeria in particular, the investigation would be highly rewarding in the sense

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that anti-growth business and economic forces would be identified and judiciously manipulated

in the best interest of the business investors, stakeholders and other players.

In the early 2008, the stress in the insurance industry first came to light. It began with the

discovery of huge size of subprime loans for housing in the United States. Bank has been lending

money which they did not have to house buyers who could not pay. To ensure the loans remain

good, they bundle them and insured the risk with big insurance companies such as AIG, and

secondary mortgage companies. When huge number of house buyers could not pay, the system

collapsed. Pressures increased with the downfall of Bear Stearns and intensified with the

bankruptcy of Lehman Brothers and the bailout of AIG which then triggered the global financial

crisis. During this time, many financial institution and insurance companies faced with several

challenges. Following the financial crisis, all organizations are taking greater interest in risk and

risk management. Therefore, insurance companies responded by raising capital, increasing cash

allocation and better improve the regulation.

1.2 Statement of the Problem

Financial crisis has its roots in credit contraction in the banking sector due to certain Laxities in

the U.S financial system. The crisis at the early stage manifested strongly in the sub-prime

mortgages because households faced difficulties in making higher payments on adjusted

mortgages (Soludo 2009). This development led to the use of credit contraction by financial

institutions to tighten their standards in the light of their deteriorating balance sheets.

In view of the importance of this project, under the statement of the problem, it is imperative to

looked into

i. The complexity of Insurance industry Relationships

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 ii. The impact of financial crisis on the underwriting

iii. The insurance industry investment results and financial crisis and

iv. The expected effect of financial crisis on insurance risk transfer

In addition financial institutions stopped lending and recalled their credit lines to ensure capital

adequacy (Aluko, 2009). The increase in financial crisis in Nigeria in recent years if not arrested

may pose a serious threat to the stability and survival of the economy. This has resulted in great

financial loss to both the institutions and their respective customers.

In view of this development, this research study is undertaken to examine the impacts of

financial crisis on Insurers.

1.3 Purpose of the Study

The main purpose of this research work is to investigate the impact of financial crisis on insurers

and specific objectives are as follows:

1. To determine the impact of the global financial crisis on selected insurers in Lagos State;

2. To evaluate the effect of the global financial crisis on the net profit earnings of selected

insurance companies in Lagos metropolis;

3. To find out the extent to which the global financial crisis has affected the overall

efficiency of insurance companies;

4. To proffer solutions to the impact of the global financial crisis on the insurance sector of

Nigeria.

1.4 Research Questions

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 1. To what level will global financial crisis impact insurers in Lagos State?

2. To evaluate the effect of the global financial crisis on the net profit earnings of selected

insurance companies in Lagos metropolis?

3. To find out the extent to which the global financial crisis has affected the overall

efficiency of insurance companies;

4. To proffer solutions to the impact of the global financial crisis on the insurance sector of

Nigeria.

1.5 Research Hypotheses

The current global financial crisis has no significant impact on the insurance sector in Nigeria.

The current global financial crisis has a significant impact on insurance sector in Nigeria.

Global financial crisis will have no effect on net profit earning of insurance companies in Lagos.

Global financial crisis will have no impact on insurance sector of Nigeria.

1.6 Scope and Delimitation of the Study

This study is restricted to the impact of financial crises on insurers with Lagos state serving as

the case study. Financial constraint- Insufficient fund tends to impede the efficiency of the

researcher in sourcing for the relevant materials, literature or information and in the process of

data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic

work. This consequently will cut down on the time devoted for the research work.

1.7 Significance of the Study

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This study would be of importance to the insurance companies and other relevant agencies in

knowing how the financial crises have affected them. This study will equally be important to the

general public, researchers and stakeholders in knowing the impact of financial crises on

insurers. This study will also be important to government so that relevant policies can be made

and implemented in be proactive in dealing with future financial crises.

1.8 Definition of Terms

Financial crises: A financial crisis is a disturbance to financial markets associated typically with

falling asset prices and insolvency among debtors and intermediaries, which spreads through the

financial system, disrupting the market’s capacity to allocate capital.

Financial crises: A financial crisis is a disturbance to financial markets associated typically with

falling asset prices and insolvency among debtors and intermediaries, which spreads through

the financial system, disrupting the market’s capacity to allocate capital.

Insurance: An arrangement by which a company or the state undertakes to provide a guarantee of

compensation for specified loss, damage, illness, or death in return for payment of a specified

premium.

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 CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 Conceptual Review

2.1.1 Meaning of Insurance

Insurance is often defined as the act of pooling funds from many insured entities (known as

exposures) in order to pay for relatively uncommon but severely devastating losses which can

occur to these entities. The insured entities are therefore protected from risk for a fee, with the

fee being dependent upon the frequency and severity of the event occurring (Encarta dictionary,

2009). Thus, it is a commercial enterprise and a major part of the financial services industry.

Insurance is a form of risk management in which the insured transfers the cost of potential loss to

another entity in exchange for monetary compensation known as the premium. Insurance In

economic terms is refers to the pooling mechanism for reducing the down-side of risk through

resource reallocation from good to stormy states of the world.

Churchill et.al (2003) opines that insurance facilitates financial protection against by reimbursing

losses during crisis. It is designed to protect the financial well-being of an individual, company

or other entity in the case of unexpected loss. This protection is accomplished through a pooling

mechanism whereby many individuals who are vulnerable to the particular risk are joined

together into a risk pool. Each person pays a small amount of money, known as a premium, into

the pool, which is then used to compensate the unfortunate individuals who do actually suffer a

loss.

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Agbaje (2005) defined insurance as the business of pooling resources together to pay

compensation to the insured or assured (i.e. the policy holder) on the happening of a specified

event in return for a periodic consideration known as premium. Insurance involved the transfer

of risk from one individual to another, sharing losses on an equitable basis by all members of the

group. The group, known as insurance company, must increase its hold on the premium and

widen its profit margin to cope with the demand of there.

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 services is essential

for the stability of the economy and can make the business participants accept aggravated risks.

By accepting claims, insurance companies also have to pool premiums and form reserve funds.

So, insurance companies are playing an important role by enhancing internal cash flow at the

assured and by creating large amount of assets placed on the capital market. Theoretical studies

and empirical evidence have shown that countries with better developed financial system enjoy

faster and more stable long-run growth of which insurance companies contribute to. Well-

developed financial markets have a significant positive impact on total factor productivity, which

translates into higher long-run development.

2.1.2. How insurance works

Insurance is a financial product sold by insurance companies to safeguard you and / or your

property against the risk of loss, damage or theft (such as flooding, burglary or an accident).

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Some types of insurance you have to take out by law such as motor insurance if you drive a

vehicle; some you may need as a condition of a contract such as buildings insurance as

a requirement of your mortgage; and others are sensible to take out such as life insurance or

saving for a pension.

While it is a good idea to make sure you are not paying for insurance that you don’t need, you

should always think about what would happen if disaster struck and you didn’t have cover to

protect you.

You can buy insurance policies for many aspects of your life, for example for your health, home,

car, business, or retirement.

An insurance policy is the contract that you take out with an insurer to protect you against

specific risks under agreed terms.  When you buy a policy you make regular payments, known as

premiums, to the insurer. If you make a claim your insurer will pay out for the loss that is

covered under the policy.

If you don’t make a claim, you won’t get your money back; instead it is pooled with the

premiums of other policyholders who have taken out insurance with the same insurance

company. If you make a claim the money comes from the pool of policyholders’ premiums.

To decide on the type of insurance you need think about:

 why you need cover

 what you want to include in your cover

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  how much you can afford

 how long you might need cover for

 whether you want cover for yourself and / or for loved ones

To buy insurance cover you can:

 contact an insurer directly, either online or over the phone

 seek professional advice through an insurance broker via the British Insurance Brokers'

Association (BIBA) 

 speak to an independent financial adviser through the Association of Professional

Financial Advisors and / or unbiased.co.uk, a comprehensive website where you can find

specialist, professional financial advisers

 check comparison websites to get the best deal on the type of policy you're looking for

 for more information see how to buy insurance

How premiums are calculated

Insurers use risk data to calculate the likelihood of the event you are insuring against happening.

This information is used to work out the cost of your premium. The more likely the event you are

insuring against is to occur, the higher the risk to the insurer and, as a result, the higher the cost

of your premium.

An insurer will take two important factors into account when working out the premium they will

charge.

1. How likely is it in general terms that someone will need to make a claim?

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 2. Is the person who wants to take out a policy a bigger or smaller risk than the ‘average’

policyholder (for example, a young person with a high-powered car may be charged a

higher premium as they are statistically more likely to be involved in an accident than a

mature, experienced driver)?

Only a proportion of policyholders will make a claim in any one year. 

Standard policy conditions 

Although policies have different terms and conditions, in general there are three main principles

that are common across all insurance policies. These include:

 cover is provided for the actual value of the property or item that has been lost or

damaged (its replacement value), but does not include any sentimental value

 there needs to be a large number of similar risks so that the likelihood of a claim can be

spread among other policyholders. It must be possible for insurers to calculate the chance

of loss so that a premium can be set which matches the risk

 losses must not be deliberate

2.1.3. The important principle of insurance

The main motive of insurance is cooperation. Insurance is defined as the equitable transfer of

risk of loss from one entity to another, in exchange for a premium.

Nature of contract is a fundamental principle of insurance contract. An insurance contract comes

into existence when one party makes an offer or proposal of a contract and the other party

accepts the proposal.

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A contract should be simple to be a valid contract. The person entering into a contract should

enter with his free consent.

2. Principal of utmost good faith:

Under this insurance contract both the parties should have faith over each other. As a client it is

the duty of the insured to disclose all the facts to the insurance company. Any fraud or

misrepresentation of facts can result into cancellation of the contract.

3. Principle of Insurable interest:

Under this principle of insurance, the insured must have interest in the subject matter of the

insurance. Absence of insurance makes the contract null and void. If there is no insurable

interest, an insurance company will not issue a policy.

An insurable interest must exist at the time of the purchase of the insurance. For example, a

creditor has an insurable interest in the life of a debtor, A person is considered to have an

unlimited interest in the life of their spouse etc.

4. Principle of indemnity:

Indemnity means security or compensation against loss or damage. The principle of indemnity is

such principle of insurance stating that an insured may not be compensated by the insurance

company in an amount exceeding the insured’s economic loss.

In type of insurance the insured would be compensation with the amount equivalent to the actual

loss and not the amount exceeding the loss.

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This is a regulatory principal. This principle is observed more strictly in property insurance than

in life insurance.

The purpose of this principle is to set back the insured to the same financial position that existed

before the loss or damage occurred.

5. Principal of subrogation:

The principle of subrogation enables the insured to claim the amount from the third party

responsible for the loss. It allows the insurer to pursue legal methods to recover the amount of

loss, For example, if you get injured in a road accident, due to reckless driving of a third party,

the insurance company will compensate your loss and will also sue the third party to recover the

money paid as claim.

6. Double insurance:

Double insurance denotes insurance of same subject matter with two different companies or with

the same company under two different policies. Insurance is possible in case of indemnity

contract like fire, marine and property insurance.

Double insurance policy is adopted where the financial position of the insurer is doubtful. The

insured cannot recover more than the actual loss and cannot claim the whole amount from both

the insurers.

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 7. Principle of proximate cause:

Proximate cause literally means the ‘nearest cause’ or ‘direct cause’. This principle is applicable

when the loss is the result of two or more causes. The proximate cause means; the most dominant

and most effective cause of loss is considered. This principle is applicable when there are series

of causes of damage or loss.

2.2 TOTAL ASSET IN INSURANCE

The asset mix of an insurance company’s investment portfolio varies over time based on different

influences, including both macroeconomic and industry-specific factors. The general state of the

global economy, industry trends, market and political events also impact investment management

decisions. Similar to other industries, an adjustment to risk appetite tends to also result in an

adjustment to investment strategies and philosophies. In a strong economy, risk appetite tends to

increase and the converse is true during poor economic conditions.

The NAIC Capital Markets Bureau studied the insurance industry’s portfolio mix across the five

general insurance company types (life, property/casualty, fraternal, health and title) as of year-end

2010, year-end 2008 and year-end 2005. Depending on the insurer type, portfolio compositions

could vary, due mostly to appropriately matching assets to liabilities and taking into consideration

relative duration and liquidity risk. For example, life companies have longer-term liabilities than

property/casualty companies; therefore, the former invests more heavily in longer-term assets,

such as bonds with 30-year maturities, than the other industries.

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Consistently in each of the three analyzed years, bonds represented the majority of insurance

industry investments, ranging between 68% and 71% of total cash and invested assets. And,

within the bond sector, the largest type across all three years was corporate bonds, ranging

between approximately 43% and 48% of total bond investments. Investment across other asset

types tended to vary.

The greater a company's earnings in proportion to its assets (and the greater the coefficient from

this calculation), the more effectively that company is said to be using its assets.

2.2.1 Meaning of Investment

The term investment from the point of view of an insurance manager, is the conversion of

money, the insurance funds and reserves into some species of property from which an income or

profit is expected to derived either immediately or at some future date in the normal course of

business. According to George and John Clendenin (1974:103) are investment is nay asset or

property right acquired or held for the purpose of conserving capital or earning an income.

Considering the Nigerian environment, the investment of insurance fund is heavily regulated by

growth and problems.

Investment in insurance business is concerned with the application of insurance funds which are

meant or immediately required for expenditure, or for payment of insurance claims and other

benefits. The insurance business generate funds which must be invested either on a short term or

a long term basis depending on the circumstances of the company concerned and the classes of

the business transacted. The funds are exposed to risk of diminution on value, illegality or even

loss, hence the need for vigilant and protection against those hazards arises.

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Nwaru (2002:68) implicated that investment is the conversion of money the insurance funds and

reserves into some, species of propriety from which an income or profit is expected date to be

served either immediately or at some future date in the normal course of business, perimeter

(1968:40) defined investment as the process by which people will available resources put them at

the disposal of company, building sureties, public arteries and other bodies in return for certain

right embodied in share, stock or other forms of securities.

Victor (2004) says that investment involves the allocation of monetary resources to assets that

are expected to yield some positive returns over a given period which comprises of the sacrifice

of the present consumption for the prospect of uncertain reward, basically resulting to increase in

future output.

Linter, (1965) concluded that investment can be defined as the act which involves the choice by

an individual or organization after some analysis to place money in instrument or asset that has

certain level of risk and provides possibility of generating returns over a period of time. It can

further be explained that investment as an instrument of generating funds involves deployment of

money in securities or assets issued by any financial institution with a view to obtaining the

targets returns over a specified period of time.

According to www.mapsofwould.com, investment is the commitment of money or capital to

purchase financial instruments or other assets in order to gain profitable returns in the form of

interest, income, or appreciation of value of the instrument. Investments are related to savings or

deferring consumption.

The needs for Investment in insurance business is to accumulate more fund for the purpose of

Claim Payment which is the first and most important obligation of the insurer is to pay the

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amount of claims whenever they arise, to avoid financial deficit if funds are not invested, the

total income of the insurer will fall short of its requirements for meeting its commitments

because a particular rate of interest on its investments has been assumed while calculating the

rate of premium and for economic development of the nation.

Aneke (2006:215) gave an explanation on insurance company’s sources of funds, these insurance

companies sources of funds, life insurance companies have substantial funds at their disposal

such funds are Premiums, Interest, Capital Gain, Savings in Expenses, NonPayment of Claims:

There is a distinction between the types of insurance one is life insurance and other is non-life

or general insurance. As an individual, you will be covered under the Life insurance policy. The

reimbursement under the policy can be withdrawn on the event of death or maturity of the

policy. On the other hand, a General Insurance Policy will pay for the losses that may occur

during the policy period only.

What is a General Insurance

 A policy or agreement between the policyholder and the insurer which is considered only

after realization of the premium.

 The premium is paid by the insurer who has a financial interest in the asset covered.

 The insurer will protect the insured from the financial liability in case of loss.

Insurance is a concept that applies to a large group of people which may suffer the same risk in

the same conditions or region. The money collected as the premium can be called as a pool and

when anyone faces a loss, the person is paid from that pool. Still perplexed at how does a general

insurance policy come into play? Consider that your mother suffered a heart attack suddenly and

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she needs a transplant. At the same time, your daughter’s college fee was due. It definitely is a

huge expense to be made at the same time and none can be preferred over the other.

In this time of stress, the family’s health insurance policy can save your burden and the fees can

be paid from the savings. A General Insurance Policy here works to save your burden for money.

Once we've understood what General Insurance is, let us understand how and when will the

policy apply.

The loss may occur due to perils like fire, storm and flood, earthquake, theft, accident, health,

travel, and other similar factors. So now, we know that there exists an asset which is exposed to

risk. And in case of the occurrence of losses (subject to the limit of the policy) plays the

insurance which pay for the damages.Imagine you're driving back home in your car and

suddenly, a taxi hits you from behind. Your car has a dent and its bumper has come off too. Now

you need about Rs. 2000/- for the dent and Rs.7500/- for the bumper to be able to fix it all. A car

insurance policy, in this case, will play well. You can get the amount reimbursed under the

insurance policy. Your car is the asset here in which you have a financial interest. But remember,

an insurance policy will pay only as per its predefined conditions.

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 Difference between General Insurance and Life Insurance

General Insurance Life Insurance

Arun took a Life Insurance Policy for

Arun took a Fire Insurance Policy for Rs. 1 crore. He had to give an annual

his factory. The Sum Insured for the premium of Rs. 20000 for 50 years.

factory was Rs.1 cr and the premium After 10 installments, Arun met with an
Applicability of
was Rs. 10 lakhs. In case of fire or accident and passed away. Arun’s
claim
loss due to any peril, the insurance family received an amount of Rs.1

company will pay the claim amount crore. The reimbursement under the life

after the deductible (as applicable). insurance is made either at the time of

maturity or death.
Sheela got her car insured for Rs.5 Sheela chose to buy a Life Insurance

lacs. She got her car banged and her Policy worth Rs.50 lakhs. The total time

car’s bumper came off. The repair for which she had to deposit the

Amount of charges for the bumper was premium was 10 years. After 10 years,

Reimbursement Rs.15,000/-. The insurance company she received Rs. 50 lakh. The Life

will pay off the amount after the Insurance Policy is an investment

deductible. General insurance works policy which is paid on maturity of the

as per the policy limits and conditions. policy.

Functional Prakash bought a Fire Insurance for Prakash bought an Endowment Policy

Period his factory and got the building, which will pay him some proceeds on

equipment, and other fixtures. The the maturity or otherwise pay some

policy was issued on 2.03.2019 and amount to his family members in the

will be renewed on 1.03.2020. The event of Prakash’s death. The Life

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 General Insurance Policies are issued Insurance Policy is issued for Life Time

for a period of 1 year. or till the time of the maturity period.

Madhur bought a car and got its Madhur bought a Money Back Policy

insurance also. The next year, he sold for 20 years. He will have to pay the

his car. He bought a bike and did not premium for 20 years with money being

get the renewal for the car. Under the received after every 3 years. The
Payment of
General Insurance Policy, the premium will be paid till the total term
Premium
premium will be paid for one year till of the policy, that is, 20 years. Under

the renewal. Madhur sold his car and the Life Insurance Policy, the premium

hence, no renewal or no payment of will be paid for the total term of the

premium. policy.
Rikant bought a Tata Safari in the year

2018. He got its insurance at the same

Rikant took a Term Plan and got his
time.The next year, he sold the car to
policy issued from ABC Life Insurer. It
Shweta and the policy was renewed
is important for Rikant to be present at
Insurable again as the vehicle will be in use. The
the time of contract. Under the Life
Interest policy was renewed by Shweta and
Insurance the individual who has the
not Rikant. Under the General
insurable interest should always be
Insurance Policy, the insurable interest
present.
of the policyholder should be present

at the time of renewal and the loss.

Almost everything is insurable. However, General Insurance in India is bifurcated as Fire,

Engineering, Marine and Miscellaneous Insurance. Let us look at them as per the use and general

acceptability. Following are the different types of General Insurances in India:

23
  Health Insurance

 Travel Insurance

 Motor Insurance

 Marine Insurance

 Home Insurance

 Commercial Insurance

Digit Insurance also offers insurance policies for Mobile, Bicycle, Shop Protection, and others.

1. Health Insurance

The Health Insurance cover from Digit offers protection for the medical expenses incurred due to

hospitalization caused because of an accident or illnesses.

Although every policy is different, based on who it's being purchased for, it mainly covers:

 Accidental Hospitalization (pre & post)

 Accidental illness and hospitalization

 Daycare procedures

 Psychiatric Support

 Annual Health Checkups

 Daily Hospital Cash

The cover can be extended to cover the following with some predefined conditions:

24
  Maternity benefit with Infertility benefit

 Critical Illness

 Organ Donation

 AYUSH (Alternate Treatment)

The premium for the health insurance is charged on the basis of:

 Age

 Pre-existing illness

 Lifestyle Habits

 Type of coverage

 Your family health history

2. Travel Insurance

Travel Insurance covers your financial liability, if any, when you travel within or beyond the

Indian boundaries. The financial liability may arise due to medical or non-medical emergencies.

The duration of the travel for one time can be 180 days at the maximum. The policyholder can

take more than one trip in a year. Your Travel Insurance will cover:

 Loss of Baggage

 Loss of Passport

 Hijacking

 Medical Emergencies

25
  Delayed Flights

 Accidental Deaths

 Adventure Sports

Digit’s Travel cover comes with worldwide support and special features like:

 Zero Deductibles.

 Smartphone enabled claim process.

 Customized Travel Plan Cover.

 Missed call claim facilitation.

3. Motor Insurance

A Motor Insurance Policy is mandatory to be able to drive legally in India. Broadly there are two

types a) Third-Party Liability b) Comprehensive Package Policy. A Third-Party Policy covers for

losses faced in a situation where your vehicle damages any third-party such as a public property,

person or third-party vehicle. The same is the minimum requirement to be able to drive legally in

India, as stated by the Motor Vehicles Act. A Comprehensive Package Policy covers both third-

party damages and liabilities and damages/losses caused to you and your own vehicle. The losses

may arise due to an accident, theft, fire, natural calamities, and others. Digit Insurance provides

some add-ons under its Comprehensive Package Policies for Cars and Bikes that act as additional

shields to your vehicle, such as:

 Tyre Protect Cover

 Zero Depreciation Cover

26
  Return to Invoice

 Engine and Gearbox Protection

 Breakdown Assistance Cover

4. Home Insurance

You build your home with your toil and hard earned money. Everything you buy is a priceless

possession for you and hence it needs to be protected. A Home Insurance Policy protects your

valuable and other assets. It is a comprehensive package policy that covers all valuables. Digit

Insurance gives protection for Home against Burglary, Loss/Damage of Jewelry, Fire and

Natural Disasters.

5. Commercial Lines

The lines of insurance that affects the business operations in the real terms are categorized under

the Commercial Lines of Insurance. Type of the insurance covers that one can buy may include:

 Property Insurance

 Engineering Insurance

 Liability Insurance

 Marine Insurance

 Employees Benefit Insurance

 Business Interruption

Depending on the type of occupation, risk exposure, and the money involved, the insurance

could be different for each industry or business. For example; an insurance that is specific to a

27
cement plant, versus one for an IT company will be different. The premium charged for a cement

plant will be higher than a showroom of air conditioner. Therefore, Insurance is completely

based on the level of the risk exposure. A worker in the cement plant is more prone or

susceptible to injury than to the one who is working in the showroom.

6. Mobile Insurance

Simple as it reads. A mobile insurance protects the phone from accidental damage. Under the

mobile protection cover, Digit Insurance compensates for repair of accidental screen damage to

your phone. The buyers can have mobile insurance for both an old or new phone. Very

affordable insurance protection for the most expensive phones you buy. Not just the cars and two

wheelers, people are now passionate for expensive bicycles also. Call it a fashion or change of

lifestyle, Bicycle Insurance is another sought product these days. Digit Insurance offers cover

against Personal Accident, Theft, Accidental Damage, and Hospital woes.

2.3 Theoretical Framework

2.3.1 Efficient Markets Theory

This theory states that the market prices for shares/financial securities incorporates or captures

all the known information about that stock/security. This means that the stock is accurately

priced or valued until a future event changes that valuation. Because the future is uncertain, an

adherent to the efficient market hypothesis is far better off for owning a wide range of stocks and

profiting from the general price rise of the market. Opponents of efficient market theory point to

a few works such as Warren Buffett and other investors who have consistently beaten the market

by finding irrational prices within the overall market.

28
This Markowitz efficient behaviour exhibited by insurance companies while investing is usually

associated with five cardinal patterns:

a) Preference for more returns on investment to fewer returns.

b) Envisaging expected returns on investment to depend on possible current returns.

c) Envisaging risk on investment as directly depending on the size of expected returns.

d) Preference of less risk to more risk.

e) Saving/premium-investment (intermediation) decisions are based on the parameters of

risk and returns (Ezirim and Muogholu, 2002).

(Ezirim, 2007), observed that Markowitz efficient market hypothesis is basically a theory of

return and risk, which phenomena are the building blocks of modern portfolio theory. In their

investment and intermediation activities, insurance companies construct portfolios in the process

of creating and holding different types of both real and financial assets. The portfolio behaviour

of insurance companies is targeted at creating optimum amounts and varieties of assets, and

hence optimum returns on investment, at a given level of risk. The effect would be to minimize

the level of risk possible at any given level of expected return. Such portfolio behaviour is in line

with what has been described as efficient portfolio behaviour

2.4 Empirical Framework

The work of Ching, Kogid and Furuoka (2010), examined the causal effect of life insurance

assets on economic growth. This was experimented using the co-integration analysis with

29
quarterly data drawn from Malaysia for the period 1997 to 2008. On the whole, the evidence,

particularly from the regression result seems to suggest that there is a one way relationship

flowing from real GDP to life insurance sector. No causal relationship flowed from life insurance

to GDP. This shows that the response by the economy growth indicators to life insurance sector

variables like savings mobilization, risk management and investment do not completely grow the

economy. Chen, Lee and Lee (2011), in their work that sampled sixty (60) countries for the years

1976 to 2005, examine the effects of life insurance market on GDP per capital growth. The study

focused on the relationship between life insurance market development as well as stock market

operations and the implication for economic growth. A derivative of the endogenous growth

model was employed to analyze the relationship. The generalized method of moments (GMM)

technique was used in estimating the equations that link life insurance and stock market with

growth. The result from the study shows a supplyleading impact of the development of the life

insurance market on economic growth. The results further showed some evidence that stock

market and the life insurance market are substitutes rather than complements. The results imply

that causality runs from life insurance market to economic growth.

Agwuegbo, Adewole and Maduegbuna (2010) predicted insurance investment using a factor

analytic approach and the implication for economic growth in Nigeria. The study focused on the

role played by insurance companies in enhancing the efficient functioning of the financial system

in Nigeria. It was observed that insurance companies issue and sell indirect financial securities to

the surplus economic units and consequently, purchase other financial securities, which are

primary in nature, from the ultimate borrowers of those funds. The study reported that the

insurance industry in Nigeria holds a reasonable percentage of the country’s total investable fund

generated by the capital market. These investments in the stock market serve as a shield for

30
insurance against predictable underwriting losses (covered losses) which are more prominent

than their return on investment. These findings suggest that insurance investment activities not

only boost the output level of goods and services in the economy but also, enhance the

performance of the risk management function of insurance, hence, stabilizing and growing the

economy.

31
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter describes the research methods and procedures used in conducting the study. It

outlines the research design, population of the study and sampling design, data collection and

data analysis.

3.2 Research Design

Mugenda & Mugenda (2003) describe a research design as the plan or structure of investigation

conceived to obtain answers to research questions that includes an outline of the research work to

enable the representation of results in a form understandable by all. A descriptive research design

was adopted for this study. Descriptive research enables the researcher to describe the existing

relationship by using observation and interpretation methods. It provides the researcher with the

appropriate methodology to illustrate characteristics of the variables under study. Causal research

determines causal linkages between study variables by studying existing phenomena and then

reviewing available data so as to try to identify workable causal relationships.

3.3 Population of the Study

The population of the study includes Branches insurance companies in Nigeria. There are about

57 of these companies operating in Nigeria at present (NIA, 2019). Since the population of this

32
study is a finite one, Yamane (1964) formula for determining sample size from a finite

population was employed in the selection of the study’s sample size at 5% level of significance.

The formula states that; 𝑛 = 𝑁 /(1+𝑁(𝑒) 2 )

n = required sample size

N= population

e= maximum margin of error at 5%

Thus, 𝑛 = 57 / (1 + 41(0.05) 2 )

𝑛 = 57/ (1 + 0.1025 )

𝑛 = 51.700680272

𝑛 ≅ 52

The data generated for this study include Ratio of Ceded Reinsurance (RCR), Ratio of

Reinsurance Recoverable to Policyholders’ Surplus (RRPHS), Loss Ratio (LR), and premium

growth rate (PGR). The LR and the PGR are used as proxies for dependent variables in this

study. The LR shows what percentage of claim is being settled with premium received by the

insurance company. It is calculated by dividing loss adjustments expenses by premiums earned.

Higher loss ratios may indicate that an insurance company needs better risk management

strategy. A lower rate of this ratio indicates a better financial health for an insurer. Malik (2011)

used LR to study the determinants of insurers’ profitability in Pakistan and found a significant

negative correlation between LR and profitability. Cummins et al. (2008) and Iqbal and Rehman

(2014) have also used LR as an indicator of profitability. PGR is measured as a year to year

change in the new premium of insurance companies. The proxy use for this variable is sales

growth (percentage change in premiums) of insurance companies. The insurers with a high

33
premium growth rate will have low profitability due to increased underwriting risk and related

provision for solvency margin (Lee, 2014; Ahmed et al., 2011).

3.4 Data Collection

Secondary data is used for this study. The data is obtained from the audited annual financial

reports of selected Nigerian insurance firms and therefore represent the most pragmatic view of

the insurance companies. The data is generated from the financial reports published by the

insurance firms, as well as on their respective websites. Secondary data was collected from

secondary data sources like Standard Alliance Assurance financial survey reports form and the

audited financial statements of Mutual Benefit insurance companies as presented. Secondary data

for the period 2000 to 2010 was used in this study.

3.4 Data Analysis

This research employed descriptive statistics to analyse the data. It is argued (Mugenda &

Mugenda, 2003) that descriptive statistics enable the researcher to get meaningful description of

scores and measurements for the study through the uses of few indices or statistics. The data

obtained from the questionnaires was edited and then coded for the purposes of data analysis. It

was further summarized using descriptive statistics which usually include measure of central

tendency, measures of variability, and measures of reliability and frequency among others.

Measures of central tendency such as the mean, median and the mode state the best estimate of

the expected score or measure from a group of scores in a group of scores in a study.

34
 3.5 Diagnostic Tests

F-test was tested for joint significance of all coefficients and t-test for significance of individual

coefficients. Measures of central tendency (mean) and a measure of dispersion/variation

(standard deviation) was used to analyse the data.

35
 CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

4.1 INTRODUCTION

Suffice it to say that this study will be meaningless without this important chapter, which deals

with a critical appraisal of the data collected for the purpose of this research work. In this

chapter, according to the past authors n this research project work: Farman Afzal1 Aisha

Masood1Shoaib Masood Khan2, Muhammad Sajid3, the data collected are analyzed and

interpreted for valid conclusion purpose of this work. However, in this chapter, the secondary

data collated from the audit department of Standard Alliance Assurance company shall be used

to analyses the data analysis.

4.2 PRESENTATION AND ANALYSIS OF DATA:

Presentation of data: the responses of the sample surveyed from the data collated to be used,

and trust of observation made from this study are summarized in tables as we progress.

Data Analysis: This refers to the segregation of data into parts with relevant comments and best

of judgments. In other words, it means breaking down and putting in order, the qualitative

information gathered through the research exercise. It also involves comparing and contrasting

the events, patterns and relationships. As earlier stated in chapter three, the data collected for this

study are carefully analyzed in simple percentage and tables, while chi – square statistical

36
technique was used to test the hypotheses. The following are the questions and responses in the

questionnaire. Lecturer, Institute of Business and Management, Igbesa, Ogun State.

4.3 TEST OF HYPOTHESES

Predominantly, before testing these hypotheses, it’s very important to note that:

a) The greater the value of the calculated chi-square, the lower the chance of its occurrence.

b) The probability of chi-square of any given figure depends upon the number of degrees of

freedom.

In consideration of the above, the chi-square computation method is thus shown below.

Expected frequency (E) = RXC

Where:
R = Total on each row
C = Total on each column
G = Grand total
In other words,

Expected value = Row total x Column total

Grand total

While, Xc2 = ∑(0 – E)2

37
 Degree of freedom (d.f) = (m-1)(n-1) Where,

m = number of columns n =

number of rows

Decision Rule

If Xc2 > Xt2, reject Ho and accept H1

If Xc2 < Xt2, accept Ho and reject H1

Where,

Xc2 => Chi-square calculated

Xt2 => Critical value or Chi-square tabulated

38
4.3.1 TEST OF HYPOTHESIS ONE

Table 4.17: Observed frequency table

CATEGORY DISTRIBUTION PERCENTAGE

Yes 52 86.67
No 8 13.33
Total 60 100
Source: Extracted from table 4.5

Table 4.18: Contingency table

Variable Oi Ei Oi – Ei (Oi – Ei)2 (Oi – Ei) 2

Ei
Yes 52 30 22 484 16.13
No 8 30 -22 484 16.13
Total = 2 60 32.26

Xc2 = 32.26, while Critical value = 3.841

39
Decision:

From the chi-square computed above, it is observed that the computed value of Xc 2 is greater

than the critical or table value at d.f = 1, thus, we accept the alternative hypothesis, which says

that Manipulation of share prices has significantly.

4.3.2 TEST OF HYPOTHESIS TWO

Ho2: Insider trading is not a significant factor in the financial crisis looming within the insurer.

Table 4.19 Observed Frequency

CATEGORY DISTRIBUTION PERCENTAGE

Yes 44 73.33
No 16 26.67
Total 60 100

Source: Extracted from, 4.6

Table 4.20: Contingency table

Variable Oi Ei Oi – Ei (Oi – Ei)2 (Oi – Ei) 2

Ei
Yes 44 30 14 196 6.53
No 16 30 -14 196 6.53
Total = 2 60 Xc2 13.06

40
 Xt2 =3.841

Table 4.3. 4 Standard Alliance Assurance Audit Index (CPI) 1980 –2010

S/N Year Total N0. of Nigeria’s Nigeria’s CPI

Countries Ranking score(0-10)

Surveyed
1 1980-1985 91 90 2.0
2 1986-1990 102 101 1.6
3 1991-1995 133 132 2.0
4 1996-2000 145 144 1.8
5 2001-2005 158 152 2.0
6 2006-2010 163 142 2.3
Score not

indicated (27%)

41
Data Analysis

Year percentage(%) Percentage (%)

1980 10.9 4.

1985 12.11 5.

1990 4.3 5.

1995 8.8 6.

2000 6.5 6.

2005 6.5 8.

2010 6.5 8.

Average 7 6.

Mean

According to the table shown above, the impact of stock market performance within the year

1980 to 1985 10.9% percentage was highly encouraged on the growth of the Nigerian Economy.

While within the year 1985-1990, the ratio of the percentage was increased to 12.11% which

adequately stated clearly that it was a bit higher than the previous years added to the growth of

the Nigerian Economy. From the list of the table shown above, the percentage of the impact of

stock of market performance within the year 1990-1995, it was downsized to the tune of 4.3%,

42
 while within the year 1995-2000, the stock picked up to 8.8%, within the year 2000-2005, it was

recorded that the percentage of 6.5% was up for stock market performance. Between the year

2005-2010, it was recorded that 6.5 which means no better advantage the stock market had on

the Nigerian economy.

Sample: 2012 2016

Included observations: 145

Correlatio

n TOBINQ DTA  LDE  SDE  SIZE  GDP  IFL  ER  IN  LQR  OPN 
TOBINQ  1.000000
1.00000

DTA  0.206445 0
- 0.28904

LDE  0.021843 8 1.000000

- 0.29517

SDE  0.024657 6 0.996178 1.000000

0.22519 -

SIZE  0.294505 4 0.031331 -0.0508301.000000

-

0.03008 -

GDP  0.008678 0 0.091859 -0.0838660.015778 1.000000

- 0.02070 - - 1.00000

IFL  0.112819 6 0.037487 -0.0398480.006022 0.481107 0

- 0.04556 - 0.25489

ER  0.176958 3 0.096605 0.106990 0.053700 0.256353 9 1.000000

- 0.00817 - 0.62742

IN  0.170251 9 0.029657 -0.0194680.047894 0.034370 0 0.685378 1.000000

LQR  - - 0.109617 0.113805 - - 0.08818 - - 1.000000

43
 0.40679

0.137916 6 0.256864 0.107665 0 0.051891 0.025649

-

0.03423 - - - 0.00303 - -

OPN  0.172176 6 0.063042 -0.077122 0.061249 0.191278 0 0.898143 0.671259 0.104278 1.000000

Source: NSE computation (2019)

The correlation between the manufacturing firm value (TOBIN’S Q) and the other variables.

This implies that most manufacturing firms with large bank size are likely to generate superior

firm value (TOBIN’S Q). In the case of short term debt to equity we observed a negative and

week relationship (SDE) with manufacturing firm value (TOBIN’S Q) (-2.4657%). This means

that manufacturing firms with large short term debt are likely to perform less in maximizing

firm’s value. We also observed that in the case of long term debt to equity (LDE) they tend to be

a negative and weak association with firm value (TOBIN’S Q) (-2.1843%). This implies that the

long term debt to equity will reduce the maximization objective of manufacturing firms in

Nigeria. A close look at the correlation matrix also revealed that total debt to total assets has a

week positive association of (20.6445%) on the firm value (TOBIN’S Q) in Nigeria. This implies

that maximizing the value of a manufacturing firm in Nigeria has little to do with total debt to

total assets.

Finally, the control variables shows that they exist a negative association of (-11.28% ,

-176958% , -17.0251% and -0.137916) for inflation growth rate , exchange rate, interest rate and

liquidity ratio respectively and manufacturing firms value in Nigeria. This implies that inflation,

exchange rate, interest rate and liquidity ratio will affect the maximizing value of a firm

negatively. Also, based on the above data, gross domestic product (GDP) and openness in the

economy has a weak positive relationship 0.008678 and 0.172176 respectively with maximizing

44
the value of a manufacturing. This result implies that both gross domestic product and openness

in the economy has little association with firm value.

Form the result, this means that there is the absence of multicollinearity problem in the model.

Thus multicollinearity between explanatory variables may result to wrong signs or implausible

magnitudes, in the estimated model coefficients, and the bias of the standard errors of the

coefficients.

4.4. Regression Results

However, to examine the cause-effect relationship between the dependent variables

manufacturing firm value (TOBIN’S Q) and the independent variables and to test our formulated

hypotheses we used panel data regression analysis since the data had time series (2012 to 2016)

and cross-section properties (29 quoted companies in the manufacturing sector). The panel data

regression results obtained and the results are presented and discussed below.

Table 4.4.1:Panel Data Regression results of the Performance

Expected TOBINQ TOBINQ

Sign (Fixed Effect) (Random Effect)

C -4899.745 -4786.800

45
 (-2.358902) (-2.327339)

[0.0202] [0.0214]

DTA - 0.000901 0.000329

(0.107203) (0.0416019)

[0.9148] [0.9669]
LDE + 0.003625 0.004127

(1.660430) (1.955268)

[0.0998] [0.0526]

SDE - -0.001123 -0.001282

(1.628304) (-1.917425)

[0.1064] [0.0573]

46
SIZE + -0.974111 0.342312

(-1.166644) (0.937707)

[0.2460] [0.3501]

GDP + 0.003027 0.002952

(2.356434) (2.320477)

[0.0203] [0.0218]

IFL - -0.522583 -0.518839

(-4.167582) (-4.162990)

[0.0001] [0.0001]

ER -

15.97398 15.57557

(2.359196) (2.323442)

[0.0201] (0.0217)

IN

-
-27.30430 -26.62146

(-2.307366) (-2.272083)

[0.0230] [0.0247]

4106.671

47
 OPN - 4210.476 (2.329021)

(2.364203) [0.0214]

[0.0199]

-0.050997

LQR -0.013185 -0.487281

+ (-0.120688) 0.6269

[0.9042

R-Squared 0.909006 0.826596

Adj-R-Squared 0.876385 0.796342

F-Statistic 27.86602 (0.0) 6.498893(0.000)

Hausman Test - 10 (1)

N(n) 29(5) 29(5)

DW 1.85 1.876
Note: 1 Figures in parentheses ( ) are t-statistics while figures in brackets [ ] are p-values

In testing he cause-effect relationship between the dependent and independent variables the two

widely used panel data regression models (fixed effect and random effect data estimation

techniques. The difference in these models is based on the assumptions made about the

explanatory variables and cross sectional error term.

48
In table 4.3, we presented the two panel data estimation techniques (fixed effect and random

effect data estimators. The results revealed difference in their coefficients magnitude signs but

did not necessary change the number of insignificant variables. In selecting from the two panel

data models test should be presented before the panel data results. The former justifies the use of

the two techniques or otherwise. The result shows that we should accept Ho (adopt random effect

model and reject fixed effect model). This means that we should adopt the random effect panel

regression results since the probability of the chi square is equal to 1 which is greater than the

significant level of 5%.

In table 4.3, we observed that the random effect results shows that the R-squared and adjusted R-

squared values were (0.826) and (0.796). The later indicates that all the independent variables

jointly explains about 79.6% of the systematic variations in firm performance (TOBIN’s across

the 29quoted manufacturing companies sampled in this study and over the five-year period

(2012-2016). This means that any models that include the ten variables may be appropriate in

explaining firm’s performance (TOBIN’s). The F –statistics(6.4989) and its p-value (0.00) show

that the firm’s performance panel random regression is generally significant at 5% levels.

4.4. SUMMARY OF FINDINGS

The study has tried to focus on examining the impact of financial crisis on the insurance

company in Nigeria, Standard Assurance Company, Lagos branch. For valid conclusion of this

study, the following findings were noted:

49
1. Given the first hypothesis, it is noted that Manipulation of share prices has significant

affect on the Nigerian capital market crash.

2. The second hypothesis shows that insider trading/dealing is a significant factor in

destroying investor’s confidence in the Nigerian Insurance company.

3. The third hypothesis indicated that there is a significant relationship between the global

economic meltdown and the crises in the Nigeria Stock Exchange.

4. From data analysis, it was discovered that margin trading and speculation by

stockbrokers has a significant in destroying the market prices.

5. From data analysis, it was also discovered that structural deficiencies of the Nigerian

Stock Market contribute to the price crash experienced at the Exchange.

6. It was also discovered that the crash at the Nigerian insurance company was partly

caused by ineffective regulation and supervision by the assurance agemcu Commission.

50
 CHAPTER FIVE

DISCUSSION, CONCLUSIONS AND RECOMMENDATION

5.1 DISCUSSION
As a result of the Global Financial Crisis, management of the global economy was, it comprised

of the world’s 20 largest economies. The G-20’s emergence began when the onset of the

financial crisis prompted the elevation of what had previously been a modest and little-reported

meeting of finance ministers and central bank governors to a much more prominent meeting of

the heads of state of the world’s most important economies. financial crisis may have multiple

causes.

According to Nerian Shaif, AJ&K, (2015), generally, a crisis can occur if institutions or assets

are overvalued, and can be exacerbated by irrational or herd-like investor behavior. For example,

a rapid string of selloffs can result in lower asset prices, prompting individuals to dump assets or

make huge savings withdrawals when a bank failure is rumored. Contributing factors to a

financial crisis include systemic failures, unanticipated or uncontrollable human behavior,

according to the incentives given by the initial author of this research project work. (UET

Lahore, Pakistan), Lecturer, Institute of Business and Management said, Insurance sector is

mainly affected by financial crisis due to failure of other sectors such as banks where insurance

companies has put their guarantee on different securities and its investments. Risk management

is an important discipline in business especially the insurance business. Recently, businesses put

great emphasis on risk management as this determines their survival and business performance.

Insurance companies are in the risk business and as such cover various types of risks for

individuals, businesses and companies. It is therefore, necessary that insurance companies

51
manage their risk exposure and conduct proper analysis to avoid losses due to the compensation

claims made by the insured. However, Kadi (2003) observes that most insurance companies

cover insurable risks without carrying out proper analysis of the expected claims from clients and

without putting in place a mechanism of identifying appropriate risk reduction methods.

Poor management of risk, by insurance companies, leads to accumulation of claims from the

clients hence leading to increased losses and hence poor financial performance (Magezi, 2001).

Risk management activities are affected by the risk behaviour of managers. A robust risk

management framework can help organizations to reduce their exposure to risks, and enhance

their financial performance (Iqbal and Mirakhor, 2017) .Further; it is argued that the selection of

particular risk tools tends to be associated with the firm’s calculative culture – the measurable

attitudes that senior decision makers display towards the use of risk management models. While

some risk functions focus on extensive risk measurement and risk based performance

management, others focus instead on qualitative discourse and the mobilization of expert

opinions about emerging risk issues (Mikes and Kaplan, 2014).

5.2 CONCLUSIONS

Nigeria, a frontier market has shown remarkable economic growth with an average economic

growth of 10.03 per cent. However, a lot still needs to be done to enable the country become one

of the top twenty countries in 2020. Consequently, there is a need to sustain the current level of

economic growth and encourage both domestic and foreign investments in Nigeria. Evidence

from recent empirical economic studies suggests that deeper, broader, and better functioning

financial markets can stimulate economic growth. Hence, the interrelationship between the

reforms of the CBN and that undertaken by the regulators of the capital markets should not be

undermined.

52
The financial markets stimulate economic growth through the provision of short and long term

funds to the productive sector. The banking sector, a major source of short to medium term

funds, has contributed actively to the economic development in Nigeria. No business can

succeed without access to adequate working capital and only the banking system can fill this gap.

Consequently, the various banking sector reforms had been developed in order to ensure that the

productive sector has access to this critical source of funding. Economies also require long term

capital investment for productive activities that produce goods and services that drive economic

growth. However, the surplus sector (households) is usually unwilling to surrender control of its

savings for a long period. The capital markets bridges this gap by providing an arrangement

where organizations can raise long term capital while providing investors the flexibility to

liquidate their investment without holding them to maturity. By providing investors with

financial instruments that matches their risk preferences and liquidity needs, the capital market

enhances the prospects of sustainable economic growth through the generation of long term

capital for the productive sector.

High cost of borrowing discourages organizations from making investments, thereby limiting

economic growth. However, capital markets eliminate high cost of borrowing by offering

companies the opportunity to raise equity with minimal issuing cost.

Companies benefit from injection of funds through equity to embark on expansion without the

burden of interest payments. In addition, capital markets listing requirement and banks due

diligence ensures that companies provide regular information. This information enables

shareholders scrutinize the businesses and demand efficiency from the organizations. This in turn

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results in further growth as resources are deployed only to profitable ventures within the business

and inefficient units are let go.

Capital markets provide a level playing ground for the numerous organizations seeking to raise

funds. A competition for funds drives businesses to outperform each other to the benefit of the

economy. In this vein, the capital market efficiently allocates financial resources to the benefit of

the economy. Well developed financial markets stimulate economic growth and regulators are

continuously embarking on reforms to fine tune the markets to achieve this. Consequently,

regulators like CBN and SEC should continue to adopt appropriate measures to ensure that the

financial system is well equipped to stimulate economic growth. However, there is the need by

the capital market regulators to employ more efforts in tackling some of the inefficiencies that

surround the capital market crash and make more transparent so as to restore investors’

confidence in the market.

5.3 RECOMMENDATION

The current macro-economic and social challenges posed by the global financial crisis require a

much better understanding of appropriate policy responses. Some recommended policy

responses which can be applied to the situation in Nigeria are enumerated as follows:

 There needs to be a better understanding of what can provide financial stability, how
cross-border cooperation can help to provide the public good of international financial
rules and systems, and what the most appropriate rules are with respect to development;

 There needs to be an understanding of whether and how Nigeria and other developing
countries can minimise financial contagion;

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 Nigeria and other developing countries will also need to manage the implications of the
current economic slowdown – after a period of strong and continued growth in
developing countries, which has promoted interest in structural factors of growth,
international macroeconomic management will now move up the policy agenda.

 Nigeria and other developing countries need to understand the social outcomes and
provide appropriate social protection schemes.

 Central Banks should regulate issue of foreign exchange to companies during this time of
crisis to avoid creating a deep in foreign reserves.

 Non-bank financial sector such as Pension Funds should also be regulated. This is to
protect pension funds from being invested in some of this complex instruments to enable
them meet their liquidity obligation as at when due.

 African countries should strengthen domestic and regional markets and boost intra-
African trade and it is also important to promote domestic tourism.

 There is a need for new stability of the global financial system in which the voice of
every nation, every continent is heard and their concerns taken into account.

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