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Globalization VS Market Protection: Effects on the West African Insurance Industry

PAPER DELIVERED BY

MRS. OLUSEYI IFATUROTI


Managing Director/CEO

CrystaLife Assurance Plc.


At West African Insurance Companies Association Educational Conference 21
st

2 3 rd N o v e m b e r , 2 0 1 0

Freetown, Sierra Leone.

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

Preamble Globalization: Characteristics, Pros, and Cons Market Protection: Benefits and Costs An Overview of The West African Region Globalization and The West African Insurance Industry Case Study: Nigeria Protecting The West African Insurance Market The Future of the W/A Insurance Market Conclusion and the Way Forward
Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

Preamble
Until the second half of 2008, the global economy was purring along with little or no bumps. For a period of about three decades, the fortunes of many nations and societies have irrevocably changed for the better.

For the three decades these nations embraced the concept of globalization and free trade, their human development indices improved dramatically.

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

A lot of countries were able to modernize their economies by developing competitive advantages in modern technologies and other industries.
The foundation of this unprecedented economic growth and rapid transformation in many countries was laid in the seventies. And there is no doubt that the driving force behind global economics was globalization.
Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

Wikipedia defines:
Globalization as the process by which regional economies, societies, and cultures have become integrated through a global network of communication, transportation, andtrade.

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

ORIGIN OF GLOBALIZATION
The historical origins of globalization is still subject to on-going debate. While some scholars situate the origins of globalization in the modern era, others regard it as a phenomenon with a long history. The popular Wikipedia website states that the 19th century witnessed the advent of globalization into its modern form as industrialization allowed for the cheap production of household items using economies of scale, while rapid population growth created sustained demand for such commodities.

However, this first phase of "modern globalization" began to break down at the beginning of the 20th century, with the first world war.
The second wave of globalization began roughly after the Second World war with the Bretton Woods conference, an agreement by the world's leading politicians to lay down the framework for international commerce and finance, which led to the founding of several international institutions e.g. International Monetary Fund (IMF) and the General Agreement on Tariffs and Trade (GATT) which are intended to oversee the processes of globalization.
Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

Globalization is the freedom and ability of individuals and firms

to initiate voluntary economic transactions with residents of


other countries. - (The World Bank) Globalization is the broadening and deepening linkages of national economies into a worldwide market for goods and services, especially capital. John Ohiorhenuan (Resident Coordinator, UNDP, South Africa)

Globalization is the tendency towards a worldwide investment


environment, and the integration of national capital markets. -(www.beingwarranbuffet.com)
Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

Globalization involves:

one fundamental project: that of opening up the economies of all countries freely and widely to the global market and its forces.

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

CHARACTERISTICS OF GLOBALIZATION Globalization is characterized by liberalization of the world economies and economic activities that are free from institutional control and which fosters and promotes free market mechanism, private enterprise, open competition, professionalism and excellence in corporate governance

Globalization

Liberalization

Free Market Mechanism

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

The Pros of Globalization


Investment and Capital Flows

Spread of Technical Know-How


Employment Opportunities Increased Competition Spread of Education Reduction in the cost of production and distribution as a result of an improved technology
Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

The Pros of Globalization (Contd)


Enhancement of productivity Improved specialization in resource allocation Improved transparency in the conduct of business

Increased volume of business


Scale of economy Cultural Regeneration Decentralization of power
Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

The Cons
Exploitation of labor

Job insecurity
Local industries being taken over by foreign multinationals Hostility between the host and the foreign nationals Imposed reforms and capitalization
Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

The Cons (Contd)


Cultural Violence Terrorism

Promotion of a credit-based economics leading to an unsustainable growth of debt among developing nations
Widened arbitrary inequalities Use of substantial and sophisticated legal and financial means by foreign investors to circumvent the bounds of local laws and standards.
Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

Market Protection on the other hand refers to the advocacy, system, or theory of protecting domestic producers by impeding or limiting, as by tariffs or quotas, the importation of foreign goods and services.

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

Market protection also known as Protectionism is the economic policy of restraining trade between states, through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to discourage imports, and prevent foreign take-over of domestic markets and companies. Protectionism is often regarded as a barrier to free trade which the advocates of globalization dread to hear.
Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

Some Methods of Market Protection


Tariffs Import Quotas Administrative Barriers Direct Subsidies Exchange Rate Manipulation Restrictive licenses

Employment Law
Complex regulatory environment
Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

Why Market Protection ?


Protecting the infant industry
Protecting jobs. Increasing Revenue

Providing National security

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

Prior to 1980, many countries quite deliberately adopted policies that were designed to insulate their economies from the world market in order to give their domestic industries an opportunity to advance to the point where they could be competitive.
Even the likes of China, South Korea, and others became more developed using measures to protect their industries and so on, with various forms of controls.
Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

All Western European core economies

had higher industrial protection than Brazil, China and India today when they had similar per capita income levels.

Dr. Yilmaz Akyz, former Director of Division on Globalization and Development Strategies at United Nations Conference on Trade and Development (UNCTAD)

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

The Cost of Market Protection: The America Steel Industry In 2002, the U.S. government headed by President Bush slapped a 30 percent tariff on imported steel, making other steels 10 percent more expensive than U.S. steel. The American hubcap (wheel cover) industry who rely on steel for their material had to pay 20% more for the steel to produce their wheels. Since the government had not put a tariff on hubs, Japanese hubs into the market came cheaper than those produced in US. The result: Americans started buying from Japan, the industry faced declining revenue; some of the firms laid off workers whilst some completely went out of business.
Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

Costs of Market Protection

Lack of technical Skill Loss of jobs Stunted Economic Growth Higher Prices of goods and services Higher taxes Declining revenue Lack of exposure Lack of Innovation Restriction of Consumers rights
Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

The region is characterized by:


high level of illiteracy, high rural population,

poor infrastructure,
poverty as many dwellers live below $1 per day High dependency on industrialized economies for financial integration. Low insurance penetration Poor infrastructure Galloping inflation

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

Globalization , Liberalization Impact on the West African Region


Increase in the Foreign Direct Investment Increase in the Volume of Insurance business Exposure to the International financial market Exposure to international crimes financial , terrorists etc. Provides for risk diversification and costs reduction as a result of new technology. Improved quality of product and services Reformation and Liberalization of the economy

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

DRIVERS OF GLOBALIZATION
According to the Swiss Re (Sigma No.4/2000), there are drivers for globalization and these are the: Push Factors: are the motives behind the movement of foreign insurance companies

Global Trade
Growing Direct Investment

Potential Future Growth in developing/emerging markets


Saturation in developed economies

Efficiency Gains through diversification


Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

Pull Factors:
Factors are the motives behind allowing the foreign companies to operate in local market: Strong and Enduring regulatory framework Strong Economic Growth Availability of infrastructure facilities Availability of large capital in the market to cover major risks

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

Illustration of the Benefits of a liberalized Insurance Industry

Local Economy Mobilization of domestic savings Improvement in financial stability Facilitation of production and trade Improvement in the efficiency of capital allocation

Spill-over effects

Local Insurance Market


Capital inflows Improvement in service to customers Improvement in the efficiency of the insurance market Transfer of knowledge in the areas of technology and management Supervisory Authorities

Foreign Insurers

Knowledge transfer

Increase efficiency

Improvement in the quality of supervision

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

Globalization and West Africa: A Case Study of Nigeria


Nigeria is a dominant player in the economic bloc of West Africa and accounts for 67% of the regions Gross Domestic Product (GDP). The country has the sixth largest insurance market in Africa. The country became a member of the World Trade Organization (WTO) on 1 January 1995. Since then Nigeria has been liberalizing its economy by doing the following: Investment Policy Reforms Import liberalization Guided privatization Administrative and legal reform measures Capital Market reforms

Multilateral and regional agreements

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

The Consolidation Plan for Insurance Industry


As part of plan by the Government to liberalize its insurance industry through the consolidation, on September 2005 the government announced the new minimum capital base as shown below; Business Type Old New % Increase Life 150million 2billion/US$13m 1,233 Non-Life 200million 3billion/US$19.6m 1,400 Composite 350Million 5billion/US$32.9m 1329 Reinsurance 350million 10billion/US$65.6m 2,757
Note: Exchange Rate As @ 15/12/2009 N152.50 = $1.00

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

Aftermath of the Consolidation Exercise


Foreign Direct Investment Attraction of both local and foreign investments is one of the benefits derived from the recapitalisation exercise. An estimated N600 million came into the insurance sector as direct foreign investment through the Nigeria Stock Exchange during the exercise. Financial Strength With improved financial strength, insurers were well-positioned to take advantage of the governments local content policy (LCP) on the underwriting of oil and gas risks Therefore, the exclusivity given to Nigerian Insurance Companies now makes better sense since the Nigerian Insurers now have the wherewithal to provide greater cover following the consolidation

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

Gross Premium Income of Nigeria Insurance Industry


2004 2005 2006 2007 2008 69.4billion 76.3billion 82.3billion 100.6billion 150.3billion 160 140 120 100 80 60 40 20 0 2004 2005 2006 2007 2008
Gross Premium Vs Year

The growth in the premium encouraged Nigerian Insurance companies to move offshore and establish offices in some other West African sub-region like Ghana, Gambia, e.t.c.

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

The Total Investment: Nigerian Insurance Business (2004- 2008)


N (billions) 450 400 350 300 250 200 150 100 50 0 2004 2005 2006 2007 2008
Source: 2009 Nigeria Insurance Digest
Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

Nigerian Insurance Industry: Opened doors with Protectionist Measures The Insurance Act 2003 Registration Requirement Section 72: Restriction of transactions of insurance business to Nigeria Empowerment of the Commission (National Insurance Commission) The Local Content Act Section 49 of the Nigerian Content Act specifically stated that all operators, alliance partners and Nigerian indigenous engaged in any form of business, operations, or contract in the Nigerian oil and gas industry shall insure all insurable risks related to its oil and gas business, operations or contract within and through an insurance broker or brokerage firm or an insurer registered in Nigeria under the provision of Insurance Act 2003. No risk should be placed offshore without the approval of the National Insurance Commission (NAICOM)

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

THE WEST AFRICAN INSURANCE INDUSTRY SHOULD CONSIDER.

Efficient insurance markets are an essential basis for emerging markets to achieve integration into the global economy and strong economic growth Klime Poposki (Faculty of Tourism and Hospitality, University of St. Kliment Ohridski, Bitola, Maccedonia). Generally speaking, companies have to participate in the consolidation phenomenon in recent years to attain the global scale needed to compete, because it is impossible to achieve that scale through organic growth alone Patrick G. Ryan - (Chairman, President and CEO, Aon Corporation, Chicago, USA)

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

The West African Insurance Market : the Future


The huge potential of the insurance business has remained untapped in West Africa, largely attributable to the absence of an enabling environment for insurance, the lack of commitment to creating and implementing policies targeted at developing the industry and the problem of inadequate capital. The future of our market should be paramount in the minds of all stakeholders so as to ensure stability and enduring contributions by the insurance to the nation building.

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

However, to ensure an enviable insurance industry in the region, we need to take the following radical steps: Establish a robust and protective legal and regulatory system Introduce Micro-insurance mechanisms to help to deepen the market especially among the low income (informal) sector of the region. Develop indigenous information technologies suitable for the environment. Develop innovative strategies to enhance the channels of distribution of products and services
Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

The role of the media in the needed reformation of the insurance industry cannot be overemphasized as they would be helpful in the Massive education and enlightenment programmes needed by the industry.
Build and enduring industry capacity capable of accommodating large risks and investments Easy access to credible statistics that would enable insurance companies to design comprehensive policies to meet the needs of prospective clients.

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

The Story of The Three Blind men

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

CONCLUSION
I believe that all economies even the developed ones like US, UK inspite of openness to globalization still have some measure of market protection e.g. the automobile industry in the US is protected by the high tariff imposed on vehicles from others parts of the world e.g. Japan. This is to ensure that the automobile industry continue to exist and contribute to their GDP.

However, the issue is in the balance which should be maintained at an equilibrium that the economy does not deprive itself of the benefit of globalization.
Africa is the future investment destination , it is becoming what we can term as the last frontier of investment. This is because of the growth potential of the African economies. Whereas the developed economies are matured now or approaching maturity. The continent and the West African sub-region has so much room for growth and development. Consequently, investors world wide are interested in the region and such would aid growth and development. Unnecessary or over protection of this would not augur well for this growth and economic expansion that we badly need.
Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

Echoing the Lagos State Commissioner for Finance at the just concluded AIO Life Seminar in Lagos, - Africa is plagued by two things : Capital and Technology and its time we put on our thinking caps on how to generate more income and mobilize profit.
We must open our doors to one another, learn from each other and share experiences. Africa has a lot of untapped investible resources to take care of her capital needs.
Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

According to Napoleon Hill in his classic boo Think and Grow rich, he said one of the most common causes of failure is the habit of quitting when one is over taken by defeat. We all are guilty of this mistake and need to rise up to globalization. Furthermore, quoting Abraham Lincoln I will work and I will prepare and my time will come. In the light of this, we need to get together so we can get wiser. With every convinction, in view of prevailing trends I want to attest that Africa our time has come, lets come together and take on the world!
Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc

THANK YOU

Paper delivered by Mrs. Seyi Ifaturoti Managing Director/CEO CrystaLife Assurance Plc