INSURANCE BUSINESS CONCEPTUAL ISSUES

             INTRODUCTION

This section deals with conceptual issues relating to the margin estimate through the cost of capital approach. The main points that emerge are briefly summarized here under.

Either an indirect approach based on observable insurance equity price and shareholders expected rate of return or a direct approach based on insurance contract characteristics are both consistent with financial economics and are perfectly equivalent theoretically. However, only by using a direct approach does the risk margin estimations seen practically implement able.

The solvency II specification of the methodology is also consistent with financial economics. However, the theoretical frame work required (a frictionless and normally distributed world) is too far-fetched to be acceptable. In addition, even if these conditions were satisfied, a variable unitary cost of capital would be needed.

 

A consistent risk margin estimate requires the identification of priced risk in insurance contract, i.e. the risks which affect the expected return of insurance, contracts, non-hedge able systematic risks seem to be the most relevant, however non-hedge able and non systematic price risks could also be important, but it should be treated separately from systematic risks. The risk margin could also consider expected frictional costs, if there are not explicitly computed in the best estimate. In this frame work more than one risk could be used to measure the risk margin estimation. Under no condition does the value at risk measure seem to be a viable condition.

           HISTORICAL DEVELOPMENT OF INSURANCE BUSINESS

This refers to the development of a modern business in insurance against risks, especially regarding ships, cargo and buildings property and firs death (life ), automobile accidents (auto) and the cost of medical treatment (health). The industry has been profitable and has provided attractive employment insurance opportunities for white collar workers. It helps eliminate risk as when fire insurance companies demand safe practices and the availability of fire stations and hydrants. Spreads risks from the individual or single company to the larger community, and provides an important source of long-term finance for both the public and private sector of the economy.

However, the Greeks and Romans introduce the origins of health and life insurance, 600BC when they created guilds called “benevolent societies” which cared for the families of deceased members, as well as paying funeral expenses of members. Guilds in the middle ages served a similar purpose, the Talmud deals with several aspects of insuring goods. Before insurance was establish in the late 17^th century, “friendly societies” existed in England, in which people donated amounts of money to a general sum that could be used for emergencies.

     HISTORICAL DEVELOPMENT OF INSURANCE BUSINESS IN NIGERIA

Years back around 1912 the existence of insurance business was unsophisticated in Nigeria. This is because of the low level of economic activities at the period, like the use of mechanical propelled vehicle such as motor car, this were very rare and compulsory legislature on motor insurance with an outbreak of the second world war in 1939 the situation became more critical.

The road traffic act of 1950 and some into fore in 1^stApril 1950 and work man’s compensation Act of 1940 lead the organization of insurance companies properly in Nigeria. But most of those companies were owned by foreigners.

Therefore, after attainment of political independence in Nigeria, a large number of indigenous companies commenced their insurance business. The style of ownership rapidly change from foreign owned companies to indigenous companies the increament in the numbers of companies was due to the fact, that there was no frame work and control of registration of these companies.

 

But this situation was control on 1^stOctober 1966 when Dr. K Rachael a United state expert was appointed as adviser as on insurance matter. This appointment was focus in recognition to insurance company regulation which formulated in 1968 this lead to the corporation of Nigeria (NICON) on 1^st July 1969, NICON has been in existence since around 1969 and today is recognized as the best among other insurance companies in Nigeria.

              CLASSIFICATION 

Insurance generally is divided into classes according to class or business into (17 groups) some of them are:

a.     Money

b.     Accordant

c.      Marine

d.     Engineering

e.      Life

f.       Non-life

g.     Burglary

h.     Theft

 

It can also be defined for the purpose of academic work into the following uses.

a.     Introduction to insurance

b.     Insurance of ability, property and insurance and so on.

Classification according to business:

 

MONEY: Money like other property is subjected to theft, money is given a wide meaning in this form of policy, it comprises of the following.

a.     Bank and currency note

b.     Cheques

c.      Postal order

d.     Money order e.t.c.

 

MOTOR: This type of insurance provide cooler against any risk of loses on hazard which may arise from the use of motor by motorist on the high ways, the risk which motorist are exposed to, can be classified in the following ways.

a.     The risk of damages or loss of vehicle itself.

b.     The risk of legal liability for damages to the property or third party or for injury or death of such third.

 

Motorist insurance policy is divided into four types namely.

a.     Comprehensive policy

b.     Third party theft fire policy

c.      Third policy

d.     Act policy

 

Comprehensive policy has the widest cover with the biggest premium. Motor insurance is among the basic condition to be fulfilled by the motorist before he can be allowed to use the high way.

 

ACCIDENT: This type  cover for any personal accident including sickness. This type of policy is usually taken by employees of companies who work with huge machine so that if nay accident occurred in the process of using the machine he can be compensated by the insurance company.

 

MARINE : This type of insurance is the oldest type, it gives cover against any less of damages which may arise on seas by the use of vessels. The risk of this type of policy is usually large for only one insurance company undertaken in such contract, many insurance companies come together as under writers to share the risk together according to the proportion of premium to each under writer.

 

ENGINEERING INSURANCE: This policy is granted to any loss which may arise from engineering. It is very technical class of business which also involves large risks. The policy is taken against preventive work of survey, inspection of boiler, cranes, electric plants e.t.c. and other vice fidelity and goods in transit.

 

LIFE : This type of policy is taken against human life. It is very significant because it involves life i.e. the one taken against the whole life of the assured so that the claims would be given to his next of kin after death or endowment, which is taken for a fixed period of life span. The claim would be taken at the end of that period by that assured, it alive or by the next of kin the assured is no alive.

 

BURGLARY INSURANCE: This is a dishonest appropriation of property belonging to another by a trespass with the intension of permanently depriving the others of it. This is usually involves damages and forceful entry to a house. The business person who has many goods in their store or warehouse usually take this type of insurance policy.

 

CLASSIFICATIONS ACCORDING TO ACADEMIC PURPOSE ARE AS FOLLOWS:

–         INTRODUCTION : This is the elementary aspect of insurance. This aspect covers the definition, purpose, objective of insurance mostly.

This introduction of insurance is usually for those who are new on insurance as a course. It also covers origin and development.

–         LIABILITY: This aspect of policy deals with types of insurance in viable and monetary term principles of insurance and few others

 

                 RISK

The basic risk, without risk there would be no insurance. This is found in every aspect of human endeavours, in general risk has to do with uncertainty of losing or not gaining.

PURE AND SPECULATIVE RISK

Happening to pure risk always resulting into loss e.g. fire damage to properties, pure risk are insurable their capital of scientific measurement speculative risk happening to speculative risk are all uninsurable because the probability of this occurrence can not easily be measure for insurance purpose.

STATIC AND DYNAMIC RISK

Static risk involves a loss of the society and commend with the losses caused by irregular action of the force of nature or the mistake of human being while dynamic risk not involves loss to the society it is associated with change especially in human and improvement in technology and organization.

FUNDAMENTAL AND PARTICULAR RISK

Fundamental risk are group of risk that is personal in nature and origin and affect at least for the individual unpreventable such risk are present in the force of nature in the economy. Since the outcome of inflation or mass unemployment beyond individual influence particular risk are personal in nature, origin and affect. Examples are risk of property losses, such as theft, fire and explosion e.t.c

 

CHARACTERISTIC 

For risk to be involves the following condition must be presented:

1.     Any risk must be measurable in monetary terms.

2.     risk of loss must be reasonable unexpected

3.     The risk must be accidental and not deliberately caused by the insured.

4.     Risk must be nature that permits in reasonable statistical estimate.

 

The degree of loss must be sufficiently large to make the cost element a minor factor in the premium.

                 CLAIMS AND SETTLEMENT PRACTICE

Claims according to Charles E.D (1969) is accounting for the assurance companies is described as benefit amount payable in accordance with insuring desires in life and health. Policies each claims must be examined carefully and approved by a qualified person before money is paid because the amount of these payment often are quite large.

The responsibility of claims assigned to a claim approver. He is a specialist in investigating and in thoroughly familiar with various policies and contract provision. He may also have legal training point participation by this he approves and accounts in making settlement, he provides element of security to the company. Account control and record are required for calculating claims liability amount at the end of each year controlling claims the payment made in installments.

The control varies according to the classification the two principles of claims are classified as:

1.     Life claim (which include matured endowment)

2.     Health claim life cover the following

a.     Death claim

b.     Surrender claim

c.      Maturity

d.     Bonus surrender

To prove the claim will submit required document for proper office protocol. By Ogunride P.S (1990)

           INSURANCE AND ECONOMIC DEVELOPMENT: AN EMPIRICAL REVIEW

This section of this research work evaluates the long-run relationship between insurance development and economic growth. In doing so it will differentiate between developed and developing economies and the roles that life and non-life. Insurance development could play economic growth. This research work uses a panel data set of 77 economies over the period of 1994-2005. Table 1 in the appendix lists the names of economics used in this study. Table 1 reports summary statistics for 77 economies used in this study by referring to the information on economic growth, insurance density, life and non-life insurance density. As can be seen from table 1 the development is largely different in life and non-life insurance lines and across different economies

SUMMARY STATISTICS: 1994 – 2005 FIGURE AND TABLE INDEX
DESCRIPTIVE STATISTICS	ECONOMIC GROWTH	DENSITY
		TOTAL BIZ	LIFE BIZ	NON-LIFE BIZ
Mean	3.480	4.982	3.747	4.428
Median	3.700	4.808	3.507	4.433
Maximum	31.100	8.534	8.313	7.660
Minimum	-22.900	0.182	-2.302	-0.511
Std. Dev.	3.459	2.001	2.504	1.823
Sewness	0.825	-0.096	0.001	-0.388
Kurtosis	3.545	2.005	1.920	2.340
Jague-Bera	4348.392	37.427	42.103	32.468
Profitability	0.000	0.000	0.000	0.000
Observations	916	875	866	874
Cross-sections	77	77	77	77

From figure 1 it can be seen that the growth pattern between 1994 and 2005 for life and non-life insurance differ from each other. For instance, there was a large in fluctuation for life insurance while the in fluctuation in non-life is relatively small.

REFERENCE

P O Akingobi (1997), Fundamental of Insurance

Sogress M.S (2001), The role of Insurance company in National Growth and Development

Charles E.D (1969), Accounting for life Assurance Company

Ogurinde P.S (1990), Agricultural Insurance Theory and practices

Akindele (2012), Nigerian Vanguard

Prudential Inssurance Company America ed The Documentary History of Insurance, 1000BC – 1875 A.D (1915).

Alborn Timothy Regulated Lives: Life Insurance and British Society, 1800 – 1914 (U of Toronto Press, 2009)