THE EFFECT OF INSURANCE INDUSTRY IN PROMOTING BANKING SERVICES IN

NIGERIA

ABSTRACT
The aim of this research study is to identify the effect of insurance industry in promoting banking
services in Nigeria. (A study of Skye Bank Enugu Metropolis). The objectives of this research work is
to examine and analyze the success of banking business in Nigeria and the roles insurance sector
play in promoting their services and also to identify the various problems and challenges facing
Nigeria banks. The Related literature review of this work include; The historical background of
skye bank Nigeria . For a successful completion of this research work, the researcher made use of
both primary and secondary methods of data collection of information gathering. Primary data
were collected through questionnaire, administration, oral interview, and personal observations.
Secondary data were collected through journals, textbooks, lectures, notebooks and internet. The
data collected were presented in table and analyzed with simple percentage while the hypothesis
stated were tested with chi-square. The summary of findings made by the researcher include the
following: it was discovered that insurance industry has positively influenced the services of
Nigeria banking industry.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Nigeria as a developing country has been grappling with the realities of development process,
not only politically and socially but also economically. Since economic development is perceived
as a multi-dimensional process, it requires not only capital and technology but also attitude and
the creation of the institutional structures. It also includes special protection of the financial
institutions.
The banking system has thus been singled out for this special protection because of the vital
roles banks play in an economy especially in the process of economic development. According to
C. Arthur Williams jr (1992), the establishment of insurance protection and cover through Nigeria
Deposit Insurance Corporation (NDIC) was informed by economic circumstances and by a number
of other considerations. The economic circumstances involved the new economic policy of
government, the bitter experience of prior bank failures in Nigeria and the lessons from other
countries with bank deposit insurance scheme.
The distress in the banking system often precipitate other crises and this has necessitated
regulatory and supervisory authorities to take a series of actions and intervention in response to
these problems.
The emergency of Nigeria Deposit Insurance corporation into financial sector of the Nigeria
economy was borne out of necessity and need to check the incessant rise and fall of indigenous
banks, Thus, the objectives of the Nigeria Deposit Insurance corporation are to protect bank
depositors, ensure stability in the industry, encourage healthy competition among banks at foster,
informed risk taking by insured institution, grant financial assistance to banks experiencing
difficulties among others.
Insurance industry also stand as a risk transfer mechanism that can also provide cover and
protection to some certain uncertainties that can negatively affect Nigeria banking services.
According to J.O Irukwu (1999), Insurance cover risks like:
Loss of building and contents to fire and special perils
Loss of cash-in-transit and cash-in-safe
Loss or break down of computers and other business machines
Loss due to infidelity of employees
Loss due to bad debts
Theft in the business premises
Loss of key employees
Loss due to professional negligence
The researcher in this research work was prompted by the curiosity to know the challenges
facing Nigeria banking and how much insurance industry has contributed to tackle and solve
those challenges.
1.2 STATEMENT OF PROBLEMS.
The under listed problems are what led to this research:
1. Liquidation of banks
2. Weakness of internal control
3. Inconsistency in monetary and banking policy
4. Fraudulent and unprofessional conduct of bank staff, depositors and customers
1.3 OBJECTIVES OF THE STUDY
1. To determine the effect of insurance industry on bank liquidation in Nigeria.
2. To evaluate the extent of weakness of internal control system in Nigerian banking industry.
3. To examine the impact of inconsistency in monetary and banking policy.
 CREDIT RISK MODELLING TECHNIQUES FOR LIFE
INSURERS
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ABSTRACT

This study was intended to study credit risk modeling techniques for life insurers.

This study was guided by the following objectives; to know the best techniques of

credit risk modeling for life insurers. To examine the impact of credit risks on life

insurers. To examine the benefits of credit to life insurer. To examine the relationship

between credit and performance of insurers. To know if credit facilities are readily

made available to insurers. The study employed the descriptive and explanatory

design; questionnaires in addition to library research were applied in order to collect

data. Primary data sources were used and data was analyzed using the chi-square

statistical tool at 5% level of significance which was presented in frequency tables

and percentage. The respondents under the study were 32 employees of the African

Alliance Insurance company, Abuja. The study findings revealed that credit risks

taken by insurance companies are high, credit risks negatively affect insurance

institutions; based on the findings from the study, efforts should be made by the

Nigerian government and stakeholders in ensuring a less risk model when it comes

to credit facilities.

CHAPTER ONE
INTRODUCTION
1.1. BACKGROUND OF THE STUDY
This study examines the factors that influence the techniques of credit

risk modeling for life insurers in Nigeria - a major developing economy of sub-Sahara

Africa. Credit risk is the risk of default on a debt that may arise from a borrower

failing to make required payments.In the first resort, the risk is that of the lender and

includes lost principal and interest, disruption to cash flows, and increased collection

costs. The loss may be complete or partial and can arise in a number of

circumstances Life insurance provides risk protection for low income earners and is

part of the growing international micro-finance industry that emerged in the 1970s

(Churchill, 2016, 2017; Roth, McCord and Liber, 2017; Matul, McCord, Phily and

Harms, 2010). Approximately, 135 million people worldwide currently hold life-

insurance policies with annual rates of growth in some emerging markets estimated

to be up to 10% per annum (Lloyd’s of London, 2015). However, this number of life-

insurance policies represents only about 2% to 3% of the potential market (Swiss

Re, 2010). By protecting low income groups from the vulnerability of loss and

shocks, life-insurance is increasingly being spouted as a formalized risk

management solution to world poverty and a key driver of economic growth and

entrepreneurial development in low income countries such as those of west Africa

(Churchill, Phillips and Reinhard, 2011).

Over the last decade, a number of the world’s major banks have developed

sophisticated systems to quantify and aggregate credit risk across geographical and

product lines. The initial interest in credit risk models stemmed from the desire to

develop more rigorous quantitative estimates of the amount of economic capital

needed to support a bank’s risktaking activities. As the outputs of credit risk models
have assumed an increasingly large role in the risk management processes of large

banking institutions, the issue of their potential applicability for supervisory and

regulatory purposes has also gained prominence. This review highlighted the wide

range of practices both in the methodology used to develop the models and in the

internal applications of the models’ output. This exercise also underscored a number

of challenges and limitations to current modeling practices. From a supervisory

perspective, the development of modeling methodology and the consequent

improvements in the rigor and consistency of credit risk measurement hold

significant appeal. These improvements in risk management may, according to

national discretion, be acknowledged in supervisors’ assessment of banks’ internal

controls and risk management practices.

From a regulatory perspective, the flexibility of models in responding to changes in

the economic environment and innovations in financial products may reduce the

incentive for banks to engage in regulatory capital arbitrage. Furthermore, a models-

based approach may also bring capital requirements into closer alignment with the

perceived riskiness of underlying assets, and may produce estimates of credit risk

that better reflect the composition of each bank’s portfolio. However, before a

portfolio modeling approach could be used in the formal process of setting regulatory

capital requirements, regulators would have to be confident that models are not only

well integrated with banks’ day-to-day credit risk management, but are also

conceptually sound, empirically validated, and produce capital requirements that are

comparable across institutions.

1.2. STATEMENT OF THE GENERAL PROBLEM

Credit risk for life insurers in Nigeria has generated a lot of misconceptions and

misinterpretations as regards its importance, the best techniques in its modeling, its

benefits to life insurers and most importantly in the socio economic development of

Nigeria.The confusion of methods to employ in reducing the risk involved with credits

to life insurers both on the part of the insurers and the financial institution in question

Credit availability to insurers have also been a very controversial issues as most

insurers complain of not been assisted with credits.

1.3. OBJECTIVES OF THE STUDY

The following are the aims and objectives of the study

1. To know the best techniques of credit risk modeling for life insurers. Ø To examine

the impact of credit risks on life insurers.

2. To examine the benefits of credit to life insurer.

3. To examine the relationship between credit and performance of insurers.

4. To know if credit facilities are readily made available to insurers.

1.4. SIGNIFICANCE OF THE STUDY

This study will be important to insurance companies in the management of credit

risks when it comes to life insurers. This study also will be of importance to Nigerians

in unraveling the importance of credit to their profitability. The study will be important

to the government and insurance stakeholders on the best method of credit risk

modeling techniques for life insurers. This study will be important to insurers in

knowing the best method of repaying their loans or credits.

1.5. SCOPE AND LIMITATION OF THE STUDY

This study is on the techniques of credit risk modeling for life insurers with the

Nigerian insurance company serving as its case study.

Limitation of the 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.

1.6. RESEARCH QUESTIONS

1. What are the best techniques of credit risk modeling for life insurers?

2. What impactdo credit risks have on insurance companies?

3. What are the benefits of credit to the life insurer?

4. What is the relationship between credit and performance of insurers?

5. Are credit facilities readily made available to insurers?

1.7. RESEARCH HYPOTHESES

Hypothesis 1

H0: credit risks negatively affect insurance/financial institutions.

H1: credit risks positively affect insurance/financial institutions.

Hypothesis 2

H0: credit risks taken by insurance/financial institutions are low.

H1: credit risks taken by insurance/financial institutions are high.

1.8. Definition of Terms

Credit risks: A credit risk is the risk of default on a debt that may arise from a

borrower failing to make required payments. In the first resort, the risk is that of the

lender and includes lost principal and interest, disruption to cash flows, and

increased collection costs.

Model: a thing used as an example to follow or imitate.

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.

Life insurance: insurance that pays out a sum of money either on the death of the

insured person or after a set period

 THE IMPACT OF CASH FLOW RISK MANAGEMENT IN
THE INSURANCE INDUSTRY
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THE IMPACT OF CASH FLOW RISK MANAGEMENT IN THE

INSURANCE INDUSTRY

CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Cash is king. It is true for entrepreneurs, and it is also true for managers of financial

institutions. Cash-flow risks have long been one of the most essential factors while

managing a variety of risks, particularly for the insurance industry, which faces

unique underwriting risk not observed in other industries. To the insurance industry,

cash flows can be generated through underwriting activities, financing and investing

choices, and even managing risks; consequently modeling cash-flow risks will be on

a dynamic basis process because it is essential to forecasting and managing

financial and underwriting risks. To model the cash-flow risks specific to the

insurance industry, we have to capture the dynamics of the cash-flow–generating

process of an insurer. The cash-flow–generating process can be characterized by

two major components: (1) The earnings that result from core activities and cannot

be modified and (2) Other profits that can be modified through the dimensions of

investment choices, risk management, and financial policies. In addition, the factors

underlying the cash-flow–generating process may be intertwined and thus under the
generating process can present the risks to the extent of cash-flow level. For

instance, the downside risk of a company can be signaled by an abnormal decrease

in operating cash flows. Moreover, the discrepancy of the magnitude and timing of

the cash flows generated from underwriting insurance policies and those generated

from investment activities create cash-flow uncertainty and risks to insurance firms.

For insurance firms, cash flows generated from investment, underwriting, and risk

management activities are important indicators in financial management and are the

key variables in capital budgeting decisions. Hence, these generated cash flows will

provide internally interacting feedback on determining the insurers’ strategies of

underwriting, risk management, and investment from time to time. Correspondingly,

cash-flow processes and cash flow risks demonstrate their dynamic characteristics.

This study investigates management of cash flows by the insurance industry by

incorporating its interactions with risk management and investment management

after identifying and capturing the dynamic relationships between one another. For

example, an efficient implementation of a risk management mechanism can mitigate

agency costs deriving from over investments of free cash flows. In addition, a well-

established investment portfolio can efficiently utilize free cash flows for better asset

allocation. Furthermore, we extend the research to explicitly consider the dynamic

effects of economy-wide macro-variables and industry-wide common factors. The

research sample, based on the insurance industry, provides an opportunity to

incorporate the factors uniquely specific to this industry, namely, insurance

underwriting cycles and regulatory requirements, into the model. Therefore, this

study conducts a comprehensive analysis of cash-flow modeling and cash-flow risk

management in the insurance industry. The existing literature provides evidence that

suggests the relationships between cash flows, investment, and risk management.

As demonstrated in Alti (2013), cash flows contain valuable information about a

firm’s investment opportunities. In addition, Almeida et al. (2014) identify the

significant relationship between cash-flow sensitivity and financial constraints.

Rochet and Villeneuve (2011) examine how risk management mechanisms interact

with the uncertainty of cash-flow levels and conclude that the decisions are

simultaneously endogenous. In addition, the literature has shown that insurers have

more actively participated in the derivative markets by employing financial

derivatives not only to smooth cash-flow uncertainty from their invested assets and

underwriting liabilities but also to generate more cash flows. Therefore, cash-flow

management is important in the field of risk management, particularly for the insurer

firms who intend to reach effective asset/liability duration management. To the best

of our knowledge, very few of the existing studies have addressed the issues of

cash-flow risk management of insurers under the framework of considering the

dynamic risk management in investing, financing, and underwriting.

In this project we apply dynamic factor modeling (Stock and Watson 2006, 2009) to

capture the dynamic interactions between risk management and investment

management by incorporating economy-wide macro-variables and industry-wide

business cycle variables. Moreover, to further empirically carry out the applications

of dynamic factor modeling as suggested in Rochet and Villeneuve (2011), we utilize

a factor-augmented auto regression model (FAARM) through which we model how

cash flows respond to the dynamic interactions mentioned above to explicitly model

the non-monotonic effects. The research by Born et al. (2015) and Lin et al. (2011)

explores the dynamic interactions between risk management and financial

management in the U.S. property and liability insurance industry, but the explicit

effects on cash-flow management are left for future research in their study. As

financial intermediaries, the insurance industry is subject to various sources of risk,

including interest rate risk, market risk, credit risk, and liquidity risk. Engaging in

investment activities is one major source that generates the risks mentioned above,

and the variability of cash flows reflects a firm’s risks (Keown et al. 2007; Shin and

Stulz 2010). All risks, particularly liquidity risk, are related to cash flows. Bakshi and

Chen (2017) concluded that investing in stocks leads to the cash flows embedded

with higher risks. Ballotta and Haberman (2015) and Azcue and Muler (2015)

specifically examine the investment strategies of insurance companies and

emphasize minimizing the default risks of the insurers, but not the dynamic optimal

investment strategies of insurers over economic downturns. In other words, they

estimate the credit risk or liquidity risk at the firm level but fail to consider the

macroeconomic issues such as interest risk and market risk.

The study by Wen and Born (2o15) explores the dynamic interactions between

investment strategies and underwriting cycles, and their study suggests that

although one may investigate how insurers dynamically adjust their investment and

hedging strategies, the dynamic interactions between asset and liability risks

corresponding to the underwriting cycles should be taken into consideration. Taken

with these earlier studies, our study intends to bridge the extant literature by taking

steps further to model the cash-flow risks by taking into account the uncertainty of
the market cycles, thereby explicitly examining insurers’ cash-flow management.

Using the highly regulated insurance industry as a research sample enables us to

further extend the existing literature by incorporating the specific industry-wide

characteristics, such as regulatory requirements and underwriting cycles, in the

models. The simultaneous consideration of market cycle, underwriting cycle, and

regulatory requirements enables us to fully depict the insurance firms’ investment,

risk management, and underwriting strategies.

1.2 STATEMENT OF THE PROBLEM

Most insurance businesses encounter cash flow risk management problem at one

time or another. Cash flow problems can be serious and threaten your ability to stay

in business if not well analyzed. Insurance companies are more at cash flow risk due

to the nature of their business.

1.3 OBJECTIVES OF THE STUDY

1. To investigate the management of cash flows by the insurance industries.

2. To identify and capture the dynamic relationship between cash flow management

and risk management in insurance industries.

1.4 RESEARCH QUESTIONS

1. Are cash flows managed by insurance industries?

2. What dynamic relationship exists between cash flow management and risk

management in insurance industries?

1.5 RESEARCH HYPOTHESIS
Ho: There is no significant relationship between cash flow management and risk

management in insurance industries.

Hi: There is significant relationship between cash flow management and risk

management in insurance industries

1.6 SIGNIFICANCE OF THE STUDY

This project models cash-flow risks and empirically analyzes cash-flow risk

management of insurance firms under a dynamic factor modeling framework, which

can capture the dynamic interactions between an insurance firm’s activities in

financing, investing, underwriting, and risk transferring. In addition, through the use

of a factor-augmented auto regressive (FAAR) technique, the empirical analysis can

simultaneously consider the effects of macro-factors that are common to the entire

economy as well as those factors specific to the insurance industry.

1.7 Scope/Limitations of the study

This study on the evaluating the impact of cash flow risk management in the

insurance industry will cover various approaches to the study and its impact on

insurance industries in Nigeria.

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.

1.8 Definition of Terms

Cash Flow: The total amount of money being transferred into and out of a business,

especially as affecting liquidity.

Risk Management: Is the identification, assessment, and prioritization of risks

followed by coordinated and economical application of resources to minimize,

monitor, and control the probability and/or impact of unfortunate events or to

maximize the realization of opportunities.

Insurance Industry: A business that provides coverage in the form of compensation

resulting from loss, damages, injury, treatment or hardship in exchange for premium

payments