NEXUS BETWEEN UNDERWRITING OPERATION AND FINANCIAL PERFORMANCE OF NON-LIFE INSURANCE COMPANIES IN NIGERIA
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BACKGROUND TO THE STUDY
Insurance is a provision of a system of compensation for loss, damage, sickness, death and other unbearable circumstances in return for regular payment of a pre-determined premium. Insurance companies are important for both businesses and individuals as they indemnify the losses and put them in the same positions as they were before the occurrence of the loss. Insurers also provide economic and social benefits in the society i.e. prevention of losses, reduction in anxiety fear and increasing employment (Omoke, 2012).
Underwriting and financial performance are considered as the two most important aspects in the functioning of insurance company. In the present highly competitive and economically challenging environment, Underwriting can serve as a market differentiator and put insurance companies at the fore front of industry leadership and innovation (The Actuary 2014). The way and manner in which claims are managed by insurance companies determine their level of profitability. Hence insurance company needs to employ the service of highly skilled underwriters who can select good risk as against bad risk (anti-selection) and therefore grow the profitability of the company. This therefore indicates that claims must be properly managed so that profit made by insurance companies will be maximized, therefore, maximizing the wealth and profitability which will in turn enhance the public confidence in insurance industry. Insurance companies need to be profitable in order to be solvent enough so as to make other industries in the economy as they were before even after risk occurred (Yuvaraj, 2013).
According to Iqbal (2005) underwriting can be defined as a financial professional that evaluates the risks of insuring a particular person or asset and uses that information to set premium pricing for insurance policies. Insurance underwriters are employed by insurance companies to help price life insurance, health insurance, property/casualty insurance and homeowners insurance, among others. Underwriters use computer programs and actuarial data to determine the likelihood and magnitude of a payout over the life of the policy. Higher risk individuals and assets will have to pay more in premiums to receive the same level of protection as a (perceived) lower-risk person or asset(Treischmann, Hoyt, and Sommer, 2005).
An underwriter is a professional that has the ability to understand the risks to which the underwritten object is exposed to. This ability is gained not only through theoretical study, but also through the result of years of experience dealing with similar risks and setting claims on these risks (Akinlo, 2013).
Treischmann et al. (2005) assert that the purpose of any risk-selection or underwriting process is to place applicants into distinct groups that have similar expectations of life or risk of death at any time interval. They further mention that each group is charged a premium sufficient to cover costs associated with its expected rate of death. Insured’s in each group have the same expectation of life (risk of death), pay equally, and are self-supporting (Teale, 2008). He further states that no group or person unfairly subsidizes any other group.
The performance of an insurance company depends to some extent on the sort of underwriting services provided. The performance of insurance companies in financial terms is normally expressed in net premium earned, profitability from underwriting activities, annual turnover, return on investment, return on equity (William, 2004). Over-pricing of risk may lead to fewer customers joining the insurer for insurance cover, while under-pricing of risk on the other hand may result to loss or low performance for the insurance industry (Dorfman, 2005; Teale, 2008).
Hence the undertaking of this research study will critically assess the Nexus between Underwriting Operation and Financial Performance of Non-life Insurance Companies in Nigeria.
1.2 STATEMENT OF THE PROBLEM
The goal of an insurance company is to be profitable in order to be solvent enough to pay claims when the events insured against occur. This is achieved by using efficient underwriting and effective claims management administration which contributes to the performance of insurance companies.
The role of the underwriter in selecting and accepting risks that behave similarly or assessing the necessary acceptance conditions to those risks that differ to maintain the homogeneity of the portfolio has been called for proper scrutiny, since the financial performance of any insurance entity depends on the same.
The failure of many insurance companies in Nigeria has been a result of the underwriter being unable to properly assessed risks and therefore resulting to early claim to the insurance company. As an example, the motor insurance premium varies according to the risk characteristics of the driver and the car. Continuing education is necessary for advancement and independent- study programs for underwriters must be made available. Underwriters must equally analyze information on insurance applications to determine whether a risk is acceptable and will probably not result in an early claim to the insurance company.
In order to manage risks efficiently and effectively, underwriters may face the following obstacles:
· Poor evaluation of risks
· Inefficient and ineffective claims management procedures which have adverse effect on the financial turnover of insurance companies.
· Inability of insurance companies to remain solvent in order to settle claims as at when dues.
· Uneducated people in the society due to the high illiteracy in our society make the insurance companies to have difficult problem enlightening them.
· Government not looking into insurance company problems and providing them with adequate facilities for the detecting of fraud.
· The insurance officials refuse to give enough information due to bias mind to defraud the insurance company.
It is against this backdrop that the researcher was inspired to examine the “Nexus between Underwriting Operation and Financial Performance of Non-life Insurance Companies in Nigeria” with a special reference to Niger Insurance Plc.
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