The Role of Reinsurance in the Performance of Insurance Industry in Nigeria

The Role of Reinsurance in the Performance of Insurance Industry in Nigeria

Chapter One of The Role of Reinsurance in the Performance of Insurance Industry in Nigeria

INTRODUCTION

BACKGROUND TO THE STUDY

Generally, Insurance plays a pivotal role in the transfer of risk across all spheres of life. The concept of insurance refers to a contract between two parties where one party promises to indemnify the other party for the occurrence of any risk covered under the contract in exchange for a monetary consideration called premium (Ogwo, 2000). The party who makes this promise is referred to as an insurer and is a limited liability company. This company also faces several risks and this necessitates the ceding of these risks with a larger insurance company. This process is conceptualized as reinsurance.

By definition and explanation, one can describe ‘Reinsurance’ as the practice of insurers transferring portions of risk portfolios to other parties by some form of agreement in order to reduce the likelihood of having to pay a large obligation resulting from an insurance claim. The intent of reinsurance is for an insurance company to reduce the risks associated with underwritten policies by spreading risks across alternative institutions. Overall, the reinsurance company receives pieces of a larger potential obligation in exchange for some of the money the original insurer received to accept the obligation. The party that diversifies its insurance portfolio is known as the ceding party. The party that accepts a portion of the potential obligation in exchange for a share of the insurance premium is known as the reinsurer.

In developing and emerging economies, reinsurance companies spring up back bone to support the insurance business. They serve as a supportive factor to establish confidence policy holding in insurance companies, reinsurance also allow the direct insurer to free themselves from the part of a risk that exceeds their underwriting capacity, or risks which, they do not wish to bear alone. However, the situation in Nigeria seems different. Despite the existence of reinsurance in insurance sector in Nigeria, the development of the sector remains poor. 

STATEMENT OF THE PROBLEM

The contributions of reinsurance industry to the growth and development of Insurance across the globe cannot be overemphasized. This is because Reinsurance is the foundation upon which Insurance is built (Olugbemi 2016).

The business environment and lives of individuals is characterized with high risk resulting from the dynamism associated with life as a whole. The essence of Reinsurance is to preserve value to ensure strong and detailed protection in the event of casualties that arise unexpectedly. This extra mile gone in the provision and assurance of safety is known as Reinsurance.

The primary objective of reinsurance is to protect the primary insurer or the ceding company from being crippled by land losses beyond its financial capacity. Where the risk assumed by the reinsurer from the ceding company is so large that it cannot comfortably handle alone, the reinsurer can reinsure or retrocede part of the risk to another reinsurer. They also help to avoid possible financial strain due to rapid growth of the portfolio and from the part of view of young insurance companies.

Reinsurance companies have added stability to the insurance industry and to the local economies by declining out the results of the insurance companies as they continue to absorb the impact of large losses which would have led to very damaging results to the individual insurance companies. In Nigeria, reinsurance was introduced in the insurance in 1977. The reinsurance companies in playing their role in the sub sector attempts to support the effort of huge claims to restore confidence of the policyholders in the business. In spite of the existence of reinsurance and their effort to underwrite for the primary insurers, member of the public still double the ability of primary underwriters. Especially in areas that require huge claims, such as aviation, oil and gas. These areas sparingly patronized in Nigeria. Thus this study is set to determine the role of reinsurance in the performance of insurance industry in Nigeria.