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The Determinants of the Profitability of Micro-Life Insurers in Nigeria.

The Determinants of the Profitability of Micro-Life Insurers in Nigeria. Ola Olaosebikan University of Bath, UK 19 th June,2012. Overview. Aim & Motivation Institutional Setting Theory & Hypotheses Research Methodology Key Findings Policy Implications. Aim & Motivation (1).

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The Determinants of the Profitability of Micro-Life Insurers in Nigeria.

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  1. The Determinants of the Profitability of Micro-Life Insurers in Nigeria. Ola Olaosebikan University of Bath, UK 19th June,2012

  2. Overview • Aim & Motivation • Institutional Setting • Theory & Hypotheses • Research Methodology • Key Findings • Policy Implications.

  3. Aim & Motivation (1) • examine the factors that influence the profitability of micro-life insurers in Nigeria. • …inform policy makers and/or shareholders as to whether the MI provider is able to meet its contractual obligations.

  4. Aim & Motivation (2) • results could help managers make more accurate reserving and/or reinsurance decisions. • …assist ‘interested parties’ in understanding the dynamics of MI firms in sub- Sahara Africa and other emerging marketssuch as those in Latin America.

  5. Institutional Setting The study focuses on Nigeria; • Economic landscape (refer to table 1) • The life (micro) insurance market: • regulation • product types: predominantly savings-linked, credit life…mostly individual policies…. • business/distribution model: direct, partner-agent,…NIPOST-one network.

  6. Table 1: Nigeria and Selected Sub-Saharan African Countries – Key Economic Indicators(2009/10) Sources: World Bank (2010); Organization for Economic Cooperation and Development (2009); International Monetary Fund (2010).

  7. Theory & Hypotheses (1) Agency theory: • Information asymmetry: i.e. adverse selection and moral hazard. • Agency costs: direct and indirect costs of monitoring… Hypotheses: • Ownership structure: • widely-held (public) vs. closely-held (private) firms.

  8. Theory & Hypotheses (2) (ii) closely –held by managers vs. closely -held by institutional investors (e.g. banks). • Leverage:underinvestment vs. free-cash flow … • Reinsurance:asset substitution vs. transaction cost.. Controls:i.e. firm size, product mix, length of time in the market (age),interest rates and inflation.

  9. Research Methodology Data: •  obtained from annual financial statements –NIA, NAICOM and internal company sources. • Unbalanced panel data set of 149 firm-years (30 firms from 2004-2009). • Dynamic panel data estimation; Generalised Method of Moments (GMM).

  10. Key Findings • Level of reinsurance has a negative influence on profitability  suggests ‘high’ reinsurance costs… • Multi-product firms are more profitable  ability to reduce cost through economies of scope… • Profitability is positively influenced by level of interest rates in the economy. • Ownership structure has no statistically significant influence on profitability.

  11. Potential Policy Implications • reinsurers may need to ‘moderate and modify’ their prices… • …potential cost vs. benefits of risk transfer important to local regulators in solvency and performance assessment. • …impact of macroeconomic factors on the performance of MI schemes could provide insights tointernational insurers/reinsurers.

  12. Thank you!

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