Abstract
Reinsurance is used by primary insurers as a device to cushion the effect of underwriting and solvency risks. However, an overdependence on reinsurance could cause depletion in the income of the primary insurer. The study examined the effect of reinsurance on the financial performance of non-life insurers in Nigeria. Secondary data used for this research were analysed with descriptive statistics, coefficient of determination (R2), and linear regression. Results showed a significant positive relationship between reinsurance utilisation and premium growth rate. Similarly, a significant positive relationship was found between reinsurance dependence and profitability (loss ratio). It was recommended that non-life insurers should embrace more of reinsurance facilities particularly for risks of high loss potentials in order to stabilise premium growth rate. In addition, Insurance firms in Nigeria should harness their claims management activities in order to minimise cost and exposure to underwriting risks.
Highlights
Insurance service providers rely on reinsurance business for financial stability
The positive value of the co-efficient of Ratio of Ceded Reinsurance (RCR) indicated that for every 1% increase in RCR, there will be a corresponding increase of 404.4% in Premium Growth Rate (PGR) in the Nigerian insurance industry
The co-efficient of determination (R2) is 0.277. This showed that only about 27.7% of the variance recorded in the dependent variable (PGR) can be explained by the independent variable (RCR) leaving about 72.3% to be explained by other factors like Expense Ratio (ER), Loss Ratio (LR), Broker and Agents’ Commission, Cost of Overheads, and other Sundry Expenses
Summary
Insurance service providers rely on reinsurance business for financial stability. This is confirmed by studies performed previously in America, Australia, Canada and Pakistan (Iqbal & Rehman, 2014a; Chen, Hamwi & Hudson, 2001; Cummins, Dionne, Gagne & Nouira, 2008; Carneiro & Sherris, 2005; Tan & Weng, 2012). Reinsurance reduces volatility of underwriting results of primary insurers, provides them with expertise in key areas of insurance business (product development, pricing, underwriting, and claims management), relieves them of any capital strain, and allows for efficient risk and capital management (Swiss Re, 2004). As a device that enables risk to be transferred from the insured (the supposed risk bearer) to an insurer (the entity that accept to bear the risk) insurance fosters the economy by accumulating funds from premium and transferring same to deficit economic sectors for financing real investments (Oke, 2012) The performance of these and other functions of insurance depends highly on the amount of financial security and solvency that accrues to insurance firms through the fundamental roles of reinsurance. Data analysis and discussion of findings is contained in the fourth section and section five details the conclusion and recommendations
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