Key stakeholders in the Insurance Industry
As a regulated sub-sector of the Financial Services Sector of the economy, the Insurance Industry is not an all-comers business. It is an endeavour that involves a lot of professionals because of its importance and complexities. The key players in the Insurance business are: the regulators, insurance underwriters, actuaries, insurance brokers, insurance agents, loss adjusters and more importantly, the insuring public. By the nature of their disciplines, lawyers and professional accountants are also involved in insurance business. In addition to the earlier detailed discussion of the regulators and their regulations, we will now consider the buyers and sellers of insurance policies and intermediaries that operate between them.
The Insuring Public (Buyers)
This group represents the most important segment of the Insurance Industry. Without the buyers of insurance policies, the industry will be DOA, that is, “dead on arrival”. The buyers of insurance policies are persons and entities in both the public and private sectors that have need to secure their properties or minimise the risks of their investment and professional decisions. They are persons who are attracted by the comfort provided by insurance and the benefits of insurance coverage to confront uncertainties in the business environment. The insuring public are the most important segment as their actions and inactions have implications for the Insurance Industry. As customers, they are the kings. Their satisfaction is key to the continuous growth of the insurance business. Investment in customer care by insurers is therefore inevitable. This explains why both the NIA and NAICOM have complaints bureaus through which insurers can obtain feedback from buyers.
The Underwriters (Sellers)
The underwriters or insurers are the incorporated insurance companies licensed to undertake insurance business by providing protection to policy holders. They are incorporated companies that undertake to shoulder the risk of the policyholder for some consideration. To be able to carry out the onerous responsibility or underwrite the risk, they are required to have a minimum paid-up capital as indicated above.
Irukwu (1978) identified three classes of insurers:
(i) Mutual Insurers Association
This refers to cooperative societies or associations that provide protection to only their members. Such associations do not have shares and shareholders. In the event of disaster of severe magnitude, its members can be invited to make further contributions to settle the loss. In other words, their liability is not limited. It is important to add that these members do not pay premium in the strict sense of the word. They merely save collectively for the rainy day and to economically help and empower themselves.
(ii) Proprietary Companies
These are limited liability companies formed and incorporated in line with the provisions of the Companies and Allied Matters Act, 1990. The liabilities of its shareholders are limited to their investment in shares. Profits earned from the business can be paid out to shareholders in the form of dividends.
(iii) Lloyd’s Underwriters
Lloyd’s is an association of underwriters which are based in Lloyd’s Corporation in London. Underwriters here comprise individual and corporate bodies. Each time there is an insurance business, the risk is shared amongst members referred to as syndicate. The percentage of the risk taken will also determine the share of premium to be received. Thus, it is a collection of private underwriters each of which is personally liable for the payment of his proportion of each loss.
In Nigeria, only the first two classes are popular and well established. At the end of the consolidation exercise in 2007, seventy-one (71) of such insurance companies (broken down into 43 general insurance companies, 26 life insurance companies and 2 reinsurance companies) were certified to continue to carry on the business of insurance and reinsurance in Nigeria. When compared to the previous number of 104 insurance companies and 4 reinsurance companies before the consolidation exercise, this represents a 66% success rate, which is not bad for a fledgling industry that is treated with suspicion and disdain despite the value it adds to the wealth creation process. With this strengthened financial capacity, Nigeria’s insurance companies were expected, hopefully, to become dominant players in the African market where South African companies have held sway for decades in virtually all the vital performance statistics.
The point must be made that there have been some mergers and acquisition since then. For instance, AXA Group, the second largest insurer (by gross revenue) has entered the Nigerian market and invested in Mansard Insurance resulting in a change in name; Old Mutual acquired Oceanic Life Insurance Limited; Liberty Holdings acquired UNIC Insurance PLC; while New India Insurance Company acquired Prestige Assurance PLC.
Thus, the capacity of this local insurer to underwrite policies particularly in the oil and gas sector has increased considerably. This new phase of acquisition is understandable. In line with the statutes, no foreign insurance firm can set up in Nigeria without first being registered by the Commission. Hence their entry through some existing insurance entities. The numbers as at December 31, 2014 were 15 Life Assurers, 29 Non-Life Insurers, 12 Composite Insurers and 2 Reinsurers. They all make up the primary segment of the Insurance market.
Insurance Brokers and Agents (Intermediaries)
In practice, the business of insurance, by its very nature, involves the use of intermediaries called brokers and agents. They are very crucial intermediaries who operate between the potential policyholders and the underwriters. Often classified as the secondary segment of the insurance market, they consists of 2 Actuaries, 577 Insurance Brokers and 1900 Registered Agents according to the NAICOM statistics of December 31, 2014. As intermediaries, brokers and agents collect premium from prospective clients on behalf of the insurance companies and remit the premiums expeditiously to the insurers. As distinct from agents, insurance brokers are experts who are familiar with the technicalities and practice of insurance. They are truly the face of insurance practice in all nooks and crannies of the country. They often take on the task of marketing and explaining the provisions and benefits of various policies to the insuring public. Since the broker undertakes the responsibility of advising, recommending and arranging insurance cover, he is expected to have the professional and technical knowledge of the class of insurance he is handling. His primary function is to act for the insured in the handling of all his insurance problems including the negotiation of settlement of claims with insurers. He is rewarded through commissions. The maximum rate of the commission payable for any class of insurance is set by NAICOM.
The insurance agent may not necessarily be a specialist. His duty is to prospect and obtain business which he passes to his principal for which he also receives a much lower commission. A broker is different from an agent and the law acknowledges this difference. For instance, whereas Section 35(2) of the Insurance Act 2003 clearly requires the agent to make immediate remittance of premium collected from the policyholder to the insurer, Section 41(1) also states expressly that “where an insurance business is transacted through an insurance broker, the insurance broker shall, not later than 30 days of collecting the premium, remit to the insurers premium collected by him.” He can keep the premium for 30days. Furthermore, Section 50 (2) of the Insurance Act 2003, provides that “the insurance premium collected by an insurance broker in respect of an insurance business transacted through the insurance broker shall be deemed to be premium paid to the insurer involved in the transaction”. This practice facilitates business growth by smoothening the process of insurance policy procurement by the insured. In the same vein, if a claim occurs, the broker also ensures that the policyholder is fairly treated and indemnified.
It is to facilitate reconciliation of accounts, promote transparency through compliance to statutory provisions that Section 40(1) further demands that “an insurance broker shall establish and maintain at all times a client’s accounts into which all monies, premiums, claims and recoveries from and on behalf of clients, insurers and reinsurers shall be paid.” This is the standard set for professionals to preclude them from using their clients’ money to satisfy personal needs, a situation that can compromise their independence and objectivity.
These are specialists who have the responsibilities to assess and determine the extent of damage to insured assets and make recommendation for compensation which may be financial, asset repairs or replacement. Often, they need to professionally mediate between the insured and insurer. There are currently 54 Loss Adjusters registered with NAICOM.
Reinsurance is the practice of one insurance company buying insurance from another insurance company against any losses that may result from claims that are made against it. In other words, an underwriter re-insures part of the risk that a client placed with it with a reinsurer because of the enormity of the risk involved. Since each insurance company has a maximum limit of risk it can underwrite or a maximum loss it can conveniently pay, once this retention limit is reached, the underwriter is encouraged to transfer the excess risk to a reinsurer. Thus, a reinsurance contract is only between the ceding company and the reinsurer. In the event of a loss, the reinsurer is required to contribute only the percentage of the sum insured to the ceding company. There is no contractual relationship between the reinsurer and the original policy holder. Thus, reinsurance encourages the further spreading of risk and reducing the burden of heavy losses. By definition, reinsurance companies are higher order insurance companies.
That is, they participate in the sharing of higher risks which the underwriters cannot bear alone. This explains why the minimum capital requirement set for them by NAICOM is much higher than that of an underwriter.
In the preceding sections, we had discussed extensively the statutory regulators of the Insurance Industry and other institutions whose activities have regulatory implications for the insurers and insured. Readers are advised to visit the aforesaid sections for more information on this subject matter.
The key stakeholders or players in the insurance industry are the regulators, underwriters, the buying or insuring public, the brokers, loss adjusters and agents. The role of each of these players, reinforces those of the others and this makes insurance a veritable source of employment generation and wealth creation.