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FUNDS FLOW ANALYSIS OF THE INSURANCE COMPANIES IN NIGERIA

ABSTRACT

Funds refer to cash equivalent or to working capital. The fundamental concept of working capital is relatively simple. It is used to denote the excess of current assets over current liabilities. The excess is sometimes referred to as “Net working capital and it can also be referred to as company’s assets which, in normal course of business, are convertible into other assets. The concepts of funds flow analysis may be referred to as the following terms: Sources and application of funds statement; funds flow statement; movement of funds statements, and statement of changes in financial statement. The need for funds flow analysis arises because the profit and loss account and balance sheet do only show the disposition of the company at the beginning and end of the accounting periods, but do not show or identify the movements in assets and liabilities during the year and the effects on the net liquid funds. However, funds are important to an organization such that no organization can exist and continue to remain in business without adequate funds to meet its short term and long term obligations as well as meet their day transactions. Considering the peculiar nature of the industry, the following constitute the insurance funds; Premium income from clients; other incomes such as annuities receivable. The researcher decided to conduct a study on the funds flow analysis in an insurance industry to enable him to determine the peculiar ways by which this industry raises trades and uses their funds. To facilitate the study, empirically two hypothesis were drawn and subsequently a field study was under taken to establish the validity or non-validity of the hypothesis. Both primary and secondary data were collected. But due to insufficient primary data the researcher based most of his work on secondary data, which includes oral interviews held with top officials of some insurance companies and by distributing questionnaires to 100 insurance companies. This research work did not only identify the problems but also offered solutions to the problems encountered by the insurance industry.

CHAPTER ONE

INTRODUCTION

BACKGROUND TO THE STUDY

Funds refer to cash and cash equivalent or to working capital. While the concepts of funds flow analysis may be referred to as by the following terms: sources and application of funds statements; funds flow statement; movement of funds statement and statement of changes in financial position. The need for funds flow analysis arises because the profit and loss and balance sheet do only show the disposition of the company at the beginning and end of the accounting period, but do not show or identify the movements in assets and liabilities during the year, and effects on the net liquid funds.

By providing an overall picture of the changes in a company’s financial position over the year, a funds statement of standard Accounting Practice (SSAP10), provides that a statement of changes in financial position should be included as an integral part of the financial statements. The statement of changes in financial position should present for each period for which income statement is presented.

Funds provided from or used in the operations of an enterprise should be presented in the statement of changes in financial position separately from other sources or use of funds. Usually, items, which are not part of the ordinary activities of the enterprise, should be separately disclosed in the statement.

However, “funds” are important to an organization as “blood” is to a human being, such that no organization can exist and continue to remain in business without adequate funds to meet its short term and long term obligations as well as meet the day to day transactions.

Considering the peculiar nature of the industry , the following constitute the funds;

premium income from clients

investment income such as interests, dividends and rents

other incomes such as annuities receivable

The researcher decided to conduct to study on the funds flow analysis in an insurance industry to enable me determine the peculiar ways by which this industry raises trades and use their funds.

Hitherto, insurance Decree No 59 of 1976 stipulated that a separate funds accounts should be maintained for insurance funds such as;

Life insurance funds; and

Non life insurance or general business funds.

Consequently, each fund account is maintained to account for premium income by that class of department. However, the researcher hope to make a comparative analysis of the gross premium income generated by all direct insurance companies in Nigeria, using 1992 as a base year and 1997 as a current year. Also to be analyzed are total investments in the industry and claims paid by the industry during the period under review. The result of this study would obviously show the increases and decreases that have taken place in the net working capital over time.

STATEMENT OF PROBLEMS

The means by which insurance companies make their money has remained a mystery to many Nigerians. Their bias and inquisitiveness has led to many questions such as;

What are the sources of funds to an insurance industry?

How are shareholders/ policyholder’s funds managed?

Why are claims not met?

Why is public attitude on the insurance business negative?

What role does insurance business play in the economic development of Nigeria?

To what extent has premium income been grown?

What constitute their stock in trade and how do they succeed in trading on this subject?

Are insurance funds adequately invested in ventures?

PURPOSE / OBJECTIVE OF STUDY

The researcher proposed to write on the above topic so as to determine the major sources of funds in the insurance industry, as well as pry into various areas of utilization or application of funds. This will provide answers to questions such as, how does insurance companies make their money. This topic is also necessary because insurance funds are financed through premium income from clients or policy holder, who would equally want to understand, analyzed and interpret the direction of their investments. The write-up will also provide an answer to the poor image of the insurance industry in the area of claim settlement. The impact of inflation on the insurance will also be highlighted. Also the role and position of the insurance industry in the Nigeria economy will be ascertained. This study is aimed at highlighting the importance of insurance in commerce and industry.

SIGNIFICANCE OF THE STUDY

Individual and organizations who invest their money in the insurance industry for a long time say 10 to 20 years, need information to help them to decide among alternative investments after considering factors like inflation, capital and money markets interest rate and time value for money. To the managers of the industry, the recommendations and solutions provided by this study would guide them for rational decision as regards investments, financing and dividend.

SCOPE AND LIMITATION OF THE STUDY

This research is an empirical study of the Nigerian Insurance market, with particular emphasis on the funds flow position. Thus, this study is supposed to cover the entire companies in the industry. However, due to finance and time constraints, the researcher could not study the companies individually, because the number of companies involved are many, Infact about 136 companies in number and study of fire or ten companies may not be giving an accurate representation of the funds flow position of the industry.

The researcher then hope to rely more on the secondary data published by the Nigeria- Re-Insurance Corporation and also primary data gathered from survey. Other factors which tend to limit the scope of this research were the problems of data collection. Top management was secretive in making available certain data to me. Financial resources and time required to complete this research work can also not be forgotten. This not with-standing, the researcher was able to gather enough data to see to the completion of this work.

1.6  RESEARCH HYPOTHESIS

For the purpose of this research, the following hypotheses have been formulated for study;

H1 That Gross Premium income is growing in the average of over 20% in

the industry between 1992 and 1997.

Ho That Gross premium income has not been growing on the average of

Over 20% in the industry between 1992 and 1997.

H1 that total investment expenditure to total income in the industry

between 1992 to 1996 is on the average of over 75%

Ho That totals investment expenditure to total income in the industry

between 1992 to 1996 is on the average of less than 75%

H1 That the average percentage of claims to the gross premium income

(GPI) in the industry between 1992 and 1996 is over 46%

Ho That the average percentage of claims to the gross premium income

(GPI) in the industry between 1992 and 1996 is less than 46%

HISTORICAL DEVELOPMENT OF MODERN INSURANCE IN NIGERIA

Modern insurance was first introduced to Nigeria about 71years ago by the early British-traders. Until quite recently, most of the leading insurance companies in Nigeria were either wholly or partly owned by the British. This means that, the theory and practice of insurance in Nigeria has largely followed the British pattern. However, it must be noted that there was no organized insurance activity before the British arrived the territory. There existed at that time, what might be described as under or unsophisticated form of mutual and social insurance schemes. Apart from the extended family system, this was by its very nature, a social insurance scheme. There were the age-grade association and some clans and traditional unions which acted as mutual insurance societies to their members, on the same as the English ancient guilds. The age-grade associations monitored “fund” built up from individual. Contributions by members: these funds were collected periodically. From the funds, thus, accumulated, funeral expenses for deceased members were met. If a member of a particular age-grade dies without making material provision to cater for the dependents during the critical period immediately preceding his death, either the extended family or the age-grade association would take over the responsibility of maintaining the deceased member’s dependents during the period.

Both the extended family system and the clan unions still existed in Nigeria today, but most of their insurance functions have been taken over by an organized insurance system. Similarly, the age-grade system still plays an important role in some parts of the country, especially in matters relating to rural development, but like the extended family system and the clan union, they no longer render any noticeable insurance service to their members. The early European traders who introduced modern insurance into the business life of the country had no need for the limited traditional social insurance features of these peculiarly Nigeria systems. Therefore, with the establishment of trading posts in Nigeria towards the end of the 18th century by many European companies, mostly British, these companies started affecting their insurances with established insurers in the London insurance market.

As time went on, some British insurers appointed agents in Nigeria to represent them in carrying out the business of insurance. These agents were given powers of attorney to obtain insurance business, issue cover notes and services claims on behalf of their principals in London. Initially, the agents were mainly expatriates banks and traders, but later Nigeria traders and merchants were appointed agents. These agencies later gave way to full branch offices of the parent companies. Virtually, all British Insurance Company in Nigeria developed in this way. That is, a Nigeria based agent is appointed to represent the principal in London, then the later, gave way to a branch office of the parent Company in Lagos, with sub offices throughout Nigeria. In the course of time, though not in all cases, a Nigeria Company is formed but closely linked with the parent Company in Britain.

The first assurance company to have a full branch office in Nigeria was the Royal Exchange Assurance in 1921, and until 1949, it remained the only insurance fully established in the country. In 1949, three other Companies were registered. Since then more insurance Companies have been registered or incorporated in Nigeria. However, since the indigenization decree of 1972, all those foreign owned insurance companies have been incorporated as Nigerian Companies have been with certain equity holding assigned to the parent companies and Nigeria as well.  However, all those companies established within, since the enterprises promotion decree of 1977 are wholly Nigeria owned.  Since then Nigeria |Government has been holding about 60% equities in most private insurance companies.  Consequently, in 1989, Government withdrew all its equities in all the private insurance companies in one with its programme of privatization and commercialization.

1.8     DEFINITION OF TERMS

Assurance: is an indemnity involving payment of a fixed sum of money for some incident which is certain to happen but the time of its occurrence is not certain.

Attorney: Refers to the authority or power given to a person to act for another in business or law.

Clients: This refers to the policy holders

Claims: This refers tot he amount of money paid to the insured either as maturity, surrender valve or on the event of mishap, as a result of occurrence of events assured against.

Mutual: Business or insurance companies held in common with others

Premium: Means the amount of money the insured pays to the insurance company for the indemnity. This may be paid on monthly or yearly basis

Posts: refers to trading stations or centres for insurance

Tide: Means regular rise and fall in the insurance business

Direct debiting: This is a system of payment where a debit not issued periodically to the bank for the payment of insurance premium on behalf of bank customers

Fidelity Guarantee: this is an insurance taken up to indemnity the employer against a probable dishonestly of his employees

Underwriting; this refers to the processes involved in screening and issuing a policy.

Pecuniary: This refers to money

Hedging: This refers to the process of gaining protection from the risk of loss caused by prices fluctuation and is accompanied by trading futures on commodity exchange.

Insurance: is a contract of indemnity whereby the incidence may or may not happen. The indemnity is accompanied by payment of premium.

Proximate Cause: This is a principle of insurance which provides that before compensation would be paid, it must first of all be proved that the loss sustained was proximately caused by the event assured against.

Subrogation; This principle of insurance states that, it is the right of the insurer to take the insured place after he has indemnified him by paying him the requisite compensation.

Consequential Loss: This principle provides that compensation cannot be paid for a loss that is designated consequential loss unless it is clearly provided for in the contract.

Uberrima Fider: This is a principle of insurance which provides that many party to the insurance contract must show honesty and sincerity in disclosing all relevant facts to the other party before the contract is signed.

Insurable Risk: Risks that can be insured, (i.e.) can be quantified in monetary terms

Uninsurable Risk: Risks that cannot be insured because they cannot be calculated mathematically, easily, quantified, example lost of profit.

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