University of Nigeria Virtual Library

Serial No

ISSN: 1018-5895

Author 1

UCHE, Chibuike Ugochukwu

Author 2

Author 3

Title

Reinsurance in Nigeria: The Issue of

Compulsory Legal Cession

Keywords

Description

The Geneva Papers on Risk and Insurance

Category

Banking and Finance

Publisher

Blackwell Publisher

Publication Date July, 2001

Signature

Prsaidsnl: h' \ ' : aw 6 KIELHCU Cwef Er-#rveO(iir.n. SwmSS Re nsurars +any Zunrh VlcePms!aenls:L!r claucetiEe%An P r a ~ ~ e n l c u h s e ~ l C e S u ~ ~ . . l r ~ , A X A G ~ o w Pom.l:i AnhlrF.RVAN ChsmmnnnnCEO The Pwxnl,a Insuidm Cornpan< N~war i Cr Ju.gen ZECh. C n a l l l ~ n c l It6 E%KUIIYP B a r 0 awl CEO Glrrlmg Gloup c l lnsurilrre

V . c m I." Ewa- l(1ST'. Cr*lmanal llr E~ec~web;milm I Y G G T ~ ~ ~ Anrlrronm Mr R m ? l.w.3elsom- GrowCl8cI Lrecmve. R q a l 6 Sun Lll,anc+ lnsuram Lrrmo? tC- F l r w l o KIRh CANDEL. vse Prsr#n+n! h!APFRE h rpus l l on Mst.na Wr. Pslrci; PEUGEOT. Cnalrmanale CEO La hlcna,:llc Pam Dr Rc."SCHnUSLE Cmrman 01 the Eorlm. mhrr. H o l ~ n g h s l e 01 nanr Jumgen SCHINZLEH. C t w m n 01 I!IP Boars d t.4(ls?ilocmen: IAm#m Rerwiranr~CCnwo: U w r h Or n e m n i SCHULTE-NOELLF Ch.lmm.ll BI the Earocl t2wagemer.l. A l l m r AG UN,,:? h!r M m i n J SULLIVHK, ErecLnhr V s o Pres!oenl IIIG lh- N6- Yo* I.!, Joia RalalroTkLCElE CEO. EUREKO. Arnnerolrn L Para M r . Rnrm van Fmrum-. Cna~rman 0: tne E l r r u l w Hnarn F3CTIS. Brusbais ChalrpCTsOns 01 the &lenllllc A d v l ~ q C0nmln.s: Pral C e w liFS5LER. PmaUXnl. PFOA, P.m. Fral. L u l p l VAN DEN REeGHE YICWI I.!,~?~OFW,I S ~ h m Gan: MernDers o l IncSclenlrf~c Advisory Cornmitt-: Dr Ncm? BAGLINI, AlCPCV PhllaoeWle. P8ol O8nlur FhRh'Y. Unwe~s#lyo!Ur~nane. ?lo4 Chr8Slml- GCLLlER Llrlrrera~

7 .

Issues and Practice Vol. 26 No. 3 July 2001 L:.CO\O.\lICS ISSLES I\ I\SI.R:\\CE Inlcgn!cd Fin.mcial Scnicc\ ;\ 1 nn~ruurl. lor Succr\\ S>ner;lc\ In Inwr~hce. Rmbing. :md \.;,cI \ l . r n . ~ ~ ~ l l ~ n I L n A r h , % ~

l l c Orgnrral~nn ol ln~u!;s~cc Cr~mp~n~cr : Poml Tiir Llrhcwwx (VI \li~Ioals. Dcri~uri~xlintl~on 2nd Ue!ond :I,i,#,r,,< /!c.,?!, ~ T i w h

The Role of Insuran?: i r r E i~s i~rn~p Fin.in~isl h,larkcl 1.1qurd11! Pl~ib!:.~ h n m o .

Enrcrprisc Rial hlnnnremcnl: 11s Originsand Conccplual Fc?und;t~~nn Gru? fArhL,swo Eltncal Behawir C'orpnr~lc C ullorc mrd I-~n.~nc~;ll Scrvico \imwn A. Bu:1:11i

flcrlg~np 'ialr~nl C~laslroplic R I ~ . 111 I)L'\Y~O~III~ COII~IIIIU~ Puw K, FIWIW~ Cornmcnb 10 "Hedsln.~ Xslunl Cm~Irop11~ R i d in Dc\cI~~II; Counlr~cs" [lulid Drvht~r

C nn\lmcr Perccpliuns of Rnnnclal IRlsk S!qdir.m Diawrr m d firisrim, I:i;,iev

SOCIAL ISSUES I \ ISSLKXSCE Thc Fu~urc o f r\cli\c Olohd A_nem$: Clrnllrnge and Rcrl:rrn\;, A~irirl. >I. Licdrb. Thc Conlro\rny ol'Furidir~n \ d r w > P2)-Aa-loii-

Reinsurance in Nigcria: The Issue of Compulsory Legal Cession"

1. Introduction

In recent times. Ihc busincs and praclicc of reinsurance in Sigcria havc cotnc. under incrcacd scrurin!. Perhaps tlic most conrcnrious issue in the husincss of rcinsilrancc in Sizeria is the go~crntnentb dornlt~:~rion of the tndustry. This i done tl~rcii~gh :he wholly go\ el-nmen~-owned Yigerta flcinsura~~ce C-orpora~ion (Yizcria Rc). This fover~~nienr-o\\.nrd corporation currently dominntesthc Sipxian rcinsurancc industry. Its total aascr.;, \i htch arc in CXCL%S oflUaira 5.7 biliton. rcpr-wtir o\'cr 80 per ccnt of thc assets ofall t11c companies in the industry.' Its poss premiurn. c-hich is in excess ofNaira i billion. also rcptrsents o\.cr 80 !xr ccnt of thc toral g ~ s s pr-tinium c:lrncd hj, ~ h c industry. F~I-lhrrrnorc. !hi. corpot-ation's total tnsilrancc li~nd. \\ nich 1s in csccjs orSaira 1.2 biliioc. also rcprtscnrs over SO percent of the total insurance fund fat the entirc industry.' Tlic domination of thc rcinsimncc busi~iess by Nigcris Rc lius h c a ~ facil~tarcd by the Nigeria Rcinsurance Dccrec o r 1977 (as a111cndc.d) \\~htch requtrcs all muratice cornpanics in the country to conipulsorily ccde 20 pcr ccnr of their insurance bu~inesses to Kigcrin Re. Furtlicrrnorc. Migeri:, Re also has a riel11 of firsr rcll~aal on the rc~naining $0 pcr ccnr bcro1.e such business can hc pl;iceti abroad with foreien reinsurance co1npa2ics. This law n.as initially niadi. to help protect rhc then nc\~l!. csrublishcd S~pcri;?n Rc k o ~ n cslernal cotnpctilioi~ slid rc, prescn r scarce fbrcyn i'scl~nnge h! ~ncrcaaing tlic riA rctcntion capacity of tllc country. Tlitnfs have since chatyed lio\\.e\ cr. There arc non tlirec orhcr indigenous rcinsurance cotnp;~nic> opcraring in the count? rind thc tl_owlnnicnt has :ldoptcd ;I structural adiustmcnr propmtninc h ~tli cconotiiic libcri~ltmtion and subsid!

Reinsura t~cr Crmtitlrn~al Iini\.rrsc ron~p:trii's \i:wi:t Rc Kc Clolw Rr R 1' ~ ~ 1 1 ~ 1 I c i a (Uaira. OOll)' (ba i rn , 000) (Xaira. 000) (Ss i ra , 000) (\ail-a. (100)

\vitl~dra\val as 11:. lnaln instruments:' Under the new dlspcnsatlon. ir has been argued. the ivholc idea of leyal cesslon constilutes a [as burden on wl!-managed insurance co~npnnies. Along these lines. it has been supgea~cd that by:

. . . [clcding reinsurance prcmiuln. a n insurer sprcads his risks and also earns a cornmissior~ firom t11c rcinsurel-. 1-Io\rcvcr. the prcnuurn ccdcd bcars an opportunity cosi in tcrms of'lhe contribution i t would have made to under\witin~ profits if ' t t had kccn carncd :ind rhc Corcgonc investment incoln? on the premium. For the 1:trgc. \!ell- ci:pitalixd and well-manafcd conlpnnics thal arc able lo rc~;tin a high lc\.el oi'l-is!,. and also h a \ c rclatii cly li~n losl r a w . ~ h c legal ccssior] reprcsents at) additional tax on ~hc i r

profits. This is because they are forccd to forego premiums that would h a x rnadc an incremental contribution to both undcnvriting m d it~vcstmcnt rzsults. The rcinsurcrS: portion of claims and the commissions reccivcd do not comparc fa$orably with the benefits foregone. In addition, s ~ ~ c h plemiunis would have gone to further increase tlie insumncc fitnds and risk rctetition capitcity of the insura.'

Despite this. Nigeria Re hascontinued to rztain its legal advantages. This paper traces thc origins and development ofreinsurance in Nigeria and argues that government involvemcnt in thc industry has outlived its usefulness. To achicve its aim, the paper is divided into five parts. Section 3 traces the origins ofreinsurance in Nigeria whilc section 3 examines the influenccof the adoption of the Stn~cturnl Adjustment Programme (SAP) on rcinsurancc businesses and practices in Nigeria. Section 4 critically discusses the impact of the 20 per cenl compulsory legal cession on tlie development of Nigeria Rc whilc scction 5 concludes the paper.

2. The origins of reinsurance in Sigeria

Rtinsurancc of risks insured in Nigeria Ilns existed since thc beginning of insurmce in Nigeria. Understanding the history of insurance in Nigcria is therefore important if we arc to understand the history of reinsurance. The origins of insurance in Nigeria, for instance, arc entwined with the advent of British trading companies in the region and the subsequent increased inter-regional trade. Increased trade and commerce led to increased activities in shipping and banking. and it soon became necessary for some of the foreign firms to handle some of their risks locally. Trading companies were therefore subsequently grantcd insurance agency licences by foreign insurance companies. Such licences made it possible for such firms to issue covers and assist in claims supervision. The first such agency in Nigeria came into force in 19 15 when the .4frica and East Trade Companies introduced the Royal Exchange Assurancc Agency. Other agencies included: Patterson Zochonis (PZ) Liverpool, London and Globe, BE'A'AC's Legal and Gencral Assurance and the Law Union and Rock.'

Somc of these agencies subsequently metamorphosed into branch offices of their parent insurance compa~~ics . For instance. the Royal Exchange Assurance became a branch office in 1921 and Legal and General Assura~ice became a branch office in 1948. Other insurance companics that \wre subsequently introduced include: Nonvich Union. Fire Insuraticc Society and Tobacco Insurance Company Limited. They wcre all established in 1949,"t was not until 1058 that the first indigenous insurnncz company, the Afrlcan Insurance Coinpany Limited, was established.' By the time Nigeria gained its independetice in 1960, only four of the then 25 fimms in existence were indigenous. By 1976 thc number of indigcnous cornpar~ies had far surpassed that of the foreis11 companies. For instance, of the 70 insurance companies then in existence. only I4 were foreign owncd. Forty-six wcrc indigenously owned while tcn

n e r e wholly owned cithcr by the various state governments or thc federal g o c c r n m e n t ~ , ~ In real terms ho\vcver. the inipact o f these indigcnous finns rcnlained minimal. For instance. n hile the forcign-owncd firms accounted for 53 per cent of the gross premium income o f all insurance companics. the indigenous companics ~iccountcd for only 17 per cclii." It has thua been argued [hat:

[I]n spite o f the considerable presence o f thew indigenous [insurance companies] . . the bulk of the business nen t to the forcign owned companies.. . this imbalance was further reinforccd by the specific instruction which foreign companies that were operating in Nigeria normally received from their home offices that they should insure only with companies that originatc from their home countries. Even \$here there were no such insurancc companies from the forcign companies' home countries, thepracric; was such that thi. cornpanics as a rnattcr of policy restrictively insured with any other forciyn- owned Insurance companies in prekrence to the indigenous Niger~au insurancz companies.'"

Foreign insurance companies were simply seen as usurpers who were just interestcd in profits without due regards to the development and upliftnicnt o f the Africans." It was such general perczptions of foreign enterprises that helped fan nationalist movements and qucst for iiidependencc. Post-independence African governments thereforc came under zreat pressurc to directly intervene in businesses including insurance in order to quicken the economic emancipation of the Africans. The appealing argument at the time was that since niost Africans did not h a w the resources to compcte in these areas, it was the duty of the government to set up such insurance conipanies in 01-dcr to conipcte with these forcign companies and protect the intzrcst of the indigcns. Furthermore, forzign domination of the insurance industry also constituted a drain on the nations'scarce foreign eschange resources. This was so since niost of the premiums had to be remitted abroad instead of being retained locally. Along these lincs. i t has been argued that:

Although i t seemed quite encouraging that therc. were almost as many indigcnous as there were foreign-owned the bulk o f the busincss went to the foreign companies. Most of thc foreign b u h x s n i e n in Nigeria were oftcn i s ~ u e d \.\it11 specific instnicrlon from their home govcrnmcnt to insure with the i n ~ u r a ~ i c e companies from their home countries. This inevitably resulted in thc greater bulk of the insurance busincss in Nigeria being in foreign hands and i t constituted a hcavy drain on Nigcr~a's forcign zxchangc. Thc situation was also made worse because the majority of the cntirc insurance business

" Tlic reabuns tor thc proltlht~on of ind~gerom imurallcr cornpanus. at IC:ISI \r hcn mn!~;lr.xl N I ! ~ thc numbcr ol'banki 31 ~ h u timi.. include: [ I ) t hu low m~nimiilri share q x r a l rcquirmcnl For !he estni~li~limc~il ofsuul~ companics; ( 2 ) [he latc advent of governmunt control: and (3 ) tht. rclativel!; cr~sis-I-rce h~stor, of the S iy r ian tn iurancu ~mtsrr\. (Nwonkrvo. 19R0, p 1 15)

') Lzoapn ( 198 1 ). p. 240. ' ' I \ICOS (1'304). p. I I . I ' For instance. it has been sucgcstsd that ~ h c iortign Insur.lncu cornpanlsi did not consider t t ~.wr~h\\liili. to

abwrc !he 11Fe oESiyrrians. Tlicp concz~ltrxd ~ h c ~ r n ~ r c n l ~ c ~ r ; 011 a p a t r l u l v pcraonncl ilrid t h e ~ r I jm1l i~5. ~negleclrd Siger~an life as heing too full of risks. and even in covcrinp :~ccidrnts. rqu i r cd more stringent condilions for msurmci: of Styria-owned \cIitclm 2nd pri~pcny Thi.; I q c ~nurkc! \ rd\ l h u c c ~ c l u d c d hy dclinition. And a< Iring ns !hey wmed to prn,pcr. coverin; their costs sc'icral tlmei over ;I! 1l1c n.lrmw 2nd or lhc mark-t. the Insurance conlpanls* illd no1 .,cctr; i o c:lrc [Okizbo. 198 1, pp. 155- 15h).

- Thcrc \\.cr-c also pressure> kom thc ouls~dc. I'rorn the IOOOs. the I 'n~ lcd Sation.\ C'omnlittcc 011 Tradc arid Dc\~ciopment (UYC'TAI?) st;~~.li.ti to encourage lllc so\ L ' I ~ I ~ C I ~ I S o f dc:clopinp coui~ t~ icz :o directly par-iicipatc rn thc insurancc markc1 along the Sollo\\ inp lines:

Takc .;icps that \\.auld cilablc thcir domcstic insurance 1narkct5 to c w c r tllcir na~ionnl ccorlomi~ in:crcsts ~ ( 1 the insured intcrchts: Establisl~ and strcnglhcn domestic insurancc and reinsurance organizations \r,hcre the s i x of thcir insurmcc mal-lict pcrmits: Take steps to cnsurc that tcchnlcal rcscr-ves accruing from insurancc and rcinsurancc operations carried ~ L I I in thcir countrics \\.ere in\mtcd in thc same countries. bcal-inp in mind :]!I thcrcle\ ant characteristics as\tcl! as the critcrin ofsccuri!\i. liqiiidlt):and incornc: Establ~sh closer co-operation b:r\\ccn their i11su1;incc and rcirisurancc organ~zatio~is on n regional andbr- sub-rcgioml basis: and Enswe that the domestic insurance markets of he de\cloping state5 should cover rhc ins~rrailcc opcrat~ons ycncratcd b! thc ccormnic activitlcs of thc countrics cancel-ncd."

A conibinarion of these cstcrnal pressures and the inrcrnal political and cconoinic pressures \\,as parrl!. responsible for thc cstablishn~cnt ofthe Kational Insurance Corporation of Yigeria (XICON) b! thc Tigcrim go\8crnii~cnt in 1969. Scction 4 of the enabling Decrec charzed thc corporariot1 will) the fo!lo\ving functions:

To cril-ry c ~ ~ r t a n ~ ~ c l a ~ ~ o i ' i n s u r a n c c busincss including iifc insurance busincss and to insure and reinsure against loss ofany kind arising from any risk or contingency and in respect of any matter \\.hatsocvcr: To insure any propcrl!; of the go\crnlnent of'the fcdrration or of the o\.crnrnent of any slate i ~ i the federation or any s t a t u i o ~ corporation: To accept on rcinsurancc any part ofrisks undcrtakcn by any other pcl-son (bcing risk such that the corporation has po\\cr ro lnsurc against) and to rztrocede an); pan of such risks; and; To act as insurancc agent or insurznce brnkcr in relation to an): jnsurancc. and in particular in relation to the propertizs of eowrnmcnt and statutory corpolations.'"

On reinsurance, NICON \\,as further grantcd powers to compulsorily rcinsurc I0 pcr cent of all insurance busincsscs emanating from ~ i ~ c r i a . ! ' Despite this statutory pl-ovision. not much was achieved i i i this regard. I t has for insrancc becn argucd that:

As the niajor role ofthe corporation \vas not reinsurance. no significant impact n,as madc as such in the development of profcssional reinsurance busincss, and so iorcipn reinsurers continucd to daminatc the reinsurance business in ~ i g e r i a . ' "

It \\as therefore no surprise wiicn thc federal govcrnmcnt in thc rnid- 1970s decided to set up niational rcinsurance company. The Okigbo Committee on thc Nigerian Financial Systcm

b;~cl;ctl this dccisiol~ and fu~-tIicr ~.e~oninicndcd thili tllc C O ~ ~ O I . ; I I I O ~ S I ~ O L I I ~ he gi\.cn thc ri:!it of fir-st rcfuwl o n an! rcinsur,incc hu~incss bclbrc such t i u s~ncs hc pinccd on tlic ~ntcrnational markct. 4ccording to the comrni~tce's report:

The lack ofreinsurance fhcilities ill N~gcria iiasrculicti in an outRo\r o1'1nsurancc finds from Uigcl-ia. In :~dd~tion. in spite of thc f~fty ycars of th t insurancc ~ndustry. no sccondal-y marhct has tlcvclopcd. Thc ticcision by thc Fcticral Ciovcrnlncnl ro establish the Xational Rcinsurancc Corporation is thercforc a \q \velcomc stcp. The Corporation \\.ill ensurc that a higher proportion ofthc pranium income ofthc induslr>, is retained in Nigcria . . . \Vc recommend thal the Kation;~l Reinsurance Col-poration should havc the choicc of' first rcfusal on any reinsurance business from Nigcria befol-c such business is placed on the in~ernational mar1;et."

The yvernmcnt subsequently promulgaxd the Nigeria Rcinsurancc Corporation '- P)ccrec Sumber 49 of 1977 setting up the Nigcria Kcinsurance Corporation. Thc corporation

\\.,IS chal-gcd \\ ith the follo\~ing runctions:

To c a r n out reinsurance or any type of insurancc busincsi. including life insurance busincss. and to rcinsurc a p i n s t loss ofany kind arisiny from any risk or contingcnc): in respect of any Inaner \\'haL~oe\w: To rcinsurc \ \ ~ t h an!) insurcr carrying on insurance or reinsurance business any risk unde~-tzkcn by th; corporation and for that purpose to enter into rclnsurancc contracts: and To accept thc rcinsurance of any par1 of risk undcrtakcn by any other person (being risk such hat the corporation has power to reinsurc against) and to retroccdc any part ofsuch

The Rcinsurance Decree wcnt further to grant the corporation the po\vcrs to compulsorily rcinsure 30 per cent of all insurance businesses undcrtakcn in Nigeria. Follo\\in? thc reconimcndations of the Rcporl on the Xiyerian Financial System. i t funhcr gave the corporation thc right of first rcfusal beforc any of the remaining 80 per cenl of the businesses insurcd in Nigeria could be placed with a forcien reinsurancc company. According to the Decree:

A registered insurcr shall, in respect to every insurancc policy issued or renewed by i t on or after 1" January 1978: reinsure \\;ith the Corporation an amount equal to 20 per cent of thc sum insured in thc policy. . . and the registered insurer shall forth\vitli pay over to thc Corporation an amount equal to of the prcrniun~ reccived by the re~istered insurcron the issuc or. as the case m a be. renc\\al ofthe policy. . . In respect of reinsurance busincss abo\,e the legal cession . . . the Corporation shall ha \c the riyht of first rcfusal of any reinsurance business from Nigcria beforc such busincss is placcd in the international reinsurancc markct . . . R'hcrc the Corporation escrclses the right of first refusal . . . the Corporation shall issuea certificatcto this effect 10 thc insurer bcf'orc such rcinsurance is placed abroad.'"

At the time uhe lb the Uigerian Rcinsurancc Decrcc was proniulgatcd. the abo\.c regulations made scnse: the go\wnment practiced a forcign-exchange control regimc.

Fur-thc.rmore. 11 was thcn gcncr;llly belic\~cd 11i;lt tllc govcrnmcnt had IO do all in 11s poi\.cr. directly or ~ntiirxtl>.. to promote thc pal-ticipation ofAfriLanz in thi. naiional economy It \\-as.

- fin instancc. argued that:

Expcrlcncc ha5 shoum. through history. that political indcpcndcncc \%ithour economic i~ldcpcndcncc is but an cnipty shell. Thc \ alidity o f this itatcmcnt dcl-i\,cs froln the fact that the interests offorcign privatc ili\,cstora in thc Xiger:an economy cannot be cxpccteil to coincidc at all times and in evcry respcct with national aspirations. It \vould be naivc, indccd dangcrous to hopc that in the process of industrral dc~clopmrnt a set of national objectiws \\.ill automatically bc achic\wl by thcir nicrc declaration. A truly indcpendcnt nation cannot allow its objectives and priorities to be distorted or frustrated by the manipulations of po\wrful forcign invcstors. I t 1s \,ital. tliercforc, fbr Go\ crnniciit to acquire and control on behalf of the Nigcrian Soc ie t . thc greater proportion of the producli\-e a s c t s of the country.'"

In other w r d s . thcre \\.as need for the conser~ation of scarcc foreign eschangc and them \vas also a case for the protection ofthc first indifcnous entrant inlo the Rrgc~-ian rcinsurancc market. Thc nature of our economy and the perception of \\.hat the govcrnmcnl should be in\olved in has howcver since changed with the adoption of the Structural Adj~~stmcnt Progranimc (SAP) in 19x6.

3. The SAP and reinaurance in Sigeria

Prior to the inrrod~iction of the SAP, the Nigcl-ian economy was characterized by rhc growing importance of the oil sector. overdcpcndence on imports and an expanding pubiic sector." At the time. monetary management depended on the usc of direct monetary instruments such as credit ceilings, sclectivc credit controls. administered interest and cschangc rates as well as the prescription of cash rescne requirements and special deposits. Furthermore. the use of mnrket-brlsed instruments was hardly feasible mainly duc to the underde\$eloped nature of the financial niarkcts. Also the rapid magnetization of foreign eschangc during the oil boom era resulted in large increases in government expenditure."

After several years of import control regulations and import licensing, the Babangida Administration, under pressure rrom the International Monetary Fund and the World Bank, launched the Structural Adjustment Programme (SAP) in July 1986. It was designed to achieve balancc of payment viability by altering and restructllring the production and consumption patterns of the economy. eliminating pricc distortions, reducing the h c a \ . ~ dependcnce on consumer-foods imports and crudc-oil csports. enhancing the non-oil cxport base. rationalize the role of the public sector, accelerate thc g r o w h potential of thc private scctor and achieve sustainable gro\\'th." To achieve the abo1.e objectfves. the main strategies oftlic prosramme werc the adoption o f a rnarket- detcrminecl cschangc rate for the Xaira, the deregulation of external trade and payments arrangements. reductions in price and adrninistrarivc controls, more reliance on rnarhct forces as a major dctenninant ofeconomic

'' Second Wional Dcv~topmcn: Plan ( 19711). p. ?S9 :' CBN bn'cfs. 95 03. p 3. 7.

'- CBN B r d z , 9.':03. p 4. ' ' l h ~ d

activit)i and thc divcstnicnt of po\,crnmcnt control or o\rr~crdiip o f sc\cral intlustl.ics including insm-ancc.

7 hc adoption of thc SAP n;iturally encouraged neu. entrants to cntcr the Nigerian rclnsurarice mal-ke~. As has alrcatly bce~i mentioned, these entrants arc: thc Contincnt;rl Rcinaurance Corpor;ltion, Cjlohc licinsul-;mcc Cornpan) Li~iutcd and Uni\,crsc Rclnsurancc Cornpan! Lirnitcd. .A11 thcse arc indigenous companies with n o government in\ olvcment. Thcy wcrc all sct up to takc advantage ofrhe ne\v cotnpetitivc en\-ironmcnt that tlic SAP was supposcd to h a w created. Unfortunately. thc governn~cnt did not iniplcnicnt the S.4P to the Icttcr. In the case of reinsurance, for instance. thc govemmcnt decided to conimercialize (instcad of privatize) tlic Nigcria Rcinsurance Corporation.

Thc diffcrcncc b c t w c n comnicrcinlization and privatization \\.as thcn csplained by the Chairman of thc Technical C'onimittcc on Pri\.atization m d Commercialization as:

, While privatization entails alienation of government intcrcst in affcctcd enterprises. commercialization. whether full or partial, will not entail any diveslmcnt but will characteristically cntail dismantling of all forms of government non-tariff protection of any preferential treatment or insulation of our parastatals against domestic and foreign c o ~ n ~ c t i t o r s . ' ~

In practice. commercializalion. at least as practised in Nigeria. is no more than passing the inefficiency costs of such "parastatals" to the public. This is made possible by the sheer size. operational advantages and near doniinancc of the entire rcinhurance market by thc government-owned Nigeria Reinsurance Corporation. With continued government intcrcst in the Niger~a Reinsurance Corporation. it is not surprising that the corporation still retains the right to reinsure 20 per cent of all the insurance undertaken by all Nipxian insurance companies. It also rctains the right of f is t refusal before any of the remaining 80 per cent can be placed abroad. It is equally not surprising that Nigeria Re still remains a dominant factor in thc Nigerian reinsurance market.

Perhaps one of the attractions to govemnient for maintaining its ownership ofcompanies like Nigeria Re lics in its ability to appoint its board of directors and also top management positions. This is no doubt a useful avenue for political patronage. Merit and competence have unfortunately not al\vays been the prime consideration in such appointments. Also, the ever- changing political cliniate in the country ensures regular changes in both the boards and top management of such govemmcnt-owned corporations. This hardly augurs well for continua- tion and sustainable development. Even under the so-called commercialization regime, thc govemmcnt has continued to show, beyond reasonable doubt, that 11 is still in chargc and remains n4ling to intervene. For instance, in 1993: the governnicnt, without Lvarning: swapped thc managing directors ofNICON and Nigel-ia Re. Also, comniercialization has not prevented the movlng of the head office ofNigeria Re to Abuja, a purely administrative town and the nen capital of Nigcria. Although it makes conlniercial scnse for tlic corporation to be headquartered in Lagos, it has. at great cost and with littleplanning. been coerced into moving to Abuja. This would h a w bcen unlikely in a pri\.ate enterprise.2s

Another problem with continued government ownership of Nigeria Kc is that i t weakens the industry-s ability toyolice the governmcnt should the actions of the government go contrary to thc interest of the industry. Take, for instance. the issue of inflation. Despite the

:!Joption ofthc S.41'. rhc Sowrnnlcnt I ~ f u s c d to adhcrc to ;111y fur~n of fiscal discipline. This Icd to rhe promulgation of'tllc Hanks ;md Other Finxicial Institurions Dccrec (BOFII)) and Central Bank o l V ~ f c r i a ( C B S ) Ilccrcc o f 1 991. The decrees \vcl-c proniulg~tcd to llclp tacl,lc tlic rising lc\cl of fiscal dclicits and synchronize fiscal and monetary policics of thc government. Thc C:BN Dccrec. for ins~ancc. cnhanccd thc Bank's povcrs and discretion in tile dcsign and conduct of Inonct,iry policy bur stoppcd short of granting the Central Bank autonomy. The IgY I CBY Dccree also contains some pro\-isions \\hick if adhered to. hclp ensure ths attainmcnr ofthc policy objcctivc oi 'monc~ary stability. For inst;~ncc. section 33 of the Dccrec azscrts that:

. . . the Bank ma!, grant temporal-). ad\.anccs to the Fcdcral Ciovcrnmcnt in respcct of temporary dcficicncy of budpct revenue at such ratc of interest as the Bank may determine . , . The total amount of such advances ou~standiny shall not at any time excecd r \ \dvc and a half pel- cent of the estimated rccurrcnt budget rc\.enuc of the Federal Governnlent for the !;car in \vhicli the advanccs arc. granted . . . ,411 ad\,anccs made pursuant to t h ~ s xct ion shall be repaid as soon as possible and pursuant to this scction shall be rcpaid as soon as possible and shall in any cvcnt be repayable by the end oi'thc Fcdcl-a1 C;ovcrnmcnt financial year in which they arc g m t c d and if such ad \mccs remain unpaid at the end of the ycar. the power of the Bank to grant such further ad\ anccs inan! subvqucnt ! carshcll not bc csercisabic. unlcssand until the outstanding ad\.ances ;lave bcai repaid.

In practice. ho\ve\w. thesc new initiatives had littlc effect as thc govcrnlncn!. at leasi during the military era. consistently failed to adhere to any form of fiscal disciplinc. Dcspite the pro\,~sions of section 33 of the C'BK decree. the CBW con:inucd to fund the govcmment's fiscal deficits without any inhibitions. advancing more than 50 per cent of thc budgeted scvenue in some years.2" This somctinies rendered attempts to harmonize fiscal and monctary pol~cies with the aim of achvxing monetary stability fruitless. This has sometimes rcsulted in high levels of inflation. Bct\vcen I900 and 1995. for instancc, inflation sometimes rose o w r 50 pcr cent pel- year.'.

Insurance companies (and by extension reinsurance companies) by their very- nature are, ho\\;cver. usually sens~tive to inflation. Thc long-term nature of some forms of insurance businesses is perhaps responsible for this. Take for instance a life insurance policy. which can bc used as a savings device in order to help provide for f ~ ~ r u r e needs. Inflation \\;ill have the effect o f rcduc in~ the real valuc of the savings at niat~ri t~.~"herc is, thcrzforc~ littlc incentive for persons to undertake such insurance policics during an inflationary period.

I t thereforc beconics difficult for tlic board of Yigeria Reinsurancc Corporarion. which is appoinrcd by the govcrnmcnt. to be harsh in its criticisms o f thc inflationar! policies of the goiernnient. The fact that the board niny. at thc same time, hc asking the gwernment not to review the 20 per cent legal cession i t has on all the insurance businesses in Nigeria and the

right off11s1 rci'usal bcSol-e 111c rest can bc rcinsurcd ahl-oad Si1r111crcomp1-omi.;cs irs position. l'hc fgcl that go\ crn~ncnt-owi~cd coinlxmics arc 11ic main players in thc insurancc ~ndusrr-y furllicr diminishes the abiliry of thc industry lo inllucncc govcrnmcnt ;~ctions and decisions.

Thc niain vicrims of continued govcrnmcnt rcfusal to proniote a conlpct~tivc and srablc n1ac1-o-ccono~nic CII\ irontilent for thc practice of reinsrlrance in Sigcria arc thc intligcnous rcinsurancc companies. An unlicalthy busincss cliniatc. mainly perpctrated by thc govern- mciit. has made i t difficult for such indigenous conipanies to survivc and grow. at least in real terms. It is thus not surprising that tticse indigcnnus reinsurance coinpanics often complain openly. In 1096. for instance, tlic Chairman of Continental Reinsurancc Company Limited reported that:

Thc problem of incrcascd crime and dctei-ioi-atin: moral hazard rnanisested in the loss cxpcriencc[d] in 1996. Thc incidcnce of bank robberies in\ olving ni~llions ofKaira was

- unprcccdci~tcd. Also Fidelity guarnntcc claims resulting Sroni bank frauds went up . . . Wcak purchasing powcr and lin,ht liquidily in thc business sector increased thc ratc of premium dcfault in the niarkci leading to cancellation of policies as well as delays in the payment of prcmiums resulting in reduction of income. In addition, the dcrc~ulation of exchange ratcs encouraged some multinational firms to plrrchase cover outside the country leading ro furti~cl. loss of pi-en~iums to the industry.2Y

In his 1997 Annual Report. thc Chairman of Globe Reinsurance Company Limited similarly coniplaincd that:

Our trading environment \\)as plagued wit11 illstability and gcneral busincss uncertain- tics. The weak value of our foreign cschange coupled with the country's political problems posed serious hrcat to the acquisition of foreign business especially in the insurance sector of thc economy. Thc industry suffcred greater inflationary pressure which resulted from reduction in the ability ofconsumers to purchase insurance products and services. Thc economic stress on the direct underwriting companies naturally impacts on the result of the reinsurers.'"

The pressures of social, economic and political instability have been coinpounded by the compulsory legal cession the benefits of which the Nigeria Reinsurance Corporation enjoys. This has crcated an unlevel playing field thus stifling competition and growth in the reinsurance industry. Unfortunately compulsory l c p l cession has not only stifled the growth and deveiopmcnt ofreinsui-ance in general. it has also stifled the gronrh of Kigeria Re.

4. Xigeria Re and lcgd cession

In an earlier section, i t was argucd that the con~pulsory legd ccssion privilege granted Wigcria Reinsurance Corporation by the government made sensc at the inception of the corporation. Thcre was then, foi- inslance, a casc for the protection of the first indigenous cntrant into thc Nigerian Reinsurance market. Things havc since changed however. Thc N~gerian government h'l) since adopted the SAP with the aim of deregulating the economy and promoting rcliance on market forces. It is in the above spirit ofthe SAP and deregulation that the organized private scctor in Xigcria has, for somc timc no\\. been urginp the

go\,crnrncnt to crc;ltc a Ic\-cl pla!.ing field h r the practicc of rcilisur.ancc by rrpcaling its *

compulwr! Icgal cession rc~ularion. Tlic mood 01'rhc Sigcrian insurancc industr? o n t h ~ s issue has hccn sumrn;lrii.cd thus:

Tlw ismc oflegal ccssion has gcncratcd a lot ofcontro\-cr.;!.as insurcrh I i a ~ c continued to call fol- rhc ;~bropt ion uf (hat part of thc Nipcrian licin~ur;:ncc Dccrcc. \\.hlcl~ mahcx I ( mandator> for all innul-ancc cornpanic?; ro cede 20 per ccnt oftlicir husiness to Nigeria Re in form oflryal cession."

The opposition to compulsory legal ccssion is no douhl pal-11) bc~nf heilctl by thc fact that tlicrc arc no\\. thrcc otlicr indigenous reinsurance companies in Nigeria. E\an tiNCTb\D has sincc se \uscd its position on lcgal ccssions for g o \ w m c n ~ - o \ \ n c d ~nsul-a~icc companics in dc\ eloping countries. USCT.4D currently c n c o u r a p a gradual movement ~o\vards a frce- markct environment for insurancc prncticcs in dc\,cloping countrics Its I YO3 rcpoi-t on insurance asserlcd that;

Reinsurnnce companics \\.hicli rccci\ e compulsory cessmns s!iould realize that. \vhilc S L I C I ~ arranfemcnls \!.crc nccasary in the fornlali\,e ?cars of thcir operalions. dcpcndcnce on tlmn has to bc scn1c.d down and alternative sources of husincss d c v ~ l o ~ c d . ~ '

Some dc\.cloping countrics Iiave starcd to co~npl!~\\.ith the ahove reco~nn~ciidatioi~s. For instance. Tunis Rc no\\ operates \\,itIiour an? compulsory lcgal ccssion. Also. compulsor\i legal cessions lo Korcan Re is currcnrl> hcing phased out o \ m a tcn-ycar pcriod. Sonic reinsurance companies ha\v e\,cn siartctl to\'olunlariiy reduce theirreliancc on legal ccssions. African Reinsurance Corporation has sincc adoptcd this strateg?,. In its 1996 annual I-cport and accounts, thc corporation assertcd that it:

. . . has acliic\,cd a large lncnaure of success as regards the ohjcctive to incrcasc the volume of prcmiums accruing to i t from voluntary cessions. In 1996 income from this source accounted for 71..30'!4 of the total premium recol-dcd by the Corporation. This achievement is quitc ilnpressivc \vhcn compared with the corrcspondin_c proportion of 67.45 '% III 1995 (37.56% in 1994 and 41.16% in 1993)."

Unfortunatcly, Nigeria Reinsurance Corporation has not done this and thc bulk ol' its insurance premium income still comes from compulsory lcgal cessions. It is thus not surprisins that previous managements of Nigcria Reinsurance Corporalion consistently argued in support of the legal ccssion that the go\~crnrn?nt granted the corporation. Some l~a\lc even called on the go\unment to increase the 20 pcr ccnt lcgal ccssion. Along these lincs, a former managin? director once sug~cs tcd that:

The five local rc-msurcrs ale capablc of absorbing more risk. The countr). is still losing scarcc foreign euchangc through Soreign rcinsurancc transactions. M'e havc the capacity to accommodate more ofthe risks being ceded abroad . . . I \\,ill likc the cessio~j to be increasccl substanrially because the company [S iyxia Rc~nsurance Corporation] has the capacity to absorb more risks than it is currcntl!. doing.""

Such calls ho\tcvcr makc l~t t lc sense Stir xvcr.l+l reasons. Tirs! o f a11 1igcri;i R c i ~ i s ~ ~ r - ancc Corporation currcr~tly has a r i ~ h t of 1i1-st refusal on the rcln;~ining SO pcr ccn! of msurancc undcriakcn in Nigcria before i t can be rcinburcd I\ irh forcign firms. In fact. the law siipulatcs that thc) five a \\,ritten approval bcfol-c such risks can tic rcinwred abroad. There is thcrcforc no nccd to incrcasc thc corporation's lcfal ccssion. :Ill thc con~pan). nccd do is to cxcrcisc ~tsrigllt of first rcfusal in the c\ cnt that i t fccls that i l still hassomc rctcntion capacity.

Anothcr Formcl- managing dirccror of h ~ ~ e r i a Rcinsurancc C'ol-poration has il~rthcr tlcfcndcd the lcgal cession granted to thc. corporation on tlrc grounds that it helps insurance cornpanics since i t also covcra thcir substandard risks which the) could find difficult to cede clsc\\~l~crc. Along 11lcsc lincs Iic asserted tliot:

Thc qucstion of legal cession to thc corporation has never bccn fully accepttxl by insurance companies In Nigcria. and thc): have tlicrcfore often argucd that it should be abol~shed. It is fair to say that the ad\-antagcs o f a national company's participation in all tile I-isks \\ ithin the country outweigh any possiblc disad\lantagcs. Conipulson cessions cntail that the corporation can~iot sclect but must take a sharc in cach risk, even though ilic original poiicics covcrrng the risks have bccn issued at a price o \ w \vhich thc corpora~ion has littlc or no kgal control. Thus. the ceding companies in Ni~er ia arc guaranteed an automatic cover for- both thcir substandard and standard risks. which in turn is a sa\~iiigs on expense. Furthelnmrc. by cscrcising its Right of First Refusal. the corporation cnsurcs that only thc proportion oftlie risk that cannot be retained locally is ccdcd abroad."

It IS truc that the Niger~a Reinsurance Corporation \vitii all its powers has helpcd increase the retention capacity of die Nigcrian insurance industry and. by extension. helped savc scarce forelgn exchansc. It is also true that conipulsory legal cession also means that the col-poration must share in substandard risks undertaken by all Nijcrian insurance companies. This ho\vcver does not tell ihe whole story. For instance. i t is theoretically implausible for a company to purposefully under\vritc substandard risks \\?hen it runs the r ~ s k of retaining 80per ccnt of it. An estcnsion of this argurnent is that the Nigcria Reinsurance Corporation is more likely to sliarc in standard risks than non-standard risks. This is in fact thc main reason why in the past the management of the corporation was ~~nwi l l ing to forgo this legal cession adwntage. There is also a related antecedent to this.

Prior to the establishment ofThe Nigeria Reinsurance Corporation, NICON acted as the national reinsurer and en.ioycd the pri\:ilcge of 10 per cent legal cession on all insurancc contracts undertaken in Nifcria. NICOK lost this pri\,ilegc \\.lien the Nigcria Reinsurancc Corporation \vas established in 1978. The reinsurance busincss \\,as so lucratiw that its loss negativel). impacted on the financcs of NICON. Apart fi-om this, NICON was further rcquired to ccdc 30 per ccnt of its premium to the neivl? creatcd Nipcria Rcinsurancc Corporation. A combination of thcsc t \ \v factors had great impact on the financcs of NICOS. According to NICON:

On January 1. 1976: . . . NIC'OM lost a maior soiircc of its revenue as a rcsult of'the creation of Xigeld Reinsurance Corporation . . . \vhicI~ was sct up by the Fcdcml Go\wmnenl on June 14.1977. Thc dccrcc cnipowcrcd it to take over thc 10 pcr ccnt lcgal ccssion \\hich SICON had until tlicn been taking from c\cry insurance firm in N i y k i .

13csldes. Dccl-cc -19 ~ . q u i r c d c\ ery insumncc coiiip::n including ;\'I( 0s lo ~nsurc \\vtii t l ~ c h'igcri~ Rc an amount thar is equal to 30 pcr ccnr o f rhe sum insured on c.\w!, in.;ur:mcc poiic!. issucc! or rcnc\\,c.d o n 0:- nt'tcl- J a n ~ ~ a r y I . 197s. Xigcria lie was matlc tlic rqxxiror) o'thr 5 percent ccsslon of thc trcatier oScvcry rcgistcrcd insuralicc company thal \ \ a s lo bc rii:idc to thc African 1lciiisur;lncc C'ol-porztlon (Afr~ca l ie) \ \ h c h also conimcnccd husinc%s on January I . 197S. That the Corporat~on had to ccd,: a subsi:~nt~al portio~i o f ~ t s prcniium iltco~ncs to Nigcria iic c;tuscd I I great discomfort. It \ w s r~ghtl!; fcarcd g n a n thc high pcrccntagc of tlic c c ~ s i o n to N ~ g s r ~ a Re, that rile dc\~ciopmcnt \\auld cause a considcrablc drop in 11s prulits Hcncc, thc Corporation shifted 11s attention to \.igorous itnprowiicnts of ~ t s life assul-ancc s;ilcs \:hilt i t \;cnturcd inro nc\\. ;ll-cas OS insmince siicli as agricult~~ral and crop ~nsurailce.'"

In other \\.ords. Icy1 ccssion \\*as. for SICON, a sour-ce of easy business and profits. Thc loss o f h i s lcfal ccssion pri\ ilcyc made thc conipan!i di\.crsif!f into othcr areas of insur- ance i t h;~d hithcrtc iyiorcd. lndccd sonic I-c~~isurancc co~iip;~nics !lo\\ rcal~zc that despitc iiicir advantages. legal ccssions also h a w costs. As has already been mcnrioncd. Africa Rcinsurr:nce COI-poration has. for somc time iio\v. bccn pursulng a dclibcrate policy to retiucc its dependence on legal cessions.

.L\ further 21-fumclit afainst the continunlion o!' tlie Icgal cession privilege currently cnjoycd by Xiger~a iielnsurancc Corporation is tlie fact that there arc no\?; othcr indigenous reinsurance companies opcr::[in~ In the country \\.ithout enouph business to do. For instancc~ a rcccnt attclnpt b! thc Nigcria Insurers .Association (NIA) to establish a nc\: reinsurance company in the country \ \as sl~cl\'cd:

. . . due pril~cipall!~ to tlic harsh husincss cn\ironment and the Fact that there is yet to he a Icvel pla>iilg field in the market. Besides. the capacity of the existing reinsurance companies operating in thc industry has not been utilised to the full. and u.e feel i t will amount to a duplication of ef'forts to float anothcr reinsurance company in the present circumstance.

G i w n thc fact that t ime are now other rcinsumncc companies in the counrry. the argument thar the legal cessioli grantcd Nigeria Reinsurance Corporation hclps sa\.c scarce foreign eschangc for the country can no longer hold. This is especially so given the fact that foreign companies are now very careful about reinsuring Nigcrian risks. If an~qhing, the compulsory legal cession privilege granted Nigcria Re hurts the indigenous reinsurance firms greatly. This is because they can partake only in the undesired risks left over by the insurance companies and Nigeria Reinsurance Corporation. It is thus expcctcd that deregulation \\.ill, at the \ l c ~ y least; hclp crcate a level playing field for thc practicc of rcinsurance in Nigeria. This \\.ill help ro increasc competition and reduce inefiiciency in the industry. Furthermore. it \ \> i l l male thc industr), niorc ablc to defcnd and propagate the promolion of stable niacro- econonlic politics. This\vill bc so bccause rccklessgoscrnnient fiscal policics\vill no\\.liavca direct ncgati\,c impact. unmitiytcd by any form of subsidy. on the entire reinsusancc industq. Finally, deregulation may also help to open up the Nigerian insurance markct to foreign reinsurers. This \rill have the potential of injecting foreign capital and technical cspertise. which will estcnsively bcnefit tlic Nigcrian reinsurance industry.

~ ' i l t l i o ~ ~ ~ h the granting oftlic legal cc..:sion pri\,ilcsc to N l g c r ~ ; ~ Kc n u y haw bccn ~ l s c f ~ ~ l at tlic lime the h'iysia 1:einaurancc L)ccrcc \\,a> promulgated. the concept has sincc outi~vcd its uscf'ulncss. This is c\.cn nio1-c so givcn tile adoption of'lhc SAP b! thc Scdcra! govcrnmcnt and thc estnhlis!imcnt ofot!~cr indigenous insur~ncc conipanies in the country. Thc abolirion of t h ~ s 20 pcr cent compulsory legal cession to Nigeria R r is thus n ncccssiry if rhc Niycrian rcinsurancc industry is lo wifncss tiny tneaningful grou.th and propress. It is thcrrforc licartcning to noti. that the current managcmcnl of Nigeria Reinsurance Corporation now rca l i~cs that its o\~crdcpcndcl~cc on legal ccssio~i has also had ncgativc consquenccs on he corporation. Accoi-ding to the currerir managing dircctorofNigcri;~ Rcinsurn~~cc Corporat~on:

The corporation could havc been bcttcr than it is no\v. but I thlnl. thcrc n.as too much dcpcndcncc on legal cession, w,liicli hiis kind of s tun~cd our gro\\~th in the corc busincss

.. areas. n.hich I considcr to hc the treaty arcas that liave been a problem ivith the corpontion."

L c p l ccssion is. l~o\\cver. not the only issuc in I-cinsurnnce in Xigcrja. Also of importance is the need for the povcrnmcnl to create a conducive, macro-cconoinic cnvironmcnt for the practice of'insurnncc (and rcinsurancc) in Nigcria. This is also one of the factors that has icd to thc reduced intcmational interest in the Nigcrian rcinsurancc arena.

IRUK\\V. J.O.. 197-1. "Accidcnl and M o w In\urnncc In \\:csl Ahca". Lri~: uiid i'wi ; i w Ib:id:~r;. C'aslon P ~ C T F IRI;K\YL. J.O.. I O f i l . Irr.rrra~rrc Lnir i~iril/'wi.ricr. iri :Yi::ci,iu. lhadan: Caxrrln Prcrr. IRUKiVU. J.O.. IW5. R~i~i.wrorzrr. irr rlre Th~rd I t h ~ h L Ihadan: C ~ x l o n Prcss. K,\TIONAL IWSLRANCE CO\I\IISSION ULCREE No. I [KlGrRl.A] o r 1997. IIATIOSAL Ih'SVRAhC'E CORPORATlOh OF NIGLRlA ISICOS] U F C R t F No. 22 of IW9. SENS\ilATCN. \:~rinur issucs. NICCIh' INSLIRA.\'CT. PLC. 1991. :\'ICO.Col 3. 1969-1994. Lnyos: SICOX Insurancc PLC. NIGERIA RE NL\\'S. !\hl-s/~~rrcr.r!f rhr ,\'i:,.rw'o R c i ~ i ~ r i r u ~ r r ~ ~ Corp~a l io r : fvariou5 rssuus). NIGERIA RElXSL!RAI/\NCE CORPORATIOX DECREE No. 49 of 1977. IIIGEKI.4 REINSCRANCE CORPORATION PLC. 1993, Itrxrtrnr~rc urrd nc~ ~ ~ J / I ~ I I I W rn .Yigo-io L a p s : N ~ p c r ~ a

Reinsurance Corporation. YIGERIA REIYSL~RANCE' CORPORATION. ,In~lrnr! Rclwrr urrri.-lccornrr.\ (\srlous ycarsl. KIGERIAN Eh7ERPRISES PR0510'lION DECREE 1972. NIGERIAN ESTERPRISES PROMOTION DECREF lLr77 NIGFRIAN FEDLRALGOVERNMEIIT. Comnicntson the "Rcpon ofthr1r;bunnl oflnquir). inmlhe A f f a i ~ o i t h c

Kigerian Rmluy". SIGERIAX IIYSC.k4\'CE YEARROOK. ( w r i o i ~ ~ !.ears). Laeos: h'lgeria Rcinsurancr. C'orpora:ion. KIGERIAN 1NSl:RERS ASSOC I ATIOY. 1996. .J'>;cv-iurcr$ Aswciation. NIGERIAN ISSCREKS ASSOCI.4TlOii. 19Y9, hrgcria hrrrrionre Digc.rr. A Siori~/i< ol ./(iri~-iml q/ ihr . Y i p io

h i r o r r s Aswrialiorr. Locos: Nipena Insurers Aswciarion. NlCiERIAN INSL-RERS ASSOCIATIOK. Arrnlm! Reports, various years. h1VANKWO. G.O.. 1980. Tlic h'igcr.iorr Finonrial S~.r;eei. London: \l~crniIlan Puhli4icrs OKIGBO. N.C.. 1'18 I . 71112 N~.qerion Riro~i< ii;/ 5,vsrr.nr: Srr-ncrirrr and G~ni:,rli. London: Longnian Press. OSOKA. 0. . 1992. lr~rrtroncr and rhr .Xigcvrrrn Ecurrurlrj: Lagos: Abiola Press Limited. I'A\\'LEY. XI., \"INSTOSE. D. and RANTLEI: P.. 199 I . Uli'firrarrciol harirrr~io~r.t ar~ddloitars. L.ondon: hlacn~ill;m

Education Lrmkd . SECOXD N.4TlOSAL DEVELOPRIEh'T PL;ZN 1970- 1974. Lagos. Federal Gmernment Print~rb. UCHE. C.L!. 1996. "Thc N ~ ~ e r i a i l Failed Ranks Dccree. A Cntiquc". Jorrr.no1 rflnfo.niiriurra1 iiuirhrrg Lo,:. 10.

pp. 436-441. UCHL. C.U.. 1997. "Bank of England 1,s. the IHRD. Did the Xigerian Colony Deserve a Ceniral Bank'?".

Explorariuns in Ecunon~ic liisrun; 34. pp. 220-24 1 LCHE. C G.. 1999. "Cio\~crnmenr Ownrrship of'lrisurance Cornpanics ~n Syerla: A Cr~bque". Tire G m e w Pu,wrs

oil Rid. artd Iriivrarrre. i.s.vre\ orrdP~urrice. Vol. 24: No. 2. pp. 2 16-227. UCME, C.U.. 1993, "Does Nigeria Wccd an Indcpendm Ccntral Bank"". :l/riI l 3 c I n l c r n r l l m i .i\\r*l3lm lor 1 I h qlud! ni1n~llnrnr.c lcun.mllcr -

A New Approach to Insurance in Rural Africa

by Hans Hoogcvecn*

' Exisung inl'or~nal insurancr arrangements arc generally ahic to deal wirh lnfbrmat~on and cnforcenicnt problems b u ~ arc unable to crraie large risk pools. Thts makes tliesc airanpnents incfi'ec~tve ayains: many rypa of (uxarinte) risix Thc m a r r q e syslcrn of the Sliona in Z~nibab\ve. in which bride \\,calth is dcniandcd for a daughtcr \r.hsn she gc~s niarried. is an informal insurancc arrangemcnt !liar is ablc lo crcate a lnrpc risk pool, nhilc maintaining at thc same time possihilirics for close monitorin? and cnforc-ment. This paper evplorcs whether rhc Sliona niarrtage system ma!( serve as a basis for a formal insurance arrangerncnl. I t i h argucd that in combination nirh an organization similar to that of micro-credit programmes. insurance can be offered in arcas where formal insurances do usually not operate. A pilor will have to estabiish the prccisc \\ay in uhich the schcrnc should be organized.

1. Introduction

Unlike informal insurance arrangcments. fortnal insurancc services are generally absent in Africa's rural arcas. The absence of formal insurance is not surprising in view of the information and enforcement problems insurmcc providers encounter in the pcncrally isolated African rural areas. The fact that itiformal insurance arrangements abound is also not surprising in vie\\. of the magnitude of the income risks involved and the advantages tightly knit communities have in dealing with information and enforccmcnt problems. Unfortu- nately, informal insurancc in these communities is unable to deal with nlany types of shocks, a s these are likely to be correlated amongst a small number ofconipa~.able agents. It follo\vs that an umnet demand for insurance services exists.

An illustration of a successful informal insurance arrangement in Africa is that of contingent crcdit contracts, described by Udry (1990. 1994) for Northern Nigeria. Despite being crcclit contracts. the arrangements coniprise an insurance clement: a s loan repayment depends on Ihc economic condition of tlic agents involved. Creditors are lenien! if their debtors go through n difficult period while debtors makc an extra attetnpt to repay if their creditor is in 11-ouble. A disadvantage of Udry's conlingcnt crcdil relations is that these are bilateral. \Vhilc this e n b n c e s the ability to deal \\.it11 information problems. i t severcly limits thc size of the insurancs pool.

Certain informal arrangements are able to gencratc much larger risk pools \\.ithour sacrificing their monitoring advantages. An csample of'such an a r t - n n p i c n t is the marriage system of the Shona (the dominant ethnic group in Zinihahwc). w,hich is described in I l o o y c e n (2000) and Dekkcr and I . l o o p r c n (2000). This marriage system comprises

2008-09-16T10:46:17+0200Mrs.NwegbuMercyUgochukwuI have reviewed this document