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ABSTRACT
This work examined the contributions of insurance to international trade in Nigeria. It reviewed the works of others, it was designed to determine the extent to which exchange policies had impacted on the growth process of Nigerian economy. To determine the contributions of insurance to Nigeria’s external reserve. Questionnaire was designed and administered to 52 respondents out of which 45 was returned to subjected to analysis using simple percentages, tables and chi-square tool. It was discovered that insurance industry plays a significant role in the Nigerian economy especially as it has to do with international trade. It was hence, recommended that the government should create an enabling environment where insurance can strive.
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
This study is basically undertaken to take an objective view of the impact of insurance in international trades on the economy of Nigeria. Before her political independence in October 1st 1960, Nigeria has been an active player on the field of international trade initially with predominately primary agricultural commodities that comprised groundnuts, cocoa beans, palm oil, cotton and rubber (Englama, et al. 2010), but presently dominated by petroleum products (Onwe, 2013). Since the discovery of oil in commercial quantity in 1956 (Englama, et al. 2010) in Oloubin in the present day Delta State (Afaha and Siyelabola, 2012), Nigeria has been an important player in world affairs, economically and otherwise, particularly being the 12th largest producer of crude oil in the organization of petroleum exporting countries (OPEC) (OPEC Annual statistics, 2014). Unfortunately, these blessings by nature to Nigerians didn’t reflect in the overall welfare of the citizen made worse (Soderbom and Teal, 2001), by the collapse of world oil market as a result of glut in 1981 (Muritala, el at. 2012).
Historical background of insurance in Nigeria, the origin of modern insurance are intertwined 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 (Adeyemi, 2005). Trading companies were therefore subsequently granted insurance agency licenses by foreign insurance companies. Such licenses made it possible for such firms to issue covers and assist in claims supervision. The first of such agency in Nigeria came into force in 1918 when the Africa and East trade companies introduced the Royal exchange Assurance Agency other agencies include Patterson Zochonis (Pz) Liverpool, London and globe, BEWAC’s legal and general assurance and the law union and rock (Jegede, 2005). There was an initial slow pace of the growth of the insurance industry in Nigeria, particularly between 1921 and 1949. This has been traced to adverse effect of the worldwar II on trading activities both n the United Kingdom and Nigeria.
The contribution of insurance to international trade in Nigeria by providing protection, insurance companies could affect economic through the channels of marginal productivity of capital, technological innovations saving rate. Insurance companies indemnify the ones who suffer a loss and stabilize the financial position of individuals and firms with possibility of transfer of different kinds of risks to insurance companies. Risk adverse economic units are more induced to buy goods and services, especially those of higher value. In this way, insurance sustains demands or consumption for goods and services which encourage production and employment which result in multiplier effect on economic growth in Nigeria. Again, firms exposed to various risks of their liability, property, illness and disability of their employees and life of key employees, have the possibility of managing those risks by transfer to insurance companies. This allow firms to concentrate their attention and resources on their core business which can lead to willingness and ability to take real investment which result in higher rate of economic growth in Nigeria.
Without mechanisms for mutualization, pooling and transferring risk which insurance companies provide, part of the economic activities would not take place and positive effects on social welfare would fail. In other words, by creating an environment of greater security, insurance fosters investment and innovation or economic growth. Insurance increases marginal productivity of capital also in a away that it makes no need for high liquid contingency funds of firms which results more funds available for financing high return projects. Without insurance coverage, large contingency funds would be needed to protect firms against risk. Increasing availability of funds could result from kind of insurance products by which insurance companies provide protection from credit risk to other financial intermediation. In that way, financial intermediaries are more willing to lend funds for financing real investments which encourage economic growth.
But, private insurers could give their contribution in solving the problem of social security system. They provide protection from the financial consequence of illness and injury, unemployment and retirement. Thus, insurance products such as life, health and payment protection insurance, can substitute for however, still left over 107 insurance as well as reinsurance operators in the market and was perceived as 2007, section 9(4) of the insurance Act provides that NAICOM may increase the amount of minimum capital requirement from time to time. The then minister of finance announced a new minimum capital regime in September 2005 which was to be complied with by the end of February 2007. While previous insurance Act 2003 only required new capital of les than N 500 million (about $4 million), the 2005 recapitalization directive required a minimum of N 2 billion (about $15 million) for life insurance and N 3 billion (about $ 23 million) for non-life business. The 2005 recapitalization changed the landscape considerably as many companies were forced to merge in compliance with the follow-up directive of NAICOM that the requirements were only to be met through mergers and acquisition. Table 1 shows the old and the new capital base of the Nigerian insurance institutions with the percentage increases.
Out of the 104 insurance companies and 4 reinsurance companies in existence before the pronouncement, 49 insurance and 2 reinsurance companies met the new level and were certified by the government in November 2007. Based on the new capital base, insurers are to raise their capital according o the risks they underwrite. This is to enable insurers to concentrate on businesses in which they have core competence. The regulatory institution, NAICOM, is not looking at the direction of fresh recapitalization but a risk-based capital which will enable the insurance companies to recapitalize in accordance with the risks it taking. Or example, if you are an insurance company that does aviation and oil and gas underwriting, then you must have the wherewithal to absolve those risks. If you are an insurer that does motor insurance alone, you do not need the same capital.
The function of providing insurance coverage could affect economic through saving rate channel in a mixed way. On one side, insurance protection contributes to greater security which makes individuals and firms less careful. As a consequence they could lower their precautionary saving. On the other side by offering various lie insurance products that combine risk protection and saving benefits, insurance companies encourage long-term savings.
1.2 STATEMENT OF THE PROBLEM
The importance of international trade in the development process has been of interest to development economists and policy makers alike (Arodoye and Iyoha, 2004). Imports and exports are a key part of international trade and the import of capital goods in particular is vital to economic growth. This is so because imported capital goods directly affect investment, which in turn constitutes the motor of economic expansion. Economic reform is expected to affect imports as part of the strategy to restore external balance. However, unless policy makers know what the major components of imports are and how they are determined, such a policy decision can be harmful to investment and output if domestic production relies or imports.
In Nigeria some people are in favour of protectionist and highly regulated economy and have even criticized the previous Nigerian government, for signing the treating of the world trade organization (WTO), claiming that, Nigeria was not adequately represented in the negotiations and should push for a fairer deal. As regards to this statement, some people, particularly economists pushed for the implementation of the structural adjustment programme (SAP) in 1986 which brought about deregulation of formerly regulated areas of the economy, so that the country could reap the benefits of economic openness.
The main thrust of this research is to take n objective view regarding the controversy of the role of international trade with the help of the insurance company, in the progress of a country in terms of economic growth of Nigeria. It has been eluded by the dissenting voices in the 21st century that trade could be negative in terms of acting as a catalyst of economic growth and development, being a retrogressive force, in the journey to economic independence. But ironically, past experience has proven the potency of trade as a catalyst of economic progress, with regards to growth and development.
1.3 RESEARCH QUESTIONS
The research questions, which guide this research work are as follows:
- How does insurance contribute to international trade stimulate economic growth in Nigeria?
- To what extent does the exchange rate impact on the growth process in Nigeria?
- Does the external reserve of the country affect it economic growth?
- What are the factors that hinder international trade of Nigeria?
1.4 OBJECTIVES OF THE STUDY
International trade has, by and large, been an “engine of growth” for global economy (Usman, 2011); (Obadan and Okojie, 2010) and may well be the condition needed by small countries to record rapid growth (Arodoye and Iyoha, 2014). But there have been large dissenting voices in the 21st century, that there is a disproportionate share of gains from trade that accrues to industrialized countries. This research work focuses on the following objectives:
- To examine the impact of insurance to international trade on the economic growth of Nigeria;
- To determine the extent to which exchange policies had impacted on the growth process of Nigerian economy;
iii. To evaluate the role of external reserve on the Nigerian economy over the years;
- To identify the factors that hinder the international trade progress of Nigeria and make suggestions on how they could be resolved.
1.5 SIGNIFICANCE OF THE STUDY
This study is significant in revealing the contribution of insurance to international trade in Nigeria and how the insurance company has contributed aversively to the economy at large. The findings are also expected to be useful to shareholders (as owners), creditors, students and researchers. Shareholders as the business owners could be the primary beneficiaries of the findings from this research, as anything affecting the value of their investments is of great importance to them.
This study is design to find out the impact and importance the contribution of insurance to international trade in Nigeria. Thus, the firm will benefit from the findings of the study.
Managers of an organization are also among the main beneficiaries of the finding of this research. This is because managers are usually interested in understanding the contribution of insurance to international trade in Nigeria. Hence, this study is an attempt towards such direction. Moreover, managers will like to know the stability of their firm’s and how secure their organization will be. On the other hand, the findings will enable businesses to measure the level of safely in being able to discharge obligations in order to attain profitability and to be prepared for unforeseen events by providing cushion for such occurrences.
This study could also be of significant importance to creditors, because they are interested in the credit worthiness of the firms in meeting their obligations, which could only be possible with only the insurance company. The study could be of interest to the business community in particular and to the government of Nigeria whose concern is to promote economic growth of the country and safety through creation of an environment that is conducive for business.
Lastly, students and researchers could find this study useful in that they are interested in how theoretically related variables empirically affect each other. This study is in the same direction, and it will also serve as source of knowledge for the student and point of references for researchers.
1.6 RESEARCH HYPOTHESIS
Ho: That international trade does not contribute to the growth of Nigeria economy.
H1: That international trade contributes to the growth of Nigeria economy.
1.7 SCOPE OF THE STUDY
Literature in most of the study of Nigeria participation in international trade, with regards to policy and strategies has been mostly concentrated on export, which is logical. This study will then pay more attention to various economic policies or programmes or strategies, that has encourage openness of the economy and Nigeria’s participation in international trade. This is not to say that the study will not look at export, but in essence this study will be as possible. Study will be using economic data from 1970 to 2013.
1.8 DEFINITION OF TERM
INSURANCE
Insurance is the equitable transfer of risk, from one entity to another in exchange for money (premium). It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. An insurer, or insurance carrier, is selling the insurance; the insurer, or policy holder, is the person or entity buying the insurance policy. The amount of money to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.
The transaction involves the insured assuming and known relatively small loss in the form of payment to the insurer in exchange for the insurer’s promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.
INSURANCE POLICY
In insurance, the insurance policy is a contract (generally a standard form contract) between the insurer and the insured known as the policy holder, which determines the claims which the insurer is legally required to pay. In exchange for an initial payment, known as the premium, the insurer promises to pay for loss caused by perils covered under the policy language.
Insurance contracts are designed to meet specific needs and thus have many features not fund in many other types of contracts. Since insurance policies are standard forms, they feature boilerplate language which is similar across a wide variety of different types of insurance policies.
TRADE
Trade involves the transfer of the ownership of goods or services from one person or entity to another in exchange for other goods or services or for money. Possible synonyms of “trade” include “commerce” and “financial transaction”. Types of trade include barter. A network that allows trade is called a market.
Trading is a value-added function: It is the economic process by which a product finds its end user, in which specific risks are borne by the trader.
Trading can also refer to the action performed by traders and other market agents in the financial markets.
INTERNATIONAL TRADE
International trade is the exchange of capital, goods and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product (GDP).
International trade is also a branch of economics, which, together with international finance, forms the larger branch called international economics. Trading is a value added function. It is the economic process by which a product finds its market, in which specific risks are to be borne by the trader.
W.T.O (WORLD TRADE ORGANIZATION)
The WTO provides quantitative information in relation to economic and trade policy issues. Its data-bases and publications provides access to data on trade flows, tariffs, non-tariff measures (NTMs) and trade in value added.
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