Role of insurance in developing countries’ economic growth: Nigeria

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The importance of insurance in mobilising savings that could be channelled to the development of the economy of developing countries has been widely acknowledged. JOSEPH INOKOTONG, in this piece, presents the United Nations Conference on Trade and Development (UNCTAD) report that identifies the problems and new developments affecting insurance.

Insurance can help to encourage investment by promoting financial stability and mobilising savings. For example, the concentration of income from customers purchasing life insurance policies can provide capital that can be invested elsewhere in the economy by the company for greater returns.

No doubt, the importance of the relationship between financial development and economic growth has been recognised in the economic literature. According to J. François Outreville, a one-time Economic Affairs Officer with the Special Programme on Insurance at the United Nations Conference on Trade and Development (UNCTAD), recent evidence suggests that the developing countries, Nigeria inclusive, have a supply-leading causality pattern of development.

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Property-liability insurance like other financial services has grown in quantitative importance as part of the general development of financial institutions. The relationship between property-liability insurance premiums and economic and financial development has been established.

Even though insurance is said to be of primordial importance in domestic economies and internationally, the role of insurance in the development process is difficult to assess. While insurance, like other financial services, has grown in quantitative importance as part of the general development of financial institutions, it also has become qualitatively more important due to the increase of risks and uncertainties in most societies.

However, the share of total insurance premiums generated in developing countries remain at a low figure even though these countries contain more than 75 percent of the world’s population and account for almost 20 percent of the world’s economic activity.

Indeed, so important is insurance in the trade and development matrix that at its first session in 1964, the United Nations Conference on Trade and Development (UNCTAD) formally acknowledged it.

The eighth session of UNCTAD, held in Cartagena, resolved to give a new direction to the work of UNCTAD as expressed in the Cartagena Commitment. Following the new approach adopted by the conference, it was decided to suspend the existing main committees of the Trade and Development Board, including the committee on Invisibles and Financing related to Trade (CIFT), one of whose two sessions was devoted to insurance. The body said the work on insurance is to be incorporated in that of the newly created standing committee on Developing Services Sectors: Fostering Competitive Services Sectors in Developing Countries.

In implementing the decisions of UNCTAD VIII, the Trade and Development Board, at the second part of its 38th session, adopted the terms of reference of the standing committee.

Interestingly, paragraph four of these terms of reference applies to insurance, asking the committee “to analyse prospects for developing and strengthening the insurance sector and enhancing the trade of developing countries in this sector.”

In addition, the terms of reference asks the committee to focus on a “review of the development of services sectors in developing countries and comparative analysis of policies, including identification of domestic weaknesses and capabilities, aimed at creating the conditions necessary for the development of competitive service sectors and export of services.”

The preparation of the present assessment and review is in line with this objective. Some of the data used for the preparation of the review were supplied to the UNCTAD secretariat by the governments of developing countries in response to a request made by the Secretary-General of UNCTAD.

Other information has come from papers presented at international insurance conferences and meetings, which were made available to the secretariat. Much of the information has been taken from trade journals and periodicals. The coverage of countries included in the UNCTAD survey has therefore largely depended on the “information available in the professional press.”

The body admitted that it has of course not been possible to verify the accuracy of the information obtained through this method. Also, some of the information may be outdated and superseded by new developments by the time the review is out. It should be noted that when reference is made to specific insurance problems of developing countries, the statements made often apply only to a certain number of countries and not to all of them, since they are at different stages of development. Some problems may also be more widespread in one region or on one continent than elsewhere.

The UNCTAD report is an assessment of the insurance markets of developing countries with particular reference to the problems faced by them, and a general review of developments that have taken place during the period under review.

On the problems and new developments affecting insurance, UNCTAD remarked that the problems affecting the functioning of insurance markets can be classified into two categories. The first category consists of problems arising from factors external to the insurance sector and relating to the general economic environment. The second concerns problems related to the practice of insurance itself, such as those deriving from a specific market structure, the level of skills and expertise present in the sector, underwriting factors and those relating to the evaluation of losses and settlement of claims.

Explaining the problems related to the general economic environment growth of insurance markets, UNCTAD said the development and growth of the insurance sector in a country depends on the general level of economic development and on economic prospects in the immediate future. Generally, there is a positive correlation between the economic development of a country and the amount people spend on insurance. In addition, the demand for insurance is influenced by the general price level, prices of insurance services, the aversion to risk and the specific social and political features of a country.

From its works, it can be seen that the share of developing countries in world total insurance increased from 3.9 percent in 1988 to 4.5 percent in 1990. This increase is accompanied by contrasting performances in individual regions, sub regions and even countries. While Africa’s share declined by more than 23 percent mainly due to the decreasing premium volumes in the Northern African countries, the share of Asia grew by 26 percent mainly due to sharp growth in premium volumes in the Republic of Korea and in the ASEAN countries. Latin America’s share, after a sharp fall in 1989, recovered somewhat to its previous levels. Changes in premium volumes were generally in line with the economic performance of the different regions, sub-regions and countries.

UNCTAD observed that a high level of inflation is a factor of great concern to the insurance industry in a number of countries. Conditions of high inflation result in premium levels being depreciated in real terms and create numerous problems for insurance companies. Very high levels of inflation or hyperinflation may even render insurance inoperative in certain cases.

For example, in Argentina, where the economy was characterised in the last years of the 1980s by hyperinflation peaking at 200 percent a month in 1989, the value of insured properties could not be adjusted because there were no indexes that could predict price increases. In the motor insurance branch in 1989, despite the fact that policies were invoiced every four months, a car’s replacement value estimated a month before could not be used a month later as a reference to estimate the total loss value, since that value would have been less than 50 percent of a similar car’s actual price tag. As a consequence the premiums charged were insufficient.