CHAPTER ONE INTRODUCTION 1.1     BACKGROUND OF THE STUDY

Section 52 of the Insurance Act 2003 provides that there is to be a rating committee which will handle all matters connected with Insurances that are compulsory in Nigeria. These compulsory insurances are two: workmen compensation and motor insurance. For the purpose of this work, we will be dwelling on the motor insurance which has to do with the ethical aspect of ensuring motor underwriting and the role of Nigeria Insurance Association (NIA).

This Rating Committee comprises of the National Insurance Commission (NAICOM) which is the regulatory body of Insurance Industry and Nigeria Insurance Association (NIA) which serves as an umbrella organization representing the Insurance Industry.

The rating committee has produced a tariff to be used by all Insurance Companies transacting motor insurance business in Nigeria; of which all insurers are expected to comply or adhere with this tariff.

Tariff gives the following: the rate of premium to be charged for different classes of insurance; the commission to be paid for different classes of insurance; uniformity in the terms, exceptions and conditions of the policy.

The ethical practices in underwriting means that every insurer must be charge the same premium for the same vehicle. The main ethical problem with motor underwriting is undercutting of the approved rates by some insurance companies. They charge a lower price in other to get more business patronage from the insuring public. For this cause there has been an insistent of an ethical practice in motor insurance underwriting. This is illustrated by the experience of the vehicle versus general insurance company limited in Britain in 1971.

Vehicle insurance (also known as, GAP insurance, car insurance or motor insurance) is insurance purchased for cars, trucks, motorcycles, and other road vehicles. Its primary use is to provide financial protection against physical damage and/or bodily injury resulting from traffic collisions and against liability that could also arise there form. The specific terms of vehicle insurance vary with legal regulations in each region. To a lesser degree vehicle insurance may additionally offer financial protection against theft of the vehicle and possibly damage to the vehicle, sustained things other than traffic collisions.

Vehicles that are commonly considered luxury automobiles usually carry more expensive physical damage premiums because they are more expensive to replace (Ismail, 2007). Vehicles that can be classified as high performance autos will carry higher premiums generally because there is greater opportunity for risky driving behavior (Haberman, 1996). Motor vehicles insurance may carry lower property damage premiums because the risk of damage to other vehicles is minimal, yet have higher liability or personal injury premiums, because motor vehicles drivers face difference physical risks while on the road lawless, (1984).

The legal consequence in motor insurance material facts include (but not limited) to the age of the driver, his/her physical condition, occupation, where the vehicle is kept at night, over the past years, motor insurers have been facing growing completion from in and outside the industry (e.g, car manufacturers, automobile clubs) (Kaeslin and El Hae 2008) . Together with a growing pricing pressure on insurance premiums, their combined ratio increased from 94.5% in 2004 to 101.6% in 2008 (GDV 2009). At the same time, motor insurance is the class of business with by far the largest volumes within property and casualty insurance with a total of 20.4 billion Eurors in premiums (German market in 2008).

However, demand for motor insurance is dependent on perception of some hazard which valuation of motor risks. These perceived risks can be financial, psychological, performance or time risks (Nelder, 1992). This had led to some people to understand risk as if no hazard exists while other rate a low – probability risk which equal to more frequent exposure. Moreover, laws of each country also influence how road users perceive risk and its subsequent demand (Ismail, 2006).

The rating of motor, fire and workmen’s compensation insurance in many countries is governed by their respective traffic formulated by Persatuan insurance Am Malaysia (PIAM) (Malaysian Insurance Institute 2001).

Statistical pricing in non – life insurance system essentially requires estimate made of two important element; the probabilities associated with the occurrence of insured events namely severity.

Estimates of claim frequency and severity are usually estimated through the use of past experience of groups of similar risk characteristics known as risk classification (Ismail, 2007).

1.2     STATEMENT OF THE PROBLEM

It has been observed that motor insurance practice in Nigeria is devoid of ethical orientation, as many firms do not have code of ethics that govern their operations. Second, the widespread unethical practices like rate cutting, premium loading, overriding commission, premium purchase, under-indemnity, (Soares, 2004), (Irukwu, 2009) also bear testimony to lack of ethical behaviour in Nigeria insurance business practice.

Recognizing the fact the ethical business relationship with stakeholders builds customer value and profitability through several competitive advantages such as customer loyalty and retention, product quality, efficiency in operations, insurance in Nigeria would perform outstandingly better, if she is ethically oriented. Although there are still some companies who believe that unethical business practices will not be discovered, or even when discovered it will not harm their business standing, there are still good reasons while service organizations should be concerned about their ethical reputations. First, business relations and operations affect its stakeholders. In service organization any company that is not trusted by its employees, customers, suppliers and other associates, would gradually and steadily decline in both growth and financial performance in the long term. Second, every business action has a trajectory effect – ethical or unethical. Continual unethical practices could lead to government intervention and regulations which will be more problematic than self-policing in the first place (McMurrian and Matulich, 2006).

Motor insurance as a strategic business activity in Nigerian developing economy, much bottlenecks have been identified as responsible for its poor performance and growth. Some identified problems affecting the business as revealed by past researchers, include ethical issue, poor premium collection; solvency problem/low liquidity, lack of standards, absence of government, poor management, low level of information technology, lack of integrity/trust, attitudes of Nigerians as towards insurance services, lack of innovation, (Akinbola, 2010).

It is as a result of this background that this study is designed to evaluate the role the Nigeria Insurance Association in ensuring ethical motor insurance underwriting. Our focus is directed on some selected insurance firms in Port Harcourt.

1.3     OBJECTIVE OF THE STUDY

The main objective of this study is to determine the role of Nigeria Insurer Association (NIA) in ensuring ethical motor insurance underwriting. The specific objectives are:

1. To determine the credibility premium chargeable for every event of loss and in turn provide an alternative to the rate pricing technique.
2. To study Nigerianethical insurance strategy vis-à-vis the strategies that are used world-wide.
3. To understand the insurance operations of other jurisdictions.
4. To provide viable solutions to the insurance questions in the Nigerian insurance industry.

1.4     RESEARCH QUESTIONS

The following research questions are posed to guide this study.

1. What is the credibility premium chargeable for every event of loss and the alternative to the rate pricing technique?
2. What are the Nigerian ethical insurance strategy and the ones that are used world-wide?
3. What are the insurance operations of other jurisdictions?
4. What are the solutions to the insurance questions in the Nigerian insurance industry?

1.5     RESEARCH HYPOTHESES

H01: Nigeria Insurer Association (NIA) does not play a critical role in ensuring ethical motor insurance underwriting.

H02: There is no credibility premium chargeable for every event of loss.

1.6     SIGNIFICANCE OF THE STUDY

This study is important to the Insurance Regulatory Authority as it shows the benefit of ensuring ethical motor insurance underwriting as compared to the unethical method. The study attempts to curb the challenge of under-reserving that has been experienced in the recent past in the insurance industry. It enhances adequate reserving measures such that the claims can be paid whilst insurance companies adhere to the solvency requirements.

Adequately priced insurance products will also benefit the insurance industry in terms of unwarranted and unhealthy competition. The insurance companies will also be able to cover risks of which they can be able to afford and pay in case of a claim. This should be done without the company going under.

1.7     SCOPE AND LIMITATIONS OF THE STUDY

This study builds up the small body of research findings available on ensuring Ethical Motor Insurance Underwriting using insurancefirms in Port Harcourt as a survey study. The selected insurance firms areAnchor Insurance Company Ltd, Ark Insurance Brokers and Fin Insurance Company Ltd.

Every research work has some limitations that can affect the overall research activities and research report. Throughout the research work these are the following constraints experienced by the researcher;

1. Time Factor: The researcher had limited time to complete the research project. Combining lectures hours with the research work is indeed time demanding.
2. Financial Constraints: The researcher had limited resources that in some cases affected the overall completion of the research work.
3. Unavailability of some of the research materials and unfriendly attitude of some of the respondents.

1.8     DEFINITION OF TERMS

Role: The function or position that somebody has or is expected to have in an organization, in society or in a relationship.

Ethics:Moral principles that control or influence a person’s or organization’s behavior. It is connected with beliefs and principles about what is right and wrong.

Insurance:A means of protection from financial loss.

Underwriting:The function of evaluating the subject of insurance,whether a person, property, profession, business, or other entity, and determining whether to insure it.

Motor Insurance:This is the minimum insurance that owners of motor vehicles plying Nigerian Roads are required to have.

Nigeria Insurer Association:An umbrella organization for all insurance companies in Nigeria.