CHAPTER ONE

INTRODUCTION

1.1            BACKGROUND OF THE STUDY

Insurance is a safe-guard against risks. Any device aimed at reducing the chances of a risk occurring, when it happens, reducing the extent of its damage and providing the affected persons with compensation is a form of insurance. Insurance as a contract is between two parties where one party called the insurer undertakes to pay the other party called the insured a fixed amount of money in the occurrence of a specified insured event.

Obasi (2010) defines it as “a contract between the person who buys insurance and an insurance company who sold the policy”. He opined that “by entering into the contract, the insurance company agrees to pay the policy holder or his family members a predetermined sum of money in case of any unfortunate event for a predetermined fixed sum payable which is in normal term called insurance premiums”. The types of insurance products available in Nigeria include, motor insurance; general accident insurance; fire insurance; marine, aviation and transit insurance; life insurance; oil and gas insurance; health insurance; among others.

Insurance industry is generally seen as the backbone of any country’s economy, since it ensures financial security, serves as an important component in the financial intermediation chain, and offers a ready source of long term capital for infrastructural projects.

Babalola (2008) argues that the insurance industry “mitigates the impacts of risks and positively correlates to growth as entrepreneurs cover their exposures, otherwise risk-taking abilities are hampered”.

Insurance also promotes the growth of businesses both small and large as it provides stability by allowing them operate effectively as they are secured in knowing they have financial security should their business encounter loss. Insurance is also very important to the financial system. In collecting relatively small amount called premium from the insured in the economy, insurers are able to pull together a large pool of funds that could be invested for short and long term periods (Obasi, 2010). Such long-term funding of the economy is very critical for economic growth, and in deepening and broadening of the domestic financial system.

Thus, a strong and competitive insurance industry is a compelling imperative for Nigeria’s economic development and growth due to the fact that the country has a considerable high level of rural population, a good proportion of which are either illiterate or with very low-levels of basic education. Years of misgovernance has straddled it with poor infrastructure and poverty (Osaghae, 2005). There are risks of potential abuse, low level awareness, poor market penetration, low operating capital as well as low capacity for retention and acceptance of foreign risks (Daniels, 2008). In this context, supervision and control of the country’s insurance sector is perhaps regarded as a sine qua non for the conduct of insurance business, and certainly so, in an age of regulation even if governments cannot (and should not) regulate everything (Scott, 2008), the context of a developing country with poor infrastructure informs the need for a strong regulatory regime for insurance business considering its high-abuse potential mentioned earlier. The challenge of course is how to ensure the institution of an appropriate and adequate system of supervision and control.