IMPACT OF UNIVERSAL BANKING ON THE INSURANCE INDUSTRYA CASE STUDY OF SELECTED INSURANCE COMPANIES IN NIGERIA

ABSTRACT

Sometimes in 1999, some sector of the Banking Industry began to advocate the adoption of Universal Banking (UB).   As the argument for and against the introduction ranged on in conferences and workshops, the CBN had to succumb to the pressure from the proponents of Universal Banking by giving approval for the introduction of Universal Banking.   Fears have been expressed over the introductions of  Universal Banking.    These fears  appear to  be  harboured by insurance who hold the notion that Banks are only coming to disturb their seemingly exclusive business.  Some people, including the insurance experts have however, dismissed these fears, stressing that the phenomenon would rather boost Insurance business and make the practitioners sit up for real competitive insurance marketing and sales.  In the light of the above, this research work seek to look at the  Impact  of  Universal Banking on  the  Insurance Industry.    To  identify  the problem that could arise there from and  to  proffer solutions to  the  problem. Universal Banking is  a  multi-purpose banking which removes the  restrictions between commercial banking merchant banking, and insurance market such that a banking institution can offer integrated financial services in one stop centre.  The principal research instrument used is the questionnaire. The case study is the first ten insurance companies on the rating of the Nigeria Reinsurance Corporation of Insurance Companies in Nigeria, based on their asset base.  The study population consists of the management and senior staff of the case study.  Ten questionnaires were given to each of the case study making it a total population of 100 workers. Since the total population is known we used Bourley’s formular to determine the sample size of 80.  The data were analysed using likert scale statistical model. The hypotheses were tested using Z-score test.    The  result showed that Universal Banking will have tremendous positive impact on the insurance industry.   It is strongly believed that the introduction of Universal Banking is good to the bettered image of insurance industry in Nigeria. Universal Banking will improve the service delivery in the insurance industry.  The banks are popular, with banks transacting insurance business the insuring public will be rest assured of the settlement of their claims. The work equally showed that the long standing insurance unawareness in the country will be broken down by Universal Banking and Insurers will stand to gain more clients.

CHAPTER ONE

INTRODUCTION

1.1     Background of the study

In choosing any project, there must be the consideration of several factors, the most prominent of which should be the end-user value.  The need should have arisen for the user to look out for an external help, such need could be a more reliable and comprehensive information concerning Universal Banking system.

Ever since creation, there has been a continuous quest for man to improve his well being through his relations to the problems and challenges posed by his environment. Tools upon tools have been fashioned and defined by man to aid him in conquering these problems and challenges posed by  his over crowded and pressurized work and leisure environment.

In the developed countries of the world, the Universal Banking system has been operating for almost a decade now.  In Nigeria, it is a new innovation in the Banking and Insurance industries. Since January 1, 2001 when the central Bank of Nigeria  approved the  “Financial Supermarket” system,  merchant bankers  who fought and won the battle may have started counting their chicks even before they are hatched.   And it is expected that their fortunes will be enhanced soon after. Proprietors of merchant banks had complained that the unequal playing field in the

banking industry which had, over the years, tilted in favour of the Commercial Banks had been responsible for continued poor performance of their outfit.  This is even so when it is on record that some merchant banks post a lot more profit than the commercial banks.

The  news  of  Universal  Banking  ha  caused  some  uneasiness  in  some quarters, notably, the Insurance industry.  Although the proponents of government policies  and  the  promoters  of  universal  banking  have  assured  the  insurance industry that they have nothing to worry about.  However, it does not really accord with sound reasoning that the insurance industry will remain the same after the introduction of Universal Banking (Nwite 2004).

The full impact of Universal Banking on insurance remains a matter of conjecture since the policy has just been newly introduced in Nigeria.  Scarcity of detailed  information  on  Universal  Banking  has  not  really  helped  matters. However,  a  report  on  universal  banking  has  to  do  with  the  dismantling  of functional barriers in the financial service delivery thereby granting each bank the right to decide to engage in any financial service from a wide range of service such as accepting deposit, lending, trading in financial instruments, foreign exchange transactions, underwriting of debts, equity issues brokerage, investment management and insurance.   In order words, a bank can be a jack of all trade

(financial services) whatever effect this will have on the banking industry is up to bankers to appraise. What bothers the researcher and warranted this write up is the need for us to be told what impact Universal Banking will have on the insurance profession and industry.

Take the often recycled arguments that are anchored on banks increased capital base for insurance. It has often been said that Universal Banking is the only way by which the huge capital investment of the banks could be justified.  This will make sense if we fail to remember that the N500m capital base was considered the minimum for a bank to carry out the present functions they are performing.  It was felt that the capital base of the banks were too small in comparison to the total deposits that they receive from the public.  But now that they have increased their capital base to N25b it will no longer form a negligible ratio of the total deposit that they receive from the members of the public.  The current capital base is the minimum they should hold to carry on with their present specialist banking services.   Bankers have boasted that their huge capital base will boost public confidence in insurance.   No insurance literate person will wait for bankers to engage  in  insurance  before  having  confidence  in  the  efficacy  of  insurance products.

Having shown reservation on the bankers’ capital base and globalization as

justification  for  dabbling  into  insurance  now  to  highlight  the  likely  impact Universal Banking may have on the insurance industry.   Before now, bankers provide mainly agency services to the insurance companies or in the alternative incorporate insurance underwriting or brokerage firms to provide insurance services.  With Universal Banking however, bankers are expected to be licensed providing some or all of the following insurance services:

   Acts as insurance broker

   Provide insurance or reinsurance protection

A combination of the above two functions then bankers are not likely to increase  the  volume  of  insurance  business  by  breaking  new  grounds  and introducing hitherto uninsured risks.  There is hardly any “Marketing music” that they will play which insurance marketers are not already playing in their attempt to foster insurance culture on Nigerian who are overwhelmingly insurance averse. This will only mean that bankers will swell the number of the people chasing the few available insurable risks.  This will surely exacerbate the problem of unethical practices which has been the bane of insurance development in Nigeria.

The second envisaged problem is that bankers will take advantage of their vantage position with the insured to poach on the customers of currently existing insurance firms.   This in the long run will lead to the edging out of insurance

brokers in the brokerage business.   If we consider that insurance intermediaries control to a large extent the insurance practices of any insurance market, then we can easily foresee the relegation of the insurance industry in the financial sub- sector of our economy in the near future.

The bankers surely have higher capital base but they cannot boast of better insurance technical expertise.   Their only source of such expertise will be the insurance industry.   Again, if we reckon with the fact that an employee in the banking industry is better remunerated than his counterpart in the insurance industry, we can then foresee drain in the insurance industry if Universal Banking is implemented.  However, if the only thing that will force the insurance industry to dispense with her below poverty line remuneration structure is Universal Banking, then there is nothing one can do but to accept it.

The fear is that Universal Banking may be a void attempt by banks to finally swallow up the insurance industry in Nigeria.  It does not matter whether or not a single bank provides commercial, merchant, investment, and any other purely banking services.  Perhaps, this will enable ordinary Nigerians to qualify for bank loans and similar services that are currently the exclusive preserve of the rich and mighty in the society.

No doubt, there is the challenge for the insurance industry to rise to the

realities of our time (Chizea 2000).   As it is, the industry does not seem to be prepared to do business in the twenty-first century.  An industry where people are not serious about the needs to deal decisively with the unprecedented level of unprofessional practices cannot be taken seriously.  How do we expect to remain relevant in future with the lean capital base and poor remuneration structure as present in the industry today? (Dodo 2000).   All over the world, the financial strength of an insurance company increases with years.  In order words, the older the company, the better its performances.

No one can say with all sincerity of purpose, that this is the case in Nigeria were many old companies just managed to meet the minimum capital requirements while others sold off their licence to new companies as they could not measure up. This should not be the case where companies are making adequate reserves.   It goes on to show poor resource management of these companies.  The government cannot continue to shoulder the responsibilities of such companies forever.   If insurance industry choose to indulge in self delusion that all is well, when all is not actually well, they should have themselves to blame, if their services are taken over by a more dynamic industry Ezeano (2005).

1.2     Guidelines on Universal Banking

One must commend NICOM and the Sub-committee on insurance for their

input in ensuring that if banks must take incursion into the insurance industry, they should do so through clearly spelt out guidelines which will guide the operators and protect consumers.  Even though there were guidelines on banking, generally, this work shall focus specifically on the guidelines on insurance activities as issued by central bank of Nigeria in its Universal Banking Guidelines of 22nd December, 2000.

i.        All insurance activities wherever they occur shall be licensed and regulated by NAICOM and subject to provisions of Insurance Decree of 1997 or such other insurance laws as may be enacted;

ii.       An  insurance subsidiary of a  bank shall comply with the  capitalization required under the Insurance Decree No. 2 of 1997 and any subsequent amendments;

iii.      An insurance policy should not be rejected solely because the policy has been issued or underwritten by a person not associated with the bank when such insurance is required in connection with a loan or extension of credit;

iv.      A bank shall nto use health information obtained from the insurance records of customers for any purpose without the customer’s consent except for activities as licensed in insurance agent or brokers;

v.       A debtor insurer, or  insurance agent or broker must not pay a separate

charge for the handling of insurance that is required in connection with a loan  unless  such  is  required  when  the  bank’s  affiliate  is  the  licensed insurance agent or broker providing the insurance;

vi.      There should be no payment or receipt of any commission or brokerage fee for services as broker or agent unless such a person is properly licensed by NAICOM;

vii.     A bank shall not release any insurance information about a customer to any person other than an employee, subsidiary of affiliate of a bank for the purpose  of  soliciting  or  selling  insurance  without  the  consent  of  the customer;

viii.    A bank shall not insist on extension of credit on the condition that the customer obtains insurance from the bank’s affiliate or associate of a particular insurer, agent or broker but must inform the customer that insurance is required in order to obtain a loan and that approval of a loan is contingent upon the customer obtaining insurance, or that insurance is available from the institution.

1.3     Universal Banking and the Insurance Industry

A critical look at these guidelines brings us to the thrust of this work, that is, The Impact of Universal Banking on the Insurance Industry.  From the guidelines,

it can be seen that banks can engage in practically all insurance services.  This is not to go on without some checks.  The implication is that the current seventy one (71) registered insurance companies will be joined by about 30 registered banks that survived the N25b capitalization giving total of one hundred and one (101). This is what some termed “Bank Assurance” to chase the business.

The  effect  of  bank  incursion  into  insurance  industry through  Universal Banking can be better appreciated when we note that the Nigerian economy has not really  grown  in  recent  years.    Even  though  some  argue  that  the  advent  of democracy has created conducive and enabling environment for macro-economic growth, the effects are yet to be manifest.  Okafor (2006) said that the incursion of banks into insurance may spell doom for the insurance industry in various areas if they do not sit up.  The areas are:

1.3.1  Capital Base

I see banks move into insurance with stronger capital base and therefore, better to assume larger risks.  Universal Banking with its attendant liberalization may bring in even bigger and stronger international conglomerates to compete with the insurance industry; therefore, the market share of large insurance companies that have lost their focus may dwindle.  Some insurance companies without strong asset base will definitely go into extinction.

1.3.2  Manpower Flight

Because the banks are moving into specialize field of insurance for which they do  nto  immediately have the skill and competence to  manage, they will naturally poach into the insurance industry for manpower in this specialized area. Professional and qualified stall will thus be lured with bigger and better packages often offered in the banks.

Expectedly, the insurance and brokers have vehemently opposed Universal Banking because of obvious fears.  They argue that if a bank is allowed to own an insurance company, a broking firm and or  lost adjusting firm, the customer’s protection and freedom may not be guaranteed and that banks may make issuing of credit conditional to the extent that such credit must be insured with their insurance company and possibly through broken firm.

1.4     Statement of Problem

Sometimes in 1999, some sectors of the Banking Industry began to advocate the adoption of Universal Banking.   Initially, the forefront proponents were Merchant Bankers that felt restricted by legislation from engaging in commercial banking.   They felt Universal Banking will create a level playing field that will enable them receive deposits and ultimately make more profit.   Soon the whole financial industry got engulfed in the controversy over Universal Banking, thus

dividing the financial industry into two camps.

On one hand, there were the banks that hinged their clamour for Universal Banking on global financial liberalization in which Nigeria could not afford to be left out.  They cited examples from all over the world were Universal Banking had been adopted successfully.  They include such places as United States of America, Germany, South Africa, United Kingdom, Kenya and Zambia (Orjih 2005).

On the other hand were the practitioners who felt threatened by the introduction of the new system.  They argued that Universal Banking will enable banking to encroach on the insurance industry to the detriment of the practitioners. As the arguments, for and against the introduction raged on in conference and workshops, the Central Bank of Nigeria had to yield to the pressure from the proponents of Universal Banking by giving approval in principle in the first quarter of 1999 for its adoption.

Fears  have  been expressed over  the  introduction of  Universal Banking. These fears appear to be harboured by insurance who hold the notion that banks are only coming to disturb their seemingly exclusive business.   Some people, including the insurance experts have however, dismissed these fears, stressing that the phenomenon would rather boost Insurance business and make the practitioners sit up for real competitive insurance marketing and sales.  In the light of the above,

it is the intention of this work, while dismissing these fears, to urge the insurance industry to  cooperate with banks  and  look  at  the  ways  of  improved product diversification to satisfy the yearning of the insuring public.

1.5     Objective of the Study

The objective of this research work into Universal Banking system is as follows:

1.      To find out whether the introduction of Universal Banking has any effect on the insurance industry;

2.       To find out the Impact of Universal Banking on the Nigerian Insurance

Industry;

3.       To  identify  the  expected  problems  that  will  arise  from  the  Universal

Banking;

1.6     Relevant Research Questions

In order to determine the various implications of Universal Banking system, this research work will consider the following research questions;

1.      To  what  extent  does  the  introduction  of  Universal  Banking  influence workers’ performances in the insurance industry?

2.      To what extent does the Universal Banking influence the general output of insurance company?

3.      What  are  the  possible  problems  Universal  Banking  will  cause  to  the insurance industry?

1.7     Formulation of Hypotheses

Ho:   There  is  no  significant  impact  of  Universal  Banking  on  the  insurance industry

Ho:   There will be no control of banking industry over insurance industry under

Universal Banking

Ho:   Universal Banking will not improve the service delivery of the insurance industry.

1.8     Scope of the study

The topic under study covers Nigeria as a whole, but due to time, financial and proximity constraints, going round the country to get the whole facts needed was not possible rather the researcher was limited to quite a number of places that were found very useful.

The research materials were gotten from Textbooks, Magazines, Journals, Seminar papers from different libraries across the country and websites.   Some staff of insurance companies were not willing to cooperate.  Some have no idea what Universal Banking is all about. Most of them found it very reluctant to disclose  certain  information.    This,  no  doubt  hindered  getting  the  necessary

information needed.

1.9     Limitations of the study

In carrying out this research work, the researcher was faced with certain problems which include the following:

1.      Time:  Time constraints, as a student researcher, the problem of trying to keep up with lectures and at the same time running around for the collection of necessary information for the completion of this research work.

2.      Money:  The cost incurred in carrying out this study is very high in terms of transportation, photocopying and internet browsing.

3.      Corporation:        Most of them found it very reluctant to disclose certain information. Some have no idea what Universal Banking is all about so they cannot offer any reasonable information.

1.10   Definition of Terms

In the context of this research work, the terms under listed would have the meaning(s) stated against them.

1.       Academic Load:    This is the load of work piled up for students.

2.      Capital:       The firm’s finances or funds are known as its capital.   It is t he key resource in business, one factor of production.   Capital is needed   to  acquire  the  other  resources  like  land,  building,  plant  and

machinery, raw materials and labour. It is the total amount paid up on all the classes of shares of a company.

3.      Deposit:      It is money paid or given for safe keeping.  Deposit money is “created” by the commercial banking system.   Customers deposit money with  banks  and  banks  give  a  promise  to  pay  on  demand  the  amount deposited by the customers.   The funds which customers deposit in these accounts can be used by the banks to create loans to other customers of the bank.

4.       Insurance Company: Company where insurance business is transacted.

5.      Investment:    Can be defined as an expenditure of money for income or profit. It may also mean the purchase of something of intrinsic value such as common stocks from the capital market, properties, painting or jewelry. Investment may also involve he commitment of fund with a view to minimizing risk and safeguarding capital earning or return.

6.      Merchant Bank:    Bank specialized in trade, sometimes known as accepting houses.

7.      Minimum Capital: The least money that has to be raised to purchase the real capital for starting up the business.

8.       System:        A  group  of  separate  pieces  or  units  working together  to  a

common goal.

9.      Universal Banking: One  stop shop or  financial supermarket.   Universal Banking is a combination of commercial banking, investment banking and various other activities including insurance.   If specialized banking is one end universal banking is the other.   This is  most common in European countries.

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