Demand for Reinsurance and Solvency of Insurance Business in Nigeria: An Empirical Analysis

Abstract

The importance of reinsurance in the insurance business cycle cannot be overemphasized. The benefits of reinsurance include increased capacity, technical expertise, allocation of risks and limitation of financial distress. However, as an insurer gathers more underwriting experience, it is expected that less reinsurance is demanded. Hence, frequent demand may be a sign of insolvency because it simultaneously reduces the variability of cash flows and financial leverage. The purpose of this research is to investigate if the excessive use of reinsurance is an indication of insolvency in the Nigerian insurance industry. Using purposive sampling techniques, ten (10) general insurance companies were selected from forty-nine (49) operating in Nigeria. Returns on assets (ROA), Returns on equity (ROE) and size were used as indicators to measure the level of solvency while product diversification, claims ratio, combined ratio, reinsurance price, liquidity ratio and expense ratio were used as indicators to measure demand for reinsurance by primary insurers. The findings of the study reveal that there is significant relationship between the solvency and demand for reinsurance, though product diversification, combined ratio and reinsurance price are more significant than loss ratio, liquidity ratio and expense ratio. It is recommended that primary insurer should be more concerned about its concentrated business mix, combined ratio and the price (premium) of reinsurance.