Financial Consolidation and Financial Performance of Insurance

Companies in Nigeria

ISHOLA RUFUS AKINTOYE1, CHARLES OGBOI2, PETER IFEANYI OGBEBOR2,

OLUROTIMI OGUNWALE2

1Accounting Department,

Babcock University,

Ilishan-Remo,

NIGERIA

2Finance Department,

Babcock University,

Ilishan-Remo,

NIGERIA

Abstract: - The research investigated the effect financial consolidation has on the performance of Nigerian

insurance firms covering the period 2011 to 2022 utilizing the feasible generalized least squares (FGLS) on

selected five insurance organizations. Key variables used in the analysis included financial consolidation

measured by merger and acquisition (M&A), Herfindahl-Hirschman index (HHI), and concentration

underwriting capacity (CUC), while performance was captured by equity return (ROE). Findings revealed that

M&A and HHI both positively and significantly affect ROE. However, CUC had positively insignificant effect

on ROE. The study then recommended that policymakers and industry stakeholders should focus on improving

financial consolidation to support economic growth and improve firm-level performance.

Key-Words: - Insurance Company, Financial Consolidation, Return on Equity, Merger and Acquisition,

Herfindahl-Hirschman index, Concentration Underwriting Capacity, Feasible Generalized Least

Squares.

Received: October 13, 2023. Revised: May 7, 2024. Accepted: June 8, 2024. Published: July 5, 2024.

1 Introduction

The insurance firm is of significant importance due

to its role in risk management, economic stability,

and social welfare. It gives room for people to

transfer any burden or potential losses to them,

reducing their exposure to various risks. By pooling

risks and sharing losses, insurance promotes

economic stability and confidence in investment

activities, [1]. Hence, investors, policymakers, and

individuals closely monitor their productivity to

improve risk management strategies, ensure

economic stability, and enhance overall

performance. Despite this, it has been observed that

the Nigerian insurance firms’ performance has been

low; impediments have been created due to low

efficiency, as reflected in a decline in return on

investment, plus contracting net profit margin, [2].

These collectively indicated a decline in both

consolidation and institutional efficiency within the

industry, impacting its overall performance.

Globally, research attention has been drawn to

insurance firms due to their substantial impact on

various aspects of the economy, as well as their

significance for individuals and businesses alike,

[3]. Insurance companies provide individuals and

businesses with a mechanism to manage and

mitigate risks. By purchasing insurance policies,

individuals transfer the burden to such insurance

organizations, which helps provide financial

security in case of unforeseen events, [4]. However,

there have been several challenges and trends in the

insurance industry that have influenced its

performance and operations. Customers'

expectations have evolved with the rise of digital

experiences in other industries. They now demand

personalized, convenient, and seamless insurance

services. Insurers are investing in digital platforms

and mobile apps to provide self-service options,

simplify claims processes, and enhance customer

experiences, [5].

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Peter Ifeanyi Ogbebor, Olurotimi Ogunwale

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The distinction between advanced and emerging

markets is evident in their respective performance,

with the latter surpassing the former. In the first half

of 2022, the United States experienced a lower

annual real GDP growth rate of 2% compared to the

euro area's 4%, [6]. Despite the adversities

presented by the conflict in Ukraine and the energy

crisis, the euro area showed resilience and sustained

positive real economic growth for the year 2022.

According to [7], India has shown exceptional

performance within the context of major developing

countries, with a noteworthy real GDP growth rate

of 7%. This growth rate surpasses that of China

(3%) and Brazil (3%). The primary factor

contributing to this accomplishment may be

attributed to the release of pent-up domestic demand

after the reopening phase after the COVID-19

pandemic. China saw limited growth (3%) as a

result of stringent measures implemented to combat

the COVID-19 pandemic while Russia's GDP

declined by 3% owing to the imposition of sanctions

and other economic consequences stemming from

the conflict in Ukraine, [8].

The 2020 pandemic effect on global insurance

markets was milder than initially expected. While

the global economy shrank by 3.3%, direct

insurance premiums saw a smaller decline of 2.1%.

This led to a slight uptick in the global insurance

penetration rate, which increased from 7.2% in 2019

to 7.4% in 2020, [9]. In Africa, a similar trend

emerged, with insurance premiums growing at a

slower pace than the GDP in 2020, decreasing by

2.9% while the economy contracted by 2.1%. This

decline had the effect of reducing Africa's insurance

entrance from 2.78% in 2019 to 2.6% in 2020.

Notably, Africa's reinsurance market continued to

perform relatively well, surpassing primary

insurance markets, primarily due to its competitive

reinsurance capacity, as highlighted by [10].

1.1 Research Problem Statement

In 2020, Nigeria experienced a 3.0% contraction in

GDP due to declining oil prices and the depreciation

of the Nigerian naira against the US dollar. In

contrast, Egypt, another oil-exporting African

country like Nigeria, achieved a 3.6% growth in

2020, [11]. South Africa, once the largest economy

on the continent, ranked third in 2020 and reported

an 8.2% GDP decline due to falling prices for

metals and minerals and the further depreciation of

the South African rand against the US dollar, [12].

The African insurance markets displayed varying

premium volumes in 2020. South Africa, the largest

insurance market on the continent, still contributing

nearly 68% of total premiums, reported a 3.4%

decline in premium volumes when adjusted for

inflation as the market contracted, and the rand

depreciated considerably. Morocco, the second-

largest insurance market in Africa, increased its

premiums by 7.3%. However, Nigeria, the

continent's fifth-largest market, witnessed the most

substantial contraction in 2020, with total premiums

decreasing by 14.8%; Kenya's premiums decreased

by 2.5% while Egypt exhibited remarkable

performance with growth of nearly 9%, adjusted for

inflation, [13].

The Nigerian insurance industry faces a myriad

of real-time challenges that warrant a

comprehensive study of the effect of consolidation

components on the performance of insurance

organizations within the nation. The Nigerian

insurance industry's market share in the gross

domestic product (GDP) has experienced a

noticeable decline. The year 2020 witnessed the

sector contributing 0.5% of the nation's GDP, a

figure that has since dwindled to 0.4% by 2023,

[14]. The trimming down displayed the problems of

sectoral development.

Inadequate adherence to regulatory standards

poses operational and reputational risks. Claims

processing inefficiencies result in delayed and

inaccurate claim settlements, further denting

customer trust and satisfaction, [15]. Effective risk

management remains a challenge for the insurance

industry, potentially leading to unanticipated losses

and financial instability, [16].

2 Theoretical Framework of Agency

Theory

The assumptions of agency theory underpin the

understanding of the relationship between principals

(shareholders) and agents (management), [17]. The

theory assumes that individuals, whether

shareholders or management, act in their self-

interest, [18]. Shareholders seek to maximize their

wealth, while managers aim to achieve their

objectives, such as job security, power, and financial

rewards. However, this conflict of interest always

leads to the ultimate goal of profit maximization,

[19]. The theory argued that managers charged with

running corporations will need to do everything

possible to boost the performance of the company

and satisfy their principal, [20], hence the need for

the separation of the office of the chief executive

officer (agent) and that of the chairman of the board

(principal), [21]. The theory believed equity holders

will have their investments better secured and would

want better performance when separate individuals

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hold both positions. The separation of the two

offices provides a monitoring device for the equity

owners and this boosts performance, [22].

The theory assumes that agents and principals

have different objectives and goals. For example,

shareholders primarily seek to maximize

shareholder value and returns, while managers may

have alternative goals, such as job security or

empire-building, [23]. These divergent goals would

boost profitability but can lead to agency problems.

Agency theory suggests that the relationship

between shareholders and management is not

without costs. These agency costs can include

monitoring costs (such as financial audits and

oversight), bonding costs (like performance bonds),

and residual loss (losses incurred due to agency

problems), [24]. In the context of insurance

companies, the effectiveness of agency theory is

contingent on understanding and addressing these

assumptions to ensure that shareholders and

management's interests are aligned, ultimately

impacting company performance, [25].

One weakness of the theory was that agency

theory postulated that there would be some

disagreements and suspicion between two parties,

[26]. This threat arises due to variances in

incentives. Principals (shareholders) believe that

agents (directors) will act in their selfish interest

because they have different preferences, [27].

Agency cost is the cost that is sacrificed by equity

owners, to ensure that the agents (executives) work

in the best interest of their principals. It is a means

by which the principal ensures that their investment

is protected from exploitation by agents, charged

with running the corporation, [28].

In the context of insurance companies, the

effectiveness of Agency Theory is contingent on

understanding and addressing these assumptions to

ensure that shareholders and management's interests

are aligned, ultimately impacting company

performance, [29].

2.1 Empirical Framework

[1], the study indicated that the consolidation

dimension had an important and favorable effect on

performance.

[2], revealed that the consolidation dimension had a

negative but significant effect on the after-tax profit

of insurance firms.

[4], stated that the consolidation dimension had a

positive influence on insurance firm performance.

Furthermore, [13], showed that consolidation

dimension had a significant influence on the before-

tax profit of insurance firms.

[5], collaboratively opined that the consolidation

dimension had a negative but beneficial influence

on the net income margin of insurance firms.

[8], indicated that mergers and acquisitions have a

positive impact on the profitability of insurance

firms in Spain. M&A activities are associated with

improvements in return on assets (ROA) and return

on equity (ROE), indicating enhanced profitability

after the occurrence of M&A transactions.

[30], examined whether or not Mergers and

acquisitions, affect Corporate Financial

Performance of financial technology inclined quoted

insurance companies in Nigeria using multiple

regression analysis. Results of the research showed

a positive impact of M&A on the financial

performance of quoted insurance firms in Nigeria.

The study failed to explore potential challenges or

limitations associated with consolidation in the

Nigerian insurance industry.

[31], study findings indicated that mergers and

acquisitions (M & A) have a positive impact on the

financial performance of Nigerian banks.

[32], the study found out that the consolidation

dimension had a positive and significant influence

on the asset returns of major insurance firms.

[33], study reveals that mergers and acquisitions

have a positive effect on the financial performance

of agricultural companies.

3 Methodology

This research utilized five insurance firms quoted on

the Nigerian capital market and included

Axamansard Insurance Plc, Custodian and Allied

Plc, Great Nigeria Insurance Plc, Law Union, and

Rock Ins. Plc, and Veritas Kapital Assurance Plc.

Secondary panel data was used for the study and

covered twelve (12) years which lags between 2011

and 2022 for the five selected Nigerian insurance

firms, during which the insurance sector in Nigeria

experienced significant consolidation. The data will

be collected from the Nigerian Insurance

Commission (NIC) and the Nigeria Exchange Group

(NGX) databases. The sourced data would be

estimated using the panel data regression.

3.1 Model Specification

The study model was adapted and modified from the

study of [34] and its explicit form was:

0 1 2 3 1it it it it t

ROE MA HHI CUC

    

    

(3.1)

Where:

The dependent variable was equity return (ROE)

The proxies for financial consolidation are:

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Ishola Rufus Akintoye, Charles Ogboi,

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Merger and acquisition (M&A)

Herfindahl-Hirschman index (HHI)

Concentration underwriting capacity (CUC),

β0 is the intercept for model 3.1

β1 to β3 are the parameters estimating each

independent variable



captures the error term;

represents the

individual insurance companies and

denotes years

4 Data Analyses and Interpretation

4.1 Panel Unit Root Test

It was utilized to test for the data stationarity, [35],

[36]. The unit root utilized was the Levin, Lin, and

Chu (LLC). In the unit root results in Table 1, it can

be seen that all variables were level stationary.

Table 1. Panel Stationary Test

LLC

Variable

I(0)

I(1)

ROE

-3.4349***

-2.2544**

-4.8226***

2.9989

HHI

-4.9256***

-3.2456 **

CUC

-5.3157***

-3.5308**

NB: ** Significant at 5%; *** Significant at 1%.

4.2 Hypothesis Testing

Pesaran CSD test showed F-statistic = -1.017 and

prob = 0.309> 0.05 dictating the evidence of cross-

sectional independence among the independent

variables. On the choice of estimation between OLS

and FEM, the testparm had F-statistic = 8.77 and

prob = 0.00 < 0.05, indicating preference for Fixed

effect model (FEM), while Breusch-Pagan LM test

with chi-square = 0.00 and prob = 1.000 >0.05

favored random effect model (REM) as the

preferred estimator. Also, the Hausman test result

was used to decide between FEM and REM has chi-

square = 7.84 and prob = 0.049< 0.05, indicating a

preference for FEM as the appropriate estimator.

However, the Modified Wald Test for

Heteroskedasticity shows chi-square was 36.40 with

0.000 probability value signaling heteroscedasticity.

Also, the Woodridge Test for Autocorrelation shows

an F-statistic of 0.281 and prob. of 0.045< 0.05

indicating serial correlation or autocorrelation.

Sequel to the stated diagnostic test results, the

Feasible Generalised Least Squares (FGLS) is

considered appropriate for interpretation and

hypothesis testing to achieve objective one because

it can simultaneously handle heteroscedasticity and

serial correlation issues present in the model.

Table 2. Regression Result

DV:

roe

Variables

OLS

FEM

REM

FGLS

Constant

-1.7560

(1.7068)

-0.4966

(3.8341)

-1.7560

(1.7068

)

-1.9735

(1.4918

)

2.7403***

(0.9452)

4.1924**

(1.1156)

2.7403*

(0.9452

)

2.5283*

(0.9596

)

hhi

1.1020***

(1.6162)

0.8210

(0.5955)

1.1020*

(0.1616

)

1.0909*

(0.2071

)

cuc

0.0194

(0.1422)

-0.0023

(0.0167)

0.0194

(0.0142

)

0.0210

(0.0185

)

Observations

Numbers of

R-squared

0.6627

0.7320

0.6627

0.8057

Adjusted R-

squared

0.6446

0.6960

0.6446

0.7796

F-statistics

(prob)

36.67(0.0

00)

8.77(0.0

00)

110.02(

0.000)

74.34(0

.000)

Pesaran CSD

Test

F (4,52) :

-1.017

Prob :

0.3093

FE Testparm

F(4,52):7

.90

Prob:

0.000

Breusch-

Pagan LM

Test

Chibar2

(01):0.0

Prob:

1.00

Hausman

Test

Chi2(3):

7.84

Prob:

0.049

Modified

Wald test for

Heteroskedas

ticity

Chi2 (5):

36.40

Prob:

0.000

Wooldridge

test for

autocorrelati

F(1, 4):

8.281

Prob:0.0

(0.364)

Notes: DV: dependent variable, OLS: ordinary least squares,

FEM: Fixed effect model, REM: Random effect model, FGLS:

feasible generalized least square. Statistics *** showed

significance at 1%.

The estimatedFGLS model as indicated.

1.974 2.528 1.091 0.0210

it it it it it

roe ma hhi cuc



     

(1)

From FGLS results presented in Table 1 and

captured in estimated model (1), there is evidence

that the merger and acquisition have a positive

relationship with the return on equity. It means any

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increment in the merger and acquisition will cause

increase in ROE. Thus, an increase in the merger

and acquisition within the insurance companies will

lead to a 2.528 percent increment in ROE. Findings

revealed further that the merger and acquisition

have a vital impact on the ROE of the Nigerian

insurance firms.

 

0 192 2 66 0 01

ma . ,z test . ,p ,   

This implies that the merger and acquisition

were vital in influencing changes in the ROE of the

chosen Nigerian insurance firms.

Also, HHI had a positive impact on ROE which

means any increment in HHI would cause an

increment in ROE.

 

1 091 5 27 0 01

hhi . ,z test . , p ,   

It means the Herfindahl-Hirschman index was

vital in affecting changes in the ROE of the chosen

Nigerian insurance firms.

Finally, as revealed in Table 2, the

concentration of underwriting capacity (CUC) was

positive with ROE. It means CUC led to an

increment in ROE. Thus, an increase in the

concentration of underwriting capacity will lead to a

0.021% increment in return on equity. Further, CUC

was insignificant to the ROE of the selected

Nigerian insurance firms.

 

0 021 1 13 0 05

cuc . ,z test . ,p ,   

Hence, CUC was an insignificant element

affecting changes in the ROE of the selected

Nigerian insurance firms.

Moreover, adjusted R2 (

20.7796R

), which is

the evidence of explained variable – return on equity

– variations explained by the explanatory variables

– merger & acquisition (MA), Herfindahl-

Hirschman index (HHI) and concentration of

underwriting capacity (CUC) – by 77.96 percent.

The Wald test statistic of 74.34 with a

probability figure of 0.000 means merger &

acquisition (MA), Herfindahl-Hirschman index

(HHI), and concentration of underwriting capacity

(CUC) are joint vital elements affecting changes in

ROE of the selected Nigerian insurance firms.

Decision Rule

To accept or reject the null hypothesis, the Wald

Chi-squared probability value was employed and

evaluated at 1 percent significant level. From Table

2, The WaldChi2 Statistic of 74.34 with a

probability value of 0.000 was vital at 5%, meaning

the null hypothesis stating that consolidation has no

significant effect on the return on equity of

insurance companies in Nigeria was not accepted.

5 Recommendations

1. The insurance firm should improve the regulatory

framework governing insurance companies to

ensure that it encourages financial consolidation

efforts that lead to efficiency gains while

safeguarding against monopolistic practices. This

can be achieved through regular reviews and

updates of regulations to align with industry best

practices.

2. The policymakers should provide financial plus

regulatory support to companies willing to

consolidate. This can help improve market

competitiveness and efficiency.

3. The policymakers should encourage insurance

companies to introduce more innovative products

and services for customers. This can help improve

the concentration underwriting capacity of the

insurance firms.

4. The policymakers should make a regulatory

framework that would ensure relaxed entry into the

insurance company market. This would boost

competition in the sector and enhance their

performances.

5. Training and seminars should be organized by the

government and policy makers for employers and

employees in the insurance business on the

importance of consolidation and how it can help

boost performance of the Nigerian insurance firms.

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Peter Ifeanyi Ogbebor, Olurotimi Ogunwale

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Contribution of Individual Authors to the

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Conflict of Interest

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WSEAS TRANSACTIONS on BUSINESS and ECONOMICS

DOI: 10.37394/23207.2024.21.125

Ishola Rufus Akintoye, Charles Ogboi,

Peter Ifeanyi Ogbebor, Olurotimi Ogunwale

E-ISSN: 2224-2899

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Volume 21, 2024