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Insurance Sector Activities and Financial Market Stability in Nigeria

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 Journal of Finance and Business Policy (JOFIBP) Vol. 4 No. 1, Dec. 2019

JOFIBP

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 Journal of Finance and Business Policy (JOFIBP) Vol. 4 No. 1, Dec. 2019

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 Journal of Finance and Business Policy (JOFIBP) Vol. 4 No. 1, Dec. 2019

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 Journal of Finance and Business Policy (JOFIBP) Vol. 4 No. 1, Dec. 2019

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 Journal of Finance and Business Policy (JOFIBP) Vol. 4 No. 1, Dec. 2019

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TABLE OF CONTENTS
Title page - - - - - - - - - i
Journal of Finance and Business Policy (JOFIBP - - - - ii
Call for paper - - - - - - - - - iii
Editorial Board - - - - - - - - iv
Editorial Style Guide for Authors - - - - - - v
Table of Contents - - - - - - - - vi
Urban Vs Rural Residents’ Savings in Formal Financial Institutions in the Niger
Delta Region, Southern Nigeria: An Exploratory Study: Uduakobong Inyang and
Ikechukwu Acha - - - - - - - - 1

Electronic Banking and Commercial Banks’ Performance in Nigeria: An ARDL

Approach: Onyike, Sixtus Chimezie Ekeagwu, Innocent Chukwuemeka &
Sunday Daniel Uche - - - - - - - - 10

Insurance Sector Activities and Financial Market Stability in Nigeria: Francis

Aniefiok Bassey, Emmanuel Ikpe Michael & Ekwere Raymond Enang - 28

Financial Statement Analysis: A Basis for Measuring Firm Financial Performance:

Ntiedo B. Ekpo & Ruth L. Tony-Obiosa - - - - - 42

Contagion Effect of Brexit Referendum on Nigeria Stock Market: Alex E. Osuala

and Uloma.A Onoh - - - - - - - - 54

Insurance Firms Risk Appetency and Demand for Reinsurance in Nigeria: Bassey
Ime Frank & Musa Adebayo Obalola - - - - - 65

Risk-Taking Propensity, Capital Structure and Performance of Insurers in Post-Risk

Based Capital Regime in Nigeria: Sunday S. Akpan and Nseabasi I. Etukafia 82

Implications of Financial Inclusion for Economic Growth in Nigeria: Ime T. Akpan - 96

Empirical Assessment of Manpower Development Programmes in Higher

Institutions in Nigeria: Ogbonnaya, Ikwor Okoroafor & Ele, Linus Egwu - 111

Economic Environment and Financial Intermediation in Nigeria: Emmanuel

Ikpe Michael & Francis A. Bassey - - - - - - 120

Oil Price Volatility and Stock Market Performance: A Three Sector Outlook
E. I. Evbayiro-Osagie, Fela Adedamola & Lekan Elugbadebo - - 137

Commercial Bank Credit and Economic Growth in Nigeria: Gabriel Tobi Edu,
Lucky S. Inaya and Solomon Onyeogo - - - - - 147

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 Journal of Finance and Business Policy (JOFIBP) Vol. 4 No. 1, Dec. 2019

INSURANCE SECTOR ACTIVITIES AND FINANCIAL

MARKET STABILITY IN NIGERIA

Francis Aniefiok Bassey1*, Emmanuel Ikpe Michael2& Ekwere Raymond Enang3

1Departmentof Insurance and Risk Management, Faculty of Business Administration, University of Uyo, Uyo,
2Department of Banking and Finance, Faculty of Business Administration, University of Uyo, Uyo.
3Department of Accounting, Faculty of Business Administration, University of Uyo, Uyo

*Corresponding Author: [email protected] Tel: 08036745826

Abstract
This paper examined insurance sector activities and financial market stability in Nigeria.
The objective of the study is to analyze the relationship between insurance industry
activities and financial market stability and economic growth in Nigeria. Ex-post facto
research design was adopted. The explanatory variables used are Gross Premium Income
(GPI), claims expenditure (CLAIMS), investments (INV) and total assets (TIA) of the
insurance industry. While financial market stability was measured as the ratio of market
capitalization and Gross Domestic Product (MCAP/GDP), economic growth was
measured by growth rate of real GDP (GDPr). Data was collected from CBN Statistical
Bulletin 2018 and Insurance Digest of various years published by Nigeria Insurers
Association (NIA) for 19 years (2000-2018). The collected data was analyzed using trend
analysis, unit root tests, cointegration analysis and multiple linear regression technique.
The findings showed that total assets of the insurance industry have direct and significant
relationship with MCAP/GDP; claims expenditure of the industry showed a positive
relationship with MCAP/GDP. Also insurance industry activities showed an insignificant
relationship with economic growth. It was concluded that insurance industry activities is
related to financial market stability and that insurance industry does not enhance
economic growth in Nigeria. Recommendations made include the need for increased level
of long-term investments by insurance firms in Nigeria in order to promote economic
growth and the need for continuous payment of claims by the industry to ensure
confidence in the insurance industry in order to enhance financial market stability.

Keywords: Gross Premium Income, Financial Market Stability, Market Capitalisation, Economic
Growth

Introduction

Several studies have shown empirically that insurance companies are an important
and growing class of financial market participants, especially in the capital market. They
insure a wide variety of businesses and household risks, thereby facilitating financial and
economic activities and stability (Oke, 2012); Richard and Victor, 2013; Dickinson, 2010).
At the same time financial market stability is also considered sacrosanct since an unstable
financial market portends contagious effects for the wide economy. The effects of the
2007/2008 world financial crisis are still a fresh testimony to this fact. Thus, an unstable
financial market will affect individuals, corporations, government, banks, insurance
companies, and capital market in ways that are better left unimagined.

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Insurance companies are an important part of the Nigerian financial market. Their
activities of indemnification and drive to maximizing profit and wealth had made them
become investors and intermediaries in a broad range of financial markets activities. They
bring innovative insurance approaches to capital market deepening, provide insurance
cover for financial risks, and develop new instruments that help bridge the gap between
banking and insurance products. Through these services and products, insurance firms
have created new opportunities for individuals, financial institutions and other corporate
organisations to fund their activities and hedge risks, thereby contributing to the
development, increased liquidity in the financial market and overall economic
improvement (Donwa and Odia, 2010).
A thriving insurance sector is not only the result of an efficient financial system
but is also an important aspect of a healthy modern economy. Insurance promote long-
term savings that support sustainable long- term development. By pooling these savings
from many small investors in the economy into large accumulations of investable funds,
insurance firms commit these pooled resources into a wider range of investments on a
large scale which is expected to be more beneficial to the economy.
According to the European Commission working document (2014), the financial
system is critically important for the economic well-being of households and corporations
as it fulfills different functions through which it serves the economy and facilitates
sustainable growth. The financial system intermediates between ultimate providers of
funds (lenders, savers or investors) and the ultimate users of funds (borrowers,
entrepreneurs or spenders). The channeling of funds between lenders and borrowers
facilitates productive investment and efficient capital allocation in the economy. Hence,
the financial system perform risk transformation and provides insurance services to risk –
averse households and firms, enabling the later to achieve superior risk - reward outcomes
compared to a situation without an insurance sub-system in the financial system.
Stable financial system is one in which financial institutions, markets and their
infrastructures facilitate the smooth flow of funds between savers and investors such that
its help to promote growth in economic activities (Jovanic, 2014). Economists have
demonstrated that economic growth and insurance development are interdependent and
that a world without insurance would be much less developed and less stable. Theoretical
studies and empirical evidence have shown that countries with better developed financial
system enjoy faster and more stable long – run growth of which insurance companies
contributes to. Well – developed financial markets have a significant positive impact on
total factor productivity, which translates into higher long – run development (Oke, 2012).
In spite of all the expectations of the mitigating impact of insurance sector to
improving investment and financial market stability, there has been a sluggish and
distorted growth in this sector. Studies have proven empirically that unfavorable
macroeconomic environment influences insurance industry negatively (Chikaodinaka,
2009). In Nigeria, the insurance industry has not grown as expected based on the untapped
potentials in the last 35 years (World Bank, 2006). An instance is the pre-capitalization
comparison of the Nigerian and Chinese insurance industry. The insurance industry in
China covering an approximately ten times the Nigerian population generates USD$6
billion in premium annually, while that of Nigeria is USD$0.6billion, a fraction of a tenth
of China’s. After the capitalization of this sector between 2003 and 2005, which placed
life insurance on the benchmark of N2 billion, non – life at N3 billion and re-insurance at
N10 billion, average premium generated per insurance firm in China which is two

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hundred times that of Nigeria at USD$1.17 billion (African Re, 2011). Suffice it to say
that the rationale for the reforms of the insurance sector was due to inadequate capital for
competitive operations; poor public perception of its activities; low insurance penetration;
low capacity for financial risk management; and poor information and technology (IT)
infrastructure amongst others(Babalola, 2008). Thus, this article therefore, seeks to
investigate the role of insurance industry activities in promoting financial market stability,
improving investments and encouraging economic growth.
To achieve these objectives, we hypothesized that:

i. Insurance industry activities have no significant effect on financial market stability;

ii. Insurance industry activities have no significant effect on economic growth.

This study is divided into five sections. Section one is the introduction, section two
provides the review of related literature, section three is the method of study, section four
explains the data, the specification of empirical model and discussion of findings. Section
five is the conclusion and policy recommendations.
REVIEW OF RELATED LITERATURE

The concepts of insurance and development of the financial market, financial

sector development, economic growth and insurance were reviewed, while attempt was
made to link this study to existing theories, and empirical literature.
Insurance Industry and the Development of Capital Market
There have been growing concerns in the literature about the role of insurance on
the facilitation of financial market stability. Dickinson (2010), opined that through the
investment of insurance premium paid by policyholders and the investment of
shareholders’ funds, the transmission of saving is fed through into the wider economy.
The mechanism through which this transmission takes place is the capital market. The
range of investments in which an insurance company can invest its funds within a given
economy will depend on the degree of development of the local capital market. Savings
mobilized and invested in the capital market by insurance companies clearly acts as an
important stimulus to the growth of both the economy and the capital market itself.
Therefore, there is a dynamic interaction at work, with the accumulation of savings
through insurance, the investments of these savings in the capital market leading to the
development of capital market, both (insurance sector and capital market) evolving
together, one assisting the other.
Again, according to Al-Faki (2006) in Donwa and Odia (2010), the capital market
is seen as a network of specialized financial institutions, mechanisms, processes and
infrastructure that bring together suppliers and users of medium to long – term capital for
investment in socio – economic developmental projects. The market is divided into the
primary and secondary market. The primary market provides the avenue through which
government and corporate bodies raise fresh funds through issuance of securities which is
subscribed to by the general public or selected group of investors. The secondary market
provides an avenue for sale, re-sale and purchase of existing securities. Hence, the growth
and development of any country is strengthened by the capital market.
It support government and corporate initiatives, financed the exploitation of new ideas
and facilitate the management of financial risk. As opined by Akinbohungbe (1996) and Adebuji
(2005), the rate of economic growth has been linked to the sophistication of the financial market

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and capital market efficiency. Both markets facilitates the mobilization and channeling of
funds into productive constituents and ensuring that the funds are used for the pursuit of
socio – economic growth and development without being idle.
Financial Sector Development, Economic Growth and Insurance

By financial sector development, we are referring to the financial and capital

market development, including the major indicators of financial sector depth and
efficiency as well as capital market liquidity and transparency (USAID, 2006). The depth
and efficiency of a country’s financial sector largely determine how well its economy
allocates resources. As such an improved financial depth (that is greater variety and
availability of financial services and instruments) advances economic growth by providing
economic agents more opportunities to save, invest, and borrow. Enhanced financial depth
and efficiency translate into increased level of financial intermediation, investment, and
productive resource allocation. Thus, the mechanisms through which insurance work to
stimulate economic growth revolve around the role insurance plays in deepening and
improving the efficiency of the financial sector.
Studies such as Lee, Lin and Zeng (2016); Madukwe and Anyanwaokoro (2014);
Outreville (2013); Haiss and Sumegi (2008); and Babalola (2008) have shown that
insurance influences financial activities in the following ways:
i. Insurers measure and manage non-diversifiable risk faced by creditors and
borrowers more efficiently than other financial institutions, facilitating the
provision of credit;
ii. Insurers generate price signals for risk that enables the economy to allocate its
resources more efficiently among activities;
iii. Insurers often offer competitive and contractual savings vehicle than other
financial institutions;
iv. Due to their success in making contractual savings products and the nature of their
liabilities, life insurance and to some extent non-life insurance firms’ can be an
important source of long-term finance and;
v. By mobilizing substantial funds through contractual savings products, and
investing them in bonds and stocks, insurers help stimulate the growth of debt and
equity markets.
As known, the amount of lending by financial institutions to the private sector is
one of the best indicators of the efficiency of a country’s financial system. In an efficient
financial system, there is greater demand and supply of credit when financial institutions
can measure, manage, and price risk better, and borrowers, lenders, and investors can
transact with more information available and at minimal costs(Kugler, Maurice, and
Ofoghi, 2005); Harichandra and Thangavelu, 2004);Impavido, Gregorio, Musalem,
Alberto and Vittas, 2002).
Theoretical Underpinnings
The role of insurance industry to financial development and economic growth have
attracted more attention in several literature across the world. Likewise, myriad of theories have
been put forward to show how financial institutions activities stimulate financial development and
economic growth. These include the Bagehot’s 1874 finance-growth nexus, Shaw (1973) and
Mckinnon (1973) financial liberalization theory, Patrick (1966) supply-leading and demand-
following theories and Harrod-Domar growth theory of the 1950s. Though these theories

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explored the impact of finance on financial development from different perspectives, they
all converged in their propositions and agreement that increased level of financial
liberalization is a causative factor for enhanced financial development in an economy.
The financial liberalization theory by Shaw (1973) and McKinnon (1973), showed
that liberalization of financial services can exert a positive effect on growth rate of the
economy. These theorists explained that this may be possible when resources are
distributed efficiently, and interest rates level move towards market equilibrium. Patrick
(1966) theorized on the association between economic growth and financial development
by hypothesizing two likely connections- the “demand-following” and “supply-leading”.
The “demand-following” theory stated that financial development increases as the
economy improves; while the “supply-leading” phenomenon, stated that the general
growth of financial institutions leads to an economic increase (Lee, Lin and Zeng, 2016).
On the other hand, Harrod-Domar growth theory explained that a well-developed
financial intermediation process can stimulate economic growth via the marginal
productivity of capital, the efficiency in directing investments savings rate and technical
innovations (Onyekachi and Okoye, 2013). These theories recognize the channels to
growth model and by this, try to link the financial intermediation function of insurance
companies to both financial development and economic growth. Many empirical
evidences have also been provided by Haissand Sumegi (2008); Madukwe and
Anyanwaokoro (2014); Mojekwu, Agwuedo and Olowokudejo (2011) and Outreville
(2013) suggesting that insurance market activities stimulates financial development and
stability, and growth in the economy. However this theory is anchored on the financial
liberalization theory by Shaw (1973) and McKinnon (1973). A robust insurance industry
with several liberalization policies is depicted by the Nigerian insurance industry, and as
such there are expectations of the positive roles of industry activities towards financial
development and stability, and economic growth
.

Empirical Literature
Numerous empirical literature have established the link between insurance and
financial market stability and economic growth in Nigeria and globally. The relationship
between economic growth and financial growth was investigated and established by
several studies in the literature (Arestis and Demetriades, 1997; Levine and Zervos, 1998;
Ward and Zurbruegg, 2002; Rousseau and Wachtel, 1998; Ying-jun and Ye-ting, 2012;
De Fiore and Uhlig, 2011; Outreville, 2013). Kugler and Ofoghi (2005) established that
national insurance and reinsurance market not only being a characteristic feature of
economic growth, is a pronounced determinant of financial stability given that it plays an
important financial intermediation role in the financial system, ensuring that the available
pool of funds from clients are placed in profitable investments as well as providing risk
covers for various individuals and institution in the financial markets.
Furthermore, International Association of Insurance Supervisors (2011) report on the
effect of insurance industry on financial stability, concluded that insurance industry’s role in
ensuring financial stability was proved during the last round of global financial crisis between
2007 and 2008. The report surmised that insurance business model confers financial stability
through financial intermediation and risk coverage during financial crises and distortions.
Similarly, Hussel, Ward and Zurrubegg (2005) established empirically that insurance activities
promotes financial stability and development, and at the same time positively contributes to

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economic growth and development. Akgakoba (2010) and Oke (2012) viewed the
insurance capacity to influence financial development and stability as central to their
function in the financial system and in the economy, establishing that insurance activities
promotes financial stability in Nigeria.
DATA AND METHODOLOGY

Data for this study are mainly secondary data. These data were sourced from
Central Bank of Nigeria statistical bulletin 2018 and Insurance Digest of various years
published by Nigeria Insurers Association (NIA) and covers 19 years (2000-2018). This
study was designed with ex-post facto method, hence the statistical and econometric
treatment of the secondary data collected in order to establish the relationship between the
various variables in the study as hypothesized. The explanatory variables used in the
measurement of the activities of the insurance industry include insurance industry gross
premium income (GPI), aggregate claims expenditure (CLAIMS), aggregate investments
of the industry (INV) and total assets (TIA). Financial market stability was measured
using the ratio of market capitalisation to real Gross Domestic Product (MCAP/GDP)
while economic growth was measured using the growth rate of real Gross Domestic
Product (GDPr) from the year 2000 to 2018.
The models specified for the hypothesized relationship earlier stated in this study is
presented as follows:
MCAP/GDP =α1+β1GPI+β2CLAIMS+β3INV+β4TIA+ϵ1 - - - (Equ.1)
GDPr =α1+β1GPI+β2CLAIMS+β3INV+β4TIA+ϵ1 - - - - (Equ.2)

Where:
MCAP/GDP= Ratio of Market Capitalization to GDP (Financial Market Stability)
GDPr= Growth rate of Gross Domestic Product (Economic Growth)
GPI = Insurance Industry Aggregate Gross Premium Income
CLAIMS = Insurance Industry Aggregate Claims Expenditure
INV = Insurance Industry Aggregate Investments
TIA = Insurance Industry Total Assets
α1= regression line intercept
β1-β4= regression coefficients of the explanatory variables
ϵ1= error or random term

ANALYSIS AND DISCUSSION

Trend Analysis
Analysis of the data collected for was presented in a table and this study was conducted
using descriptive and statistical techniques. Trend of the data analyzed using a histogram
and a line graph.
The data for this study is presented in Table 1 below:

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Table 1: Trend of Economic Growth (GDPr), Financial Market Stability (MCAP/GDP),

Insurance Industry Gross Premium Income (GPI), Insurance Industry Claims Expenditure
(CLAIMS), Insurance Industry Investments (INV) and Insurance Industry Total Assets
(TIA) from 2000 to 2018.
GDPr MCAP/GDP GPI(N’ CLAIMS INV TIA
YEAR (%) (%) Million) (N’ Million) (N’ Million) (N’ Million)
2000 5.518500 1.993813 22531.46 5629.520 25192.64 61600.00
2001 6.666848 2.621941 28981.29 6110.520 32157.27 78060.48
2002 14.60438 2.641438 37765.89 6856.145 36940.87 85255.73
2003 9.502606 4.286735 43441.81 9415.200 54642.84 124267.37
2004 10.44200 6.032173 50100.83 12084.040 74590.75 141222.03
2005 7.008457 7.738663 67465.56 12402.400 121844.2 203113.12
2006 6.725974 12.80369 81583.75 76276.110 216359.9 307542.61
2007 7.318081 30.71051 89104.89 15843.730 329247.9 427497.16
2008 7.199287 20.78341 126470.30 25864.870 336491.4 573154.46
2009 8.353344 14.10227 153127.12 49498.930 343894.2 586459.54
2010 9.539786 18.16114 157336.81 37589.560 351459.9 585015.79
2011 5.307924 17.86673 175756.75 39389.160 359192.0 621095.14
2012 4.205890 24.69710 252138.08 73162.280 252138.1 661967.57
2013 5.487793 30.17685 267835.30 92951.090 267835.3 750923.70
2014 6.222942 25.12942 307507.50 108733.450 566937.8 838547.42
2015 2.786398 24.63405 328621.88 96331.220 651630.3 941278.08
2016 -1.583065 23.82664 333975.88 113294.080 737189.4 1039680.79
2017 0.823987 30.84917 504730.98 124471.330 884175.0 1633203.84
2018 1.930000 31.37664 NA NA NA NA
Source: Central Bank of Nigeria (CBN) Statistical Bulletin 2018, Nigeria Insurers
Association (NIA) Digest (various years)

An evaluation of the trend of market stability using the ratio of Market

Stabilization (MCAP) to real Gross Domestic Product (GDP) indicates that the capital
market recorded improved stability levels between the year 2000 and 2010. This can be
attributed to continuous financial development and economic shocks especially during the
recent recessionary period in the country. While it may be stated that within these years
the market is gradually building resilience, it is not without fragility of the early years
between 2007 and 2012 as shown in Figure 1.

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MCAP/GDP
32

28

24

20

16

12

0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Figure 1: Trend of Financial Market Stability from 2000 to 2018

Market dynamics as reflected by stock market capitalization between 2014 and

2016 indicates that the capital market witnessed changes in the level of stability. This is
not isolated with the reactions to the market due to the build-up and after-math of the 2015
general election and the onset of recession in the country. However in recent years (2017-
2018), the market is gradually becoming stable. On the other hand within the same period,
growth rate of GDP has been oscillating back and forth. As shown in Figure 2, Gross
Domestic Product (GDP) growth rates have been stable. With a high growth rate in 2001
to a negative growth rate in 2015, economic growth in Nigeria is not devoid of distortions.
This fragility in growth may possibly be associated with different policy reversals and
poor implementation of economic policies which have been acculturated by successive
administrations in the country.
GDPr
16

12

-4
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Figure 2: Trend of Economic Growth in Nigeria (2000-2018)

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Unit Root Analysis

This analysis was conducted to establish the suitability of the research data for
analysis including regression analysis with respect to the existence of unit root. Data with
unit root problem are considered non-stationary and are not suitable for regression
analysis. This test of data adequacy was conducted using the Philips-Perron method at 5%
level of significance. The summary of the results is presented in Table 2.

Table 2: Philips-Perron Unit Root Test Result

Variable Philips-Perron Adjusted t- P-value Order of Integration
statistic (Critical Values at 5%)

GDPr -5.715210 (-3.052169) 0.0003 I(1)

MCAP/GDP -7.646871 (-3.052169) 0.0000 I(1)

GPI -3.649892 (-3.081002) 000523 I(2)

CLAIMS -10.46111 (-3.065585) 0.0000 I(1)

INV -8.052785 (-3.081002) 0.0001 I(2)

TIA -3.466323 (-3.081002) 0.0105 I(2)

Source: Researcher’s Compilation from E-views 10.0 output (2019)

Table 2 indicates that at 5% level of significance and at different levels of

integration, all the variables were found to be stationary. However, it must be pointed out
that GDPr, MCAP/GDP and CLAIMS were found stationary at first difference; the
remaining variables (GPI, TIA, and INV) were found to be stationary at second difference.
This indicates that these variables- GPI, INV and TIA had unit root problems at level and
first difference. This will lead to the log-linear transformation of the models earlier stated
in order to ensure that numbers are scaled down and the effect of trend in the data series is
eliminated in order to avoid spurious regression results when it is conducted in the study.

Cointegration Analysis

This test was conducted to ensure the confirmation of a possible long-run

equilibrium relationship between insurance industry activities as measured by GPI,
CLAIMS, INV and TIA and financial stability (MCAP/GDP) and economic growth
(GDPr in Nigeria. The test was conducted for both models in the study using Johansen
Cointegration technique. The results from the test are presented in Table 3 and 4.

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Table 3: Johansen Cointegration Test Result for Model One

Date: 11/28/19 Time: 10:21
Sample (adjusted): 2002 2017
Included observations: 16 after adjustments
Trend assumption: Linear deterministic trend
Series: GDPr GPI CLAIMS INV TIA
Lags interval (in first differences): 1 to 1

Unrestricted Cointegration Rank Test (Trace)

Hypothesized Trace 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.989515 146.6755 69.81889 0.0000

At most 1 * 0.902184 73.74985 47.85613 0.0000
At most 2 * 0.681087 36.55521 29.79707 0.0072
At most 3 * 0.469989 18.26984 15.49471 0.0186
At most 4 * 0.397704 8.112113 3.841466 0.0044

Source: Researcher’s Computation (2019)

The result shows that the variables in the model (GDPr, GPI, CLAIMS, INV, TIA)
are cointegrated going by the exhibited Trace statistic and probability values. Table 4 also
showed the same outcome for the model with variables MCAP/GDP, GPI, CLAIMS, INV
and TIA, with the result from the Trace statistic, max Eigen value and p-values indicating
the possibility of at most four (4) cointegrating equations among the variables. This
implies the existence of a possible long-run equilibrium relationship among insurance
industry activities and economic growth and financial market stability.

Table 4: Johansen Cointegration Test Result for Model Two

Date: 11/28/19 Time: 10:23

Sample (adjusted): 2002 2017
Included observations: 16 after adjustments
Trend assumption: Linear deterministic trend
Series: MCAP_GDP GPI CLAIMS INV TIA
Lags interval (in first differences): 1 to 1

Unrestricted Cointegration Rank Test (Trace)

Hypothesized Trace 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.994659 172.0529 69.81889 0.0000

At most 1 * 0.952209 88.33638 47.85613 0.0000
At most 2 * 0.824463 39.68179 29.79707 0.0027
At most 3 0.459757 11.84331 15.49471 0.1646
At most 4 0.117036 1.991542 3.841466 0.1582
Source: Researcher’s Computation (2019)

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Regression Analysis

The logarithmic transformation of the models earlier specified allowed for the
elimination of all the features of the data series that could cause the production of a
reliable regression results. This is given as:
LogMCAP/GDP =α1+β1LogGPI+β2LogCLAIMS+β3LogINV+β4LogTIA+ϵ1 (Equ.3)

GDPr =α1+β1LogGPI+β2LogCLAIMS+β3LogINV+β4LogTIA+ϵ1 - (Equ.4)

Multiple regression analysis was conducted and the summary of the regression result is
given as follows for the models:
MCAP/GDP = -9.30 -0.79GPI+0.03CLAIMS -0.11INV+1.73TIA
t-stat = (-7.6482) (-1.6307) (0.1620) (-0.2967) (2.4124)
P-value = (0.0000) (0.1269) (0.8738) (0.7714) (0.0313)
R2= 0.9340; Adj. R2= 0.9137; Durbin-Watson=1.22; F-stat.=46.017

Source: E-views output (2019)

The above result indicate that financial market stability (MCAP/GDP) will decline by an
average of 9.30% if all the explanatory variables are held constant (i.e.
GPI=CLAIMS=INV=TIA=0). Similarly, a 1% change in the level of GPI will lead to a
decrease of 0.79% in MCAP/GDP; a 1% increase in CLAIMS will lead to an increase of
0.03% in MCAP/GDP; a 1% increase in insurance industry aggregate investments (INV)
will lead to a decrease of 0.11% in MCAP/GDP and a 1% increase in insurance industry
total assets (TIA) will grow capital market stability by 1.73%. Between the association of
market stability and insurance industry, the result showed that adjusted R2 stood at 0.9137.
This indicates that 91.37% of departures from the norm have been accounted for by
insurance industry activities. The unaccounted 8.63% of these changes in market stability
is due to other factor not considered in this study. Furthermore, from the results only total
assets (TIA) of the insurance industry showed significant effect on market stability
(MCAP/GDP) with a probability value of 0.03 while the other explanatory variables (GPI,
CLAIMS, INV) did not. The Durbin-Watson stat value of 1.22 indicates the absence of
serial correlation since using the rule of thumb, that the model Durbin-Watson value from
1 to 3 is considered appropriate. The F-stat value of 46.01 showed that the model is a
good fit in explaining the variations in market stability (MCAP/GDP) and with a
probability value less than 0.05, the hypothesis that market stability is predicated on
insurance industry activities is accepted.
For the second hypothesis, the multiple regression results are summarized below:

GDPr= 31.43- 2.25GPI - 0.99CLAIMS- 0.43INV +1.31TIA

t-stat = (2.2521) (-0.4005) (-0.4719) (-0.0973) (0.1594)
P-value = (0.0422) (0.6953) (0.6448) (0.9224) (0.8758)
R2= 0.4234; Adj. R2= 0.2459; Durbin-Watson=1.39; F-stat. =2.386

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The above result indicates that growth rate of GDP will increase by an average of
31.43% if all the explanatory variables are held constant. Likewise, a 1% growth in GPI
will lead to loss of 2.25% in growth rate of GDP; a 1% increase in CLAIMS will lead to a
decline of 0.99% in GDPr; a 1% increase in INV will also lead to a decrease of 0.43% in
GDPr, while a 1% growth in total assets of insurance industry (TIA) will boost GDP
growth by 1.31%. The abysmal relationship between economic growth and insurance
industry is summarized by the outcome of the adjusted coefficient of determination (Adj.
R2) value of 0.2459, which implies that low predictive power of the explanatory variables
to explaining alterations in economic growth. These variables can only explain 24.59% of
the variations in GDPr leaving out 75.415 of the changes to be explained by other factors
in the economy. Furthermore, none of the variables showed a statistically significant
relationship with growth rate of GDP. The Durbin-Watson stat value of 1.39 indicates the
absence of autocorrelation going by the rule of thumb. Finally, the model failed in the
goodness-of-fit test since it cannot explain the variations in economic growth (GDPr) with
an F-statistic value of 2.386 and a probability value of 0.1047. This implies the rejection
of the hypothesis that insurance industry foster economic growth.

Conclusion and Recommendations

The nexus between insurance activities and financial stability is apparently
evidenced by the empirical results as shown in the study. The direct relationship between
insurance claims expenditure and total assets implies that increased insurance industry
activities possess the potential and capacity to instill resilience in the capital market. This
is given the fact that insurance industry is associated with the non-substitutability of risk
management services and the provision of funds for long-term investments in the capital
market. This is further embellished with the growth in the pension industry which adds
weight to the importance of the insurance industry to financial market stability in Nigeria.
With the propositions of the Mckinnon-Shaw financial development and liberalization
theory established, insurance industry in Nigeria by virtue of their activities via assets and
claims payment bears on financial market stability in Nigeria.
With respect to economic growth, experts have it that the potentials of insurance
industry towards economic growth are only based on the prospects of the industry rather
than results on ground. Insurance industry is known to contribute less than 2% to real GDP
in Nigeria hence it is not surprising that the empirical results in this study had shown that
there is no significant relationship between insurance industry activities in Nigeria and
economic growth in the last 19 years (2000-2019). This implies that there is need for
further development in the insurance industry. Recent policy for the recapitalization of the
industry is one way amongst several that will increase the capacity of the insurance
industry to contribute more to economic growth and development.
Finally, with the foregoing, it is recommended that insurance companies should be
very active in terms of investments. They should develop voracious appetite for profitable
long-term investments in the financial markets. This would enhance market stability and
economic growth. Also there is need for further development of the insurance industry in
order to enhance their capacity to write up huge policies which are currently channeled
off-shore. Their capacity to increase both gross premium income and claims payment will
be an advantage to the industry, a plus to market stability and a catalyst to economic
growth.

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