The Effect Of Claim Settlement On Profit Maximization In The Insurance Industries
The Effect Of Claim Settlement On Profit Maximization In The Insurance Industries
1.1 BACKGROUND OF THE STUDY
I can remember a definition which I was forced to cram in my first year by Mrs. Helen Ibeabuchi she defined insurance as an economic path towards unlimited opportunities for financial growth and fulfillment in life through protection and security. Winston Churchill once referred to insurance as “ bringing the magic of averages to the rescue of million”. This magic is the outcome of voluntary economic co-operation by human beings. Before this was the working out of the law of average which tells the probability or chance that an event will or will not happen.
Insurance is an arrangement by which one party (the insurer) promises to pay another party a sum of money if some thing unexpected should happen which causes the insured to sustain a financial loss.
The responsibility for paying such losses is then transferred from the policyholder to the insurer. In return, for accepting the burden of paying for losses when the events occur, the insurer charges the insured a price, the insurance premium the development of the insurance premium.
This development of the insurance industry in Nigeria data back to 1921.
Further more, growth was not phenomenal until the Nigeria economy of the 60’s and early 80’s often described as the “ mushroomery era” of the market, obviously, a lot of the malpractices especially on claim settlement crept into the industry, which the earlier laws of 1961 and 1965 could not effectively cope with. There were cases of insurer denying liabilities on the robbery of a car on the ground that only theft cover is granted.
The creation and maintenance of a good public image presents continuing difficulties and much still remains to be done. Also the danger of not appreciated by the public. Little general information is available in other field such as public liabilities, contractor, and all risk e.t.c.
In spite of this, the regulation of any insurance company depend to a large extent on the sort of claim service rounded by the company.
An unreliable and inefficient claims department could rain the reputation of a company once they discover that the company is reluctant to pay or delays payment without good reason of their genuine claims.
In order to guard against delay in the settlement of claims the insurance decree of 1976 list some condition under which the director of insurance may council the certificate of registration of an insurance company. Therefore, an insurance who makes it a matter of regular practice of delaying claim payment may stand the risk of having his license canceled.
1.2 STATEMENT OF PROBLEM
The very nature of insurance makes the creation of a good image a difficult task. The theme “that insurance provide security and peace of mind” is a good one but basically we have nothing than a piece of paper to offer which promises to pay if…
“Out difficulties in promoting confidence arising from the following factors.
a. Insurance is so intangible and in many cases it has to be explained on a secure public interest by legible product such as a car which can provide immediate benefit and enjoyment.
a.Insurance is highly technical: A policy is a contract which has to be carefully warded and misconceptions and doubts easily arise in public minds. Many people say that policies are written I deliberate jargon.
The need for insurance is not really recognized more insurance is sold than it’s bought.
Insurance are not always able to accept proposals, from all the soundly elements of selection often present.
The value of insurance, not only to the individual but also to the economy of the country, is not easily appreciated by the general public. The fact that insurance is a export is slowly becoming known but parts played by branches such as find protection and aims protection are still not widely known.
The public is slow to recognized that in many respects, insurance provide what almost amount to social services, a fact which is more readily appreciated where other industries are concerned furthermore, an unpleasant habit of non payment of premium is regrettably emerging among some policy holders most especially the co-operations and government owned companies. The Neagon for this unwholesome some development is that many of the insured out of ignorance and belief relegate insurance matters to the background in their scale of priority where expenditures are concerned.
It is quite an indisputable fact that the industry had created some image problems for itself over recent years through the operational malpractice of its member particularly some unscrupulous brokers and fraudulent agents. As a result, many people perceived insurance as a legalized robbery. With this already dented image when companies are facing serious economic and financial problems. The answer quite clearly in aforementioned is that the need of insurance as a means of protecting investments has never much more manifested than now.
It is very difficult for companies. Individuals and even government to raise new capital to invest on various project and business enterprises.
Consequently, there is utmost need for every investor to take serious steps to secure and ensure that the investment already had are prevented from loss and distraction.
1.4 THE SIGNIFICANCE OF THE STUDY
The misconception about insurance practice in Nigeria gives professional concern especially, in relation to claim settlement. Average Nigerians believe that an insurance is tend to interpret the rules to their own advantage by rejecting claims when one of these rules is not complied with by the insured. In Nigeria, the insurers operate the rules strictly like their colleagues in developed countries yet their image has been dented because the average Nigeria seems not to understand the practice of insurance.
The important of this study will enable the insuring public to know the concept behind insurance practice and the rules guiding both the insurer and insured during the negotiation of claims. It is the aim of this study to state clearly that insurance industry is not set up to collect premium only but to reduce the risk where by the insured is given peace of mind that in the event of damage or loss to his or her property, certain sum of money will become payable.
This study will also enlighten the general public that the insurers do investigated public policy where there is suspicious of fraudulent and exaggerate claims in the present competitive environment coupled with world wide recession, the implication for the insurance industry has been substantial drop in premium income for most classes of business and increasing incidence of claims. Therefore, insurance would not allow an insured person to take advantage of this economic recession by gaining that of their misfortune by deliberately damaging their property in order to claim the insurance money.
There have been allegations of malpractices, against the insurers. This research work would delve into such topics to determine whether they are factual.
1.5 LIMITATION OF STUDY
The scope of this study covers Lagos and mainly Enugu areas. The researcher tends to reach Lagos area because it is center of insurance and other commercial activities in Nigeria. The city has the largest force in the country, following the view that where insurance is mostly needed.
Majority of the office of insurance companies are situated in Lagos and this will enable the researcher to have access to information and statistical data of gross figure and claims paid so far.
Limited are the areas of collection of data for this research study. The researcher encountered difficulties from the insurance companies chosen because they refuse to release their premium figure and claims settlement figures. One was offered to the Nigeria Insurance Association, the body that is responsible for the collection of data for insurance industries. Time factor and distance also contributed to the limit of the research work.
Lawal S. A.F (2003:76) Effective claim
2. Willer Buokes (2004:45) Insurance management claim.
3. J.O Irukwu (1999:4) Insurance Law and
Practice in Nigeria.
4. Yinka Lijadus (2002) The Responsiveness of
the insurance industry
in Nigeria to social
Needs, Business Times
July 22. pg 7-10
2.0 THE REVIEW OF RELATED LITERATURE
There is a vacuum between the insurance company and the insuring public, which have been seen in different ways and given different name. We could see that the business is so complicated much that, it is beyond the understanding of an average policyholder.
Most times the insuring public finds it difficult to understand the insurance policy from the insurance document, the needs of individual policyholders is to seek of adequate information about the policies sold for a fair complaints procedure. Insurance is a highly complex subject because of the lengh of the business, which involves a lot of technicalities and doctrine of precedents. Hence disputes always arose and there were inevitable arguments about the meaning and interpretation of words used in the policy document. Claims estimated are fully examined with care, the efficiency in all aspects of the function of the claims department is highly essential. The insured has the opportunity of realizing the work of the products and the reputation of the company. Citizens entering contract of insurance were advised to be fully conversant with their rights and duties.
Insurance companies were fully aware of their rights and duties under the Law and any part to an insurance contract who was not so vigilant is likely to be ships-wrecked on the sea of speculation.
The insurer’s responsibility was to indemnify the policyholders within the terms of the Policy. Disputing claims on insustancial ground can only bring the insurance industry into dispute. What the insurers could do was to make payment promptly when claims were due to settlements,
A satisfied customer is the best advertisement for any business and insurance is not exception.
2.1 CLASSES OF INSURANCE:
The classes of insurance being transacted in Nigeria can be grouped into four areas such as:
i) Transportation insurance covering hand, vehicles, aircraft, ship, goods- in-transit motor vehicle and liability for ship.
ii)Pecunial insurance covering fidelity guarantee insurance and business interruption insurance.
Properly insurance covering damages to properly including by natural forces.
iv).Liability insurance, products liability insurance professional indemnity, insurance, employers liability insurance and public liability insurance.
MOTOR INSURANCE: For understanding purposes the insurance industry classified the motor insurance into the following:
Grouped according to the type of vehicles
Agricultural and forestry vehicles of special construction such as Mobiles shops and canteens.
The insurance industry allowed motorist a choice of four different motor covers. The higher the premium an insured was prepared to pay, the more extensive cover he obtained.
THE FOUR TYPES OF MOTOR POLICY
(a) Compressive policy: This gives the widest cover including all the covers granted by each of the other types.
(b) The third party five and theft policy: This policy insured the policyholder in respect of his legal liabilities for death or bodily injury to third parties on the road.
(c) The third party policy: This policy covers the policyholder in respect of damage property of third parties as well as death or bodily injury to the third parties.
(d) The act policy: This policy covers the policyholder to the extent of the minimum insurance he most have in order to comply with the compulsory insurance requirement of the “Road Traffic Law” it provides insurance cover for injury or death of third parties including passengers.
Marine insurance provides compensation for property losses and injury or damage to third parties caused by recks of the sea such as damage caused by bad whether sinky, collision or streamline and by fire, theft, e.t.c
Hull- Hull losses relate to damage or loss of the vessel and associated machinery, policies available to cover vessels under construction or navigation on time or voyage basis.
(a) CARGO: This insurance covers good that have been sold and are usually on either a F.O.B (free on board) or C.I.F (cost of insurance and freight basis, An F.O.B. contact means that the sellers’ responsibility ends once the cargo has been loaded at port of departure and therefore the cargo does the responsibility of the buyer.
Under (I.F contract, the seller is responsible for arranging delivery and it must cover the cargo from the port loading to final destination. The sum insured is the limit of Indemnity for any particular cargo insured.
FREIGHT: This is the cost of transporting cargo including the live of a ship where necessary freight might be lost if the cargo could not be delivered.
a) Fidelity guarantee insurance: This policy is an insurance against the result of dishonesty both of while stem from lack of fidelity.
COMMERCIAL GUARANTEE: Majority of policies issued are to commercial firms to indemnify the employer against direct pecuniary loss and in many cases also was of stock, while is necessary after some physical properties had been damaged.
The policy compensation against damage to building and stock but not for loss of earnings that they provide, therefore the business interruption insurance would cover loss of net profit suffered as a result of fire damage.
Employers Liability Insurance: The purpose of employers liability policy is to indemnify the employees (who is the insured) in respect of his legal liability to his employees for death or injury in the causer of their employment. The common law as well as the workmen’s compensation act impose certain legal obligation on employers.
The workmen’s compensation act of this country imposes a strict liability (liability without fault or negligence) on all employers of labour. Under the act, if workmen was killed or injured while acting within the course of his employment, the employer must pay compensation to the workmen or to his legal personal representative in accordance with provision of the act.
PUBLIC LIABILITY INSURANCE
This kind of policy insures the policyholder against his legal liability to members of his public generally. The insurer on return for the premium under took to indemnify the insured against all claims made by third parties who suffered damage as a result of the insured’s negligence.
Professional Indemnify insurance This intended to protect professional people such as Lawyers, Insurance Brokers, Doctors, Accountants, Engineers, or Architects against any liability incurred as a result of their negligence e.g. offering incorrect advise to clients or carelessness in carrying out their duties.
2.2 PRINCIPLES OF INSURANCE
Insurance Interest – Not all risk are insurable, insurable risk have certain characteristics. They must be capable of financial measurement. The risk must not be reasonable and finally there must be insurable interest on the part of the person insuring. It constitute the legal right to insure.
UTMOST GOOD FAITH
A the time of writing this project, the duty of utmost good faith as the positive duty to voluntary declare accurately and full, all facts, materials to the risk being proposed whether they are asked for or not
MATERIAL FACT: The definition of material fact is contained in the marine insurance act, of 1906, section (2) In these words includes every necessary information concerning the property to be insured.
3.PROXIMATE CAUSE – It means the active efficient cause that sets in motion a trend of event, which brings about a result, without the intervention of any force started and working actively from a new and independent source. It is neither the first cause nor the last cause but the dominant cause. It can only be understood by applying common sense.
4. INDEMNITY : It is a mechanism by which the insurers provide financial compensation in an attempt to place the insured in the same primary position after a loss that is putting the insured back to position he was before the loss.
5. SUBROGATION: It is the right of one person having indemnified another under a legal obligation to do so, to stand in the place of other and avail himself of all the rights and remedies of the other whether already enforced or not. As far back as (1882) the principle was put forward that an insurer having indemnified a person was entitle to receive back from an insured the proceeds there from.
CONTRIBUTION: It is the right of the insurer to all upon other insurers similarly but not necessarily equally liable to the same insured to share he cost of an indemnity payment, the principle of contribution provides that if an object is insured with more than one insurance company, the amount claimable from individual ratio able proportion of the loss.
2.3 NOTIFICATION OF CLAIMS
All policies contain conditions, which is the lay down procedures to be followed in the event of a loss the insured is advised in his own interest to observe the conditions. It states that if a loss occurs that the notice should be in writing. The insured is usually required to give knowledge and to take all practicable steps to discover the property which has been lost in a burglary policy… notice to local agent is not necessary sufficient. It might require that the notice be sent to the head office.
It is not necessary that the notice should be his household or family can give the notice.
2.4 INVESTIGATION OF CLAIMS
Checking for cover
Claim Investigation varies from one insurer to the other. It depends on the system each insure adopts in its office. If a well organized insurance company noticed the loss or damage to his property, the following steps are usually taken
The first step is to check through the records to ascertain that the policy number which the claim is quoting is the insured under the policy.
There should be a mortgage on the property so as to know who they will pay the proceeds.
That the peril or hazard which is said to have caused the loss should be the one covered by the policy.
That the policy is currently inforce that is the premium has been paid.
SCRUTINY – The claim form contains a schedule in which a description of each article lost damage must be interested, with the same of the person from whom the article was paid or received.
2.5 CIRCUMSTANCES GIVING RISE TO CLAIM:
In most large fire and property claims after normal (Insurance company).
Investigation: the insurer (s) has to satisfy themselves that one of the insured perils actually caused the damage or engineer to investigate properly.
2.6 CLAIMS REPORT (ENGINEERS AND LOSS ADJUSTER)
Life claims : A claim in a life policy may be either a death claim or a claim under a “ matured” endowment policy”
Death claim: Conditions to be fulfilled by claimants to make claims valid are
. Proof a death: The claim must have evidence of death of the life assured and this would normally consist
. A death certificate
. A declaration of identity unless age of the life assured had already been admitted in the policy.
Evidence of Title – The claimant must prove that he is the person entitle to receive the proceed of the policy.
THE PROBLEM AFFECTING CLAIMS SETTLEMENT IN NIGERIA
Before we could have a through understanding of problem effecting effective claim settlement in Nigeria, it will be expedient to know what is involve in assessing claim.
Having received the premium, the insurer is able and willing to discharge his obligation under the contract.
The effect of this is that if in event of claim the property at risk is of greater value then the sum insured shall be considered to be self insured to the extent of the difference and thus been a ratable proportion of the problems hindering effective claim settlement. Some of which are listed below
. Delay in notifying claims to insurers
. Delay in supplying necessary claims supporting document by insured/brokers
. Delay in submission of loss adjuster report.
. Fraudulent claims
. Effect of inflation on claim settlement.
The problem of inflation are worldwide but to what extent does it affect insurance industries depending on the rate of inflation on the particular region and the measures taken by authorities to investigate it.
It has also become common knowledge that during the period of depressed economic activities, fire, burglary and cash losses become rampant and settlement of claims in respect of the considerable funds of the insurer, there by affecting the ability of settling claims promptly. A claim officer must always bear in mind that claims especially liability claims do no improve with time, they turn to be expensive in long-run.
Victor I. Okonkwo (2002:10,105) introduction
to insurance in Nigerian
Prospective. Pg 20-25
Adesida E.O (1999:175) improving insurance
Image among the
Irukwu J.o (1999-56) insurance laward
Practice in Nigeria
30 RESEARCH DESIGN AND METHODOLOGY
SOURCES OF DATA
The secondary information was collected from data published in the magazines, journals text books and news papers, the information were gathered from these sources because they are presented by many insurance managers and share holders, there is shortage of books in insurance claim that the reason much reference was placed. On secondary information while the researcher expressed her own view too.
LOCATION OF DATA
The sampling unite in this research work is a particular insurance company. The sample survey was obtained by selection of respondent choosing a non-profitability sampling method based on the choice of the researcher. The sampling units are those based on accessible social units of the population-representing customer of the chosen insurance company and they are civil servants, self-employed, manufacturing companies, banks business and insurance companies.
In order for the researcher to obtain very useful information regarding the effective claim settlement and associated problem in insurance industry, the research method was divided into four stages
Drafting of questions
Choosing the populations
Collection of data.
METHOD OF DATA COLLECTION
By means of questionnaire and personal interview with top management team and various clients. T he researcher choose Enugu center for the research work, but a lot of references were made to Lagos center for the research work. The reason is that Lagos is the Head quarter of majority of insurance companies in Lagos Island, Ikeja. Ten members of the management team answered questions relating to prompt claim settlement, and how claims have affected the profit margin of the company. The personal interviews carried out these areas were divided into three sections with 40 respondents
Insuring public 15
Insurance agent 15
Insurance executives 10
Nigeria Insurance year Book (2004), Nigeria
Reinsurance corporation p8
Section 66 (2) (b) of insurance Decree 1997
OBI Mordi (2001:45) Managing insurance
Industry towards Better public image
A paper read at the 17th
Conference of the Africa
Insurance organization, Abuja, Nigeria.
From the study, the researcher identified the effect of claim settlement on profit maximization in the insurance industries. The researcher was able to the up with the following major findings
Preposition one as tested revealed that the effect of claim settlement on profit maximization in insurance industries was caused by claims which have been reported but not yet settled and those that are subject to litigation do affect the company in not making expected profit to the share holders and respondent unanimously agreed towards that. They even said openly that it was as well caused by public who are not properly educated on the scope, functions and limitation of insurance as well as the basic rules that governs insurance transactions especially in the issue of claim settlement.
It was again acclaimed by the respondents that the effect in claim settlement being the dispute test arise in insurance contract have to do with the insurer’s motive for profit maximization and also the default on the side of the policyholder such as the inability of the policyholder to provide the insurer with the necessary information about the subject matter of the insurance, (when there is no utmost good faith on the side of the insured.
It could also be caused as a result of marine insurance because marine claims are usually of a technical nature and are very complicated to evaluate correctly particularly in view of the fact that there are frequently many insurers involved and also the insurer may feel that cause of a loss falls within the exception under their policy and the insured feels otherwise.
It was again observed that the poor service rendered by insurance industry was as a result of the inability of insured to pay complete premium for a particular cover.
The researcher was able to find out that if a loss is in connection with the third party that the insurers always deny that there is no liability under the policy. In other words the insurers are far more likely to require substantial proof of the claims and far less likely to consider ex-gratis payment.
It was discovered that the service rendered by the insurers to the policyholders were not quite satisfactory, therefore the insurance company have to educate the public on the terms and loss adjusters to enable them achieve their aim.
For a genuine claims to be settled promptly by an insurance company, to maintain a good public should image worthy of mention, the public should appreciate that insurance is not a charity organization the forward to making profit just like any other share holders in other commercial enterprises.
OBI Mordi (2001:1) managing insurance
Industry towards better
Public image pg 35
Funmi Adeyemi (2004:2314) collaboration of
The Nigeria insurance
5.1 RECOMMENDATIONS AND CONCLUSION
This research had stated the recognition of the need to understand the meaning of underwriting and claims.
It briefly explains the underwriting process and claim handling procedure as it affects profitability and prompt claim settlement.
This project work further to evaluate the value and qualities of various insurance policies, claim procedure, underwritten by sovereign trust insurance company in particular to how it has really affected the company’s profit claim settlement and declaration of profit to his share holders. The literature view started with a brief history of general business as practiced to Great Britain and how its started and developed in Nigeria and there after highlighting some of the problems associated with claim settlement. It ended with a review of the various documents required for understanding in gathering data for research, secondary source of information were colleted through personal interviews, library and desk research annual report etc Television, educating the insuring public with their rights and obligations housing claims in the contract of insurance. The analysis of the information gathered, the reconsideration was beyond that of qualitative education of under writing and claims procedure and documentation to a consideration of solvency position of the company. This is appreciating the fact that the need to settle the claims and when due should not jeoperalize the solvency position of the insurance company at any given time.
From the analysis done, it shows that the various problem encountered by the company in the view of providing profit and maximizing it to the interest of claim settled as when due under writing and claim administration has reflected to a considerable extent of low level of awareness of the insuring public still view insurance companies as a form of serving rather than means of protection. Also indemnity was the problem of adjournment and procrastination at Nigeria high courts in relation to the processing of necessary documents but are important in the claim settlement process. The company’s organizational structure has not enquired the company’s ability to settle a shareholders and clients obligation. It is well arranged and has not created a significant bottleneck in the claim process but however, the problems of inadequate communication which at times causes delay should be looked into. Also noticed was at increase in general trend in claim by the company’s policyholder and the out cry of the neglect by shareholders as indicated by that rate at which claims are increasing is far greater than the rate of growth of items that can easily provide a cushion for it finally, if the company can pay special attention to their investors taking the pain to explain how insurance contract is being done and maintained and efficient underwriting and claim settlement will be a thing of ease and joy towards the parties concerned.
Based on what the research findings, the following recommendations are suggested in order not only to improve the performance, of servings trust insurance company limited but, to improve the entire insurance industry in Nigeria.
Educating the insuring public will go a long way in solving the problem encountered by insurance in attempt to ensure efficient underwriting and prompt settlement of claims and profit maximization of the company.
The insurance industry as a whole should try and set up committee to look into common problems associated to insurance companies and their shareholder and settlement of claim with main view of finding solution to them.
Above all will recommend that efficient handling and settlement of claims promptly will in the short run reduce the level of profitability but in the long-run, the insurer will earn a reputation for himself from the insuring public have high business turnover, continually increasing gross premium income raising invisible income and thus substantial profit generation. Thus, it will have shown that efficient claim administration is necessary in any insurance company, it should not be assured that by settling claims, there would be a consequent reduction in profitability.
OBI Mordi (2001:1) managing insurance
Industry towards Better
Public image pg 35
Witters Buokes (2004:45) insurance management
Irukwu J.O (1999:56) Insurance laward
Practice in Nigeria. Pg 10-11
Adesida E.O (1999) improving insurance image
Among the populace Pg 10
Ajala M.O (2001) the effect of delayed
Settlement claim on the Socio-economic
Development of a nation Pg 35
Irukwu J.O (1999) insurance laward
Practice in Nigeria Pg 21
Lawrd S.A.F (2003) effective claim management
Problem and prospects pg 40
Willis park Rokes (2000) Human Relationship
Claims pg 19
Willer, Buokes (2004) Insurance Management