AN ASSESSMENT OF RISK MANAGEMENT PRACTICES IN THE NIGERIAN INSURANCE INDUSTRY

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Insurance companies occupy an unusual position among business enterprises: risk is not an incidental feature of their operations but the commodity they sell. An insurer accepts, aggregates and finances the risks of others, and its own survival depends on whether it can measure and control the exposures it has accumulated. Risk management in an insurance company is therefore both an internal governance function and the substance of the business itself.

The framework through which this is conventionally organised is Enterprise Risk Management (ERM), which treats risk holistically across the enterprise rather than in functional silos. The Committee of Sponsoring Organizations of the Treadway Commission (COSO, 2017) framework structures ERM around governance and culture, strategy and objective-setting, performance, review and revision, and information and communication. In insurance specifically, ERM covers underwriting risk, reserving risk, market and credit risk, liquidity risk, operational risk, and increasingly climate, cyber and conduct risk.

Nigerian evidence on whether ERM actually improves insurer performance is mixed. Onafalujo and Eke (2012) reported a positive association between ERM and organisational performance in Nigerian financial institutions. Abdulkadir (2024), using COSO strategy and operations objectives as ERM measures on listed Nigerian insurers over 2018–2022 with Tobin's Q as the performance proxy, found significant effects for the operational dimension but not the strategic. Other panel studies of listed Nigerian insurers have found no significant relationship between ERM and earnings per share, return on assets or return on equity, while work on risk management committee attributes has reported that committee size, independence and gender diversity positively affect market performance (Awotomilusi, Oke, & Adeyemi, 2025). The divergence in these findings suggests either that ERM is unevenly implemented across Nigerian insurers or that the proxies used to measure it are capturing disclosure rather than practice.

What is not in dispute is that the regulatory environment has changed decisively. The Nigerian Insurance Industry Reform Act, 2025 replaced the Insurance Act 2003 and its associated statutes with a single framework, raised minimum capital to ₦15 billion for non-life, ₦10 billion for life and ₦35 billion for reinsurance business, introduced risk-based capital determined by reference to insurance, market, credit and operational risks, and required a 100 per cent capital adequacy ratio (Federal Republic of Nigeria, 2025). Risk-based supervision is now the governing philosophy, and insurers are expected to demonstrate, not merely assert, that their risk management is adequate.

Against that standard, the industry's recent record raises questions. In 2025 the non-life segment settled 75.5 per cent and the life segment 65.5 per cent of reported claims, and gross claims fell by seven per cent to ₦724.7 billion even as premiums grew by 47.3 per cent (National Insurance Commission [NAICOM], 2026). NAICOM dissolved the board and management of an established life insurer in October 2024 after it proved unable to meet obligations to annuitants. Consumer trust surveys report declining confidence in insurers. These are outcomes that effective risk management is supposed to prevent. This study assesses risk management practices in the Nigerian insurance industry against that expectation.

1.2 Statement of the Problem

Nigerian insurance companies are required by the NIIRA 2025 risk-based capital regime to identify, measure and hold capital against their risks, yet the state of actual risk management practice in the industry has not been systematically assessed.

First, the compliance–practice gap. Nigerian insurers publish risk management disclosures and constitute board risk committees because regulation and listing rules require it. Whether these structures perform substantive risk identification, measurement and control, or exist principally to satisfy disclosure requirements, is not established. The mixed empirical findings on ERM and performance in Nigeria are consistent with widespread formal adoption accompanied by shallow implementation.

Second, capacity constraints. Risk-based capital, reserving adequacy and asset–liability matching all require quantitative modelling, and Nigeria has fewer than thirty qualified actuaries against an estimated national requirement exceeding three thousand. A regulatory regime that presumes quantitative risk management capacity may be operating in an industry that largely lacks it.

Third, observable risk management failures. Delayed and unsettled claims, regulatory intervention in failing insurers, persistently low consumer trust, and under-reserving in long-tail lines are outcomes that point to deficiencies in underwriting discipline, reserving practice and asset–liability management.

Fourth, emerging risks are unaddressed in the literature. Climate-related catastrophe exposure, cyber risk and conduct risk are growing in the Nigerian market, but no assessment has established whether insurers' risk management frameworks extend to them.

The problem, therefore, is that the adequacy, depth and effectiveness of risk management practices in the Nigerian insurance industry are unknown at precisely the moment when a risk-based regulatory regime presumes them to be sound.

1.3 Aim and Objectives of the Study

The aim of this study is to assess risk management practices in the Nigerian insurance industry.

The specific objectives are to:

1. examine the extent and depth of risk management practices adopted by insurance companies in Nigeria;

2. assess the effectiveness of risk identification, measurement, control and monitoring processes in Nigerian insurance companies;

3. determine the effect of risk management practices on the financial performance of Nigerian insurance companies;

4. examine the influence of corporate governance structures, particularly board risk committees, on the quality of risk management practice; and

5. identify the constraints limiting effective risk management in the Nigerian insurance industry.

1.4 Research Questions

1. To what extent are risk management practices adopted by insurance companies in Nigeria?

2. How effective are the risk identification, measurement, control and monitoring processes of Nigerian insurance companies?

3. What effect do risk management practices have on the financial performance of Nigerian insurance companies?

4. How do corporate governance structures influence the quality of risk management practice in Nigerian insurance companies?

5. What constraints limit effective risk management in the Nigerian insurance industry?

1.5 Research Hypotheses

The following null hypotheses will be tested at the 5% level of significance:

H₀₁: Risk management practices have no significant effect on the financial performance of insurance companies in Nigeria.

H₀₂: Risk identification and assessment practices have no significant effect on the solvency position of Nigerian insurance companies.

H₀₃: Board risk committee attributes have no significant effect on the quality of risk management practice in Nigerian insurance companies.

H₀₄: There is no significant difference in risk management practice between life and non-life insurance companies in Nigeria.

H₀₅: Identified constraints have no significant effect on the effectiveness of risk management practice in the Nigerian insurance industry.

1.6 Significance of the Study

For insurance companies, the assessment provides a diagnostic benchmark against which a firm can locate its own practice relative to the industry, and evidence on which risk management dimensions actually carry performance consequences. For NAICOM, it supplies a baseline picture of industry risk management capability at the commencement of the NIIRA 2025 risk-based supervision regime, which bears directly on the feasibility of the implementation timetable and on the supervisory resources required. For boards and audit committees, the findings on governance structures inform the composition and mandate of board risk committees. For the Nigerian Actuarial Society and the Chartered Insurance Institute of Nigeria, the identified capacity constraints indicate where professional training and accreditation effort should be directed. For investors, reinsurers and rating agencies, evidence on risk management quality is an input to counterparty assessment. For policyholders, whose benefit security depends on insurer solvency, the study addresses a matter of direct financial consequence. For scholarship, it advances beyond the disclosure-based ERM proxies that dominate Nigerian studies towards a practice-based assessment, potentially explaining why existing findings on ERM and performance have been so inconsistent.

1.7 Scope of the Study

The study covers insurance and reinsurance companies licensed by NAICOM and operating in Nigeria, with particular attention to companies listed on the Nigerian Exchange Group, for which secondary data are publicly available. The temporal scope runs from 2015 to 2025, encompassing the introduction of IFRS 17, the recapitalisation programme and the enactment of NIIRA 2025. The risk categories examined are underwriting risk, reserving risk, market risk, credit risk, liquidity risk, operational risk and emerging risks including climate and cyber exposure. The study adopts a mixed design: primary data collected by structured questionnaire and interview from risk officers, underwriters, actuarial staff and board risk committee members; secondary data extracted from audited annual reports, NAICOM publications and the Nigeria Insurance Digest. It does not extend to insurance brokers, loss adjusters or the health maintenance organisations regulated separately under the NHIA.

1.8 Limitations of the Study

(i) Self-report bias respondents have a regulatory and reputational incentive to present their firm's risk management as more developed than it is, which may inflate measured practice scores. (ii) Disclosure as proxy where secondary data are used, published risk disclosures measure reporting quality rather than practice quality, a limitation this study attempts to mitigate through primary data but cannot eliminate. (iii) Access senior risk and actuarial personnel are few and heavily engaged, so response rates from the most informative respondents may be low. (iv) Construct measurement "risk management practice" is multidimensional and not directly observable, so any index constructed to represent it involves judgment that other researchers might exercise differently. (v) Regulatory transition NIIRA 2025 took effect during the study period with a twelve-month compliance window, so measured practice reflects a system in transition rather than a settled state. (vi) Sample size the population of Nigerian insurers is modest and the listed subset smaller still, constraining the statistical power available for panel analysis.

1.9 Operational Definition of Terms

Risk management: The systematic process of identifying, assessing, controlling, financing and monitoring the risks to which an organisation is exposed, in order to achieve its objectives.

Enterprise Risk Management (ERM): An integrated, enterprise-wide approach to risk management in which risks are considered in aggregate and in relation to strategy, rather than in functional silos.

Underwriting risk: The risk that premiums charged prove inadequate to meet the claims and expenses arising from the risks accepted.

Reserving risk: The risk that technical provisions established prove insufficient to meet the ultimate cost of claims already incurred.

Operational risk: The risk of loss arising from inadequate or failed internal processes, people and systems, or from external events.

Risk appetite: The amount and type of risk an organisation is willing to accept in pursuit of its objectives.

Risk-based supervision: A supervisory approach under which regulatory attention and capital requirements are calibrated to the risk profile of the individual institution.

Board risk committee: A committee of the board charged with oversight of the organisation's risk management framework, appetite and exposures.

Solvency: The capacity of an insurer to meet its liabilities as they fall due, measured by the excess of admissible assets over liabilities relative to a required minimum.

Capital adequacy ratio: The ratio of an insurer's available capital to its required capital, set at a minimum of 100 per cent under NIIRA 2025.

References

Abdulkadir, J. (2024). Enterprise risk management (ERM) practices and financial performance: Evidence from listed insurance firms in Nigeria. Yildiz Social Science Review, 10(2), 99–109.

Awotomilusi, N. S., Oke, O. A., & Adeyemi, A. A. (2025). Risk management committee attributes and market performance of listed insurance firms in Nigeria. International Journal of Economics and Financial Issues, 15(3), 1–12.

Committee of Sponsoring Organizations of the Treadway Commission. (2017). Enterprise risk management: Integrating with strategy and performance. COSO.

Federal Republic of Nigeria. (2025). Nigerian Insurance Industry Reform Act, 2025. Federal Government Press.

International Association of Insurance Supervisors. (2019). Insurance core principles and common framework for the supervision of internationally active insurance groups. IAIS.

National Insurance Commission. (2026). Bulletin of the insurance market performance: Fourth quarter 2025. NAICOM.

Nigerian Insurers Association. (2024). Nigeria insurance digest 2023. Nigerian Insurers Association.

Onafalujo, A. K., & Eke, C. E. (2012). Enterprise risk management and organisational performance: Evidence from Nigerian financial institutions. International Journal of Economics and Management Sciences, 1(10), 1–8.

Onyeka, V. N. (2018). Enterprise risk management and performance of insurance companies in Nigeria. International Journal of Business and Management Review, 6(4), 1–15.

United Nations Development Programme. (2024). Inclusive insurance and risk financing in Nigeria: Snapshot and way forward. UNDP Insurance and Risk Finance Facility. https://irff.undp.org/sites/default/files/2024/Nov/irff-diagnostic-report-nigeria.pdf