THE EFFECT OF EXCHANGE RATE FLUCTUATIONS ON INSURANCE COMPANY PERFORMANCE IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

An insurance company denominates its premiums, its reserves and most of its assets in local currency, but a substantial portion of the losses it indemnifies is determined by the cost of goods and services priced internationally. This mismatch is the essential channel through which exchange rate movements reach the insurance balance sheet. When the naira depreciates, the cost of replacing an imported vehicle part, rebuilding with imported construction materials, repairing an aircraft, or settling an oil and gas claim rises in naira terms, while the premium collected at inception was fixed at the pre-depreciation exchange rate. The insurer absorbs the difference.

Nigeria has experienced a currency adjustment of historic magnitude. Following the liberalisation of the foreign exchange market in June 2023, the naira fell from roughly ₦425.98 to the dollar on average in 2022 to about ₦924.67 by the end of 2023, and to ₦1,505.30 by March 2024, averaging approximately ₦1,518.38 in 2025 (Nairametrics, 2026). The implication for corporate performance is stark: between 2022 and 2025 a Nigerian company needed to raise its naira profit by roughly 256 per cent simply to hold its dollar profit constant. Across the wider corporate sector, the depreciation triggered substantial foreign exchange losses for firms carrying dollar-denominated obligations.

For insurers the effects run in several directions simultaneously. On the liability side, claim costs in import-dependent classes rise sharply. On the asset side, insurers holding foreign-currency assets record translation gains, while those with foreign-currency liabilities record losses. On the revenue side, classes underwritten in dollars principally oil and gas, marine and aviation produce naira premium growth simply from translation, independent of any increase in underlying exposure. This last effect is visible in the 2025 figures: oil and gas accounted for 30.3 per cent of non-life gross written premium and aviation and marine grew by 79.9 per cent in the first half of 2025, while industry gross written premium rose 47.3 per cent year on year to ₦2.30 trillion (National Insurance Commission [NAICOM], 2026). Whether that growth represents expanded underwriting or currency translation is precisely the question this study addresses.

The regulatory dimension compounds the issue. The Nigerian Insurance Industry Reform Act, 2025 requires non-life insurers to hold ₦15 billion, life insurers ₦10 billion and reinsurers ₦35 billion in minimum capital, with risk-based capital determined by reference to insurance, market, credit and operational risks (Federal Republic of Nigeria, 2025). Currency risk sits squarely within market risk, yet Nigerian insurers' capacity to measure and hedge it is limited by a shallow domestic derivatives market and by the actuarial capacity constraints affecting the industry generally.

The existing Nigerian literature on exchange rate volatility is dominated by studies of the banking sector, economic growth and small and medium enterprises. Work addressing the insurance sector specifically is sparse and largely predates the 2023 float. This study fills that gap.

1.2 Statement of the Problem

Nigerian insurance companies are carrying currency exposure they did not price for, in a regulatory regime that now requires them to hold capital against it, with limited tools for measuring or hedging it. Four problems follow.

First, the translation illusion. Premium growth of 47 per cent in a year when the naira depreciated substantially may represent little or no growth in real underwriting terms. Studies and management reports that present nominal naira growth without adjustment risk conveying a picture of sectoral expansion that dollar-denominated or volume-based measures would contradict.

Second, asymmetric exposure across classes. Oil and gas, marine and aviation are underwritten substantially in foreign currency; motor, fire and general accident are underwritten in naira but settle claims priced off imported inputs. The first group gains from depreciation in naira revenue terms; the second loses in naira claims terms. Aggregate industry analysis conceals these offsetting movements and cannot guide company-level strategy.

Third, reinsurance and retrocession cost. Nigerian insurers cede substantial proportions of large risks to foreign reinsurers, and reinsurance premiums are payable in hard currency. Depreciation raises the naira cost of reinsurance protection at the same time as it raises gross claim costs, compressing the retained margin from both directions. Premium retention improved to 68.1 per cent overall in 2025, but challenges persisted in marine, aviation and oil and gas (NAICOM, 2026), the very classes most exposed to currency movement.

Fourth, the evidence base is thin and dated. Existing Nigerian studies of exchange rate volatility and the insurance sector predate the 2023 liberalisation and the exceptional depreciation that followed, so their parameter estimates describe a managed-rate regime that no longer exists.

The problem, therefore, is the absence of current, class-disaggregated evidence on how exchange rate fluctuations affect the performance of Nigerian insurance companies.

1.3 Aim and Objectives of the Study

The aim of this study is to examine the effect of exchange rate fluctuations on the performance of insurance companies in Nigeria.

The specific objectives are to:

1. examine the trend and volatility of the naira exchange rate over the study period;

2. determine the effect of exchange rate fluctuations on the gross premium income of insurance companies in Nigeria;

3. assess the effect of exchange rate fluctuations on the claims expense and loss ratio of insurance companies in Nigeria;

4. determine the effect of exchange rate fluctuations on the profitability and solvency of insurance companies in Nigeria;

5. compare the exchange rate sensitivity of foreign-currency-exposed classes with that of naira-denominated classes; and

6. establish whether a long-run equilibrium relationship exists between the exchange rate and insurance company performance in Nigeria.

1.4 Research Questions

1. What has been the trend and volatility of the naira exchange rate over the study period?

2. What effect do exchange rate fluctuations have on the gross premium income of Nigerian insurance companies?

3. What effect do exchange rate fluctuations have on claims expense and the loss ratio?

4. What effect do exchange rate fluctuations have on profitability and solvency?

5. Do foreign-currency-exposed classes respond differently to exchange rate movements than naira-denominated classes?

6. Is there a long-run equilibrium relationship between the exchange rate and insurance company performance in Nigeria?

1.5 Research Hypotheses

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

H₀₁: Exchange rate fluctuations have no significant effect on the gross premium income of insurance companies in Nigeria.

H₀₂: Exchange rate fluctuations have no significant effect on the claims expense and loss ratio of insurance companies in Nigeria.

H₀₃: Exchange rate fluctuations have no significant effect on the profitability of insurance companies in Nigeria.

H₀₄: There is no significant difference in exchange rate sensitivity between foreign-currency-exposed and naira-denominated classes of business.

H₀₅: There is no significant long-run relationship between the exchange rate and insurance company performance in Nigeria.

1.6 Significance of the Study

For insurance companies, the study quantifies currency exposure by class and informs decisions on currency matching, premium indexation, reinsurance structuring and the pricing of import-sensitive covers. For NAICOM, it provides evidence bearing on the calibration of market risk within the risk-based capital framework of NIIRA 2025 and on whether the naira-denominated capital thresholds retain their intended real value. For the Central Bank of Nigeria, it documents a transmission channel of exchange rate policy into the financial services sector that has received little empirical attention. For investors and analysts, the separation of translation effects from underlying underwriting growth is essential to valuing insurance equities correctly. For policyholders, under-indexed sums insured mean that depreciation silently converts adequate cover into under-insurance, a consequence this study makes explicit. For scholarship, the study extends a Nigerian exchange rate literature concentrated on banking, growth and SMEs into the insurance sector, using post-liberalisation data.

1.7 Scope of the Study

The study covers insurance companies licensed by NAICOM and operating in Nigeria. The temporal scope runs from 2005 to 2025, a span of twenty-one years chosen to include the managed-rate era, the 2016 and 2020 adjustments, and the 2023 liberalisation. The independent variables are the nominal naira–dollar exchange rate, exchange rate volatility measured by the standard deviation or a GARCH-derived conditional variance, and the real effective exchange rate. The dependent variables are gross premium income, net claims incurred, loss ratio, return on assets, return on equity and solvency margin. Control variables include inflation, interest rate, firm size and premium retention. Where a panel design is adopted, the sample comprises insurance companies listed on the Nigerian Exchange Group with complete audited accounts. Class-level analysis covers oil and gas, marine and aviation as foreign-currency-exposed classes and motor, fire and general accident as naira-denominated classes. Data are drawn from the CBN Statistical Bulletin, NAICOM Annual Reports and Market Performance Bulletins, the Nigeria Insurance Digest and audited company financial statements.

1.8 Limitations of the Study

(i) Multiple exchange rate regimes for much of the study period Nigeria operated parallel official and street rates, and the choice of which series to use materially affects results. (ii) Multicollinearity exchange rate, inflation and interest rate have moved together closely since 2023, complicating the isolation of the currency effect. (iii) Currency exposure disclosure Nigerian insurers do not consistently disclose the currency composition of assets and liabilities, so exposure must often be inferred from class mix rather than measured directly. (iv) IFRS 17 discontinuity the 2023 change in insurance revenue and liability measurement creates a break in the reported series. (v) Structural break the June 2023 liberalisation is a regime change, so parameters estimated across the full sample may be unstable, and the post-break window is short. (vi) Endogeneity insurance sector activity and macroeconomic conditions are jointly determined.

1.9 Operational Definition of Terms

Exchange rate: The price of one currency expressed in units of another; here, the naira price of one United States dollar.

Exchange rate fluctuation (volatility): The magnitude and frequency of variation in the exchange rate over a period, measured by standard deviation or conditional variance.

Depreciation: A fall in the market value of a currency relative to another under a floating or managed-float regime.

Real effective exchange rate (REER): A trade-weighted index of a currency's value against a basket of foreign currencies, adjusted for relative price levels.

Translation gain or loss: The change in the reported naira value of foreign-currency assets or liabilities arising solely from a change in the exchange rate.

Loss ratio: Net claims incurred expressed as a proportion of net premium earned.

Premium retention ratio: The proportion of gross premium written that an insurer retains rather than cedes to reinsurers.

Currency matching: The practice of holding assets in the same currency as the liabilities they support, to neutralise exchange rate exposure.

Under-insurance: The condition in which the sum insured is less than the replacement value of the insured property, resulting in proportionate reduction of claim settlement.

References

Central Bank of Nigeria. (2025). Statistical bulletin. CBN.

Chilekezi, O. (2024). The influence of inflation in insurance business in Nigeria. African Journal of Management and Business Research, 13(1), 297–304. https://doi.org/10.62154/qahrt992

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

Nairametrics. (2026, September 11). Nigerian companies reclaim 2023 pre-devaluation profit levels in dollar terms. Nairametrics. https://nairametrics.com/2026/09/11/nigerian-companies-reclaim-2023-pre-devaluation-profit-levels-in-dollar-terms/

National Bureau of Statistics. (2025). Consumer price index and inflation report. NBS.

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