CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Insurance companies are financial intermediaries whose core business is the acceptance of premiums today in exchange for a contingent promise to pay claims at some uncertain future date. Because the premium is received before the claim is paid, the insurance contract is inherently a contract across time, and anything that alters the value of money between the two dates alters the real economics of the contract. Inflation is precisely such a force. It raises the nominal cost of settling claims after the premium has been fixed, erodes the real value of reserves and investment assets held to meet those claims, and compresses the disposable income out of which households purchase cover.

The Nigerian macroeconomic environment has made this concern acute. Headline inflation, which stood at 11.40 per cent in 2019, rose to 13.25 per cent in 2020 and 16.95 per cent in 2021 (Chilekezi, 2024), before accelerating sharply following the removal of the petrol subsidy and the liberalisation of the foreign exchange market in 2023. Inflation reached 22.22 per cent in April 2023 and 33.20 per cent by March 2024 (Ogunleye, Adeyemi, & Olaniyan, 2024), and remained in the mid-thirties through 2025. For insurers, this has meant simultaneous pressure on both sides of the balance sheet: claim costs, particularly in motor, fire, and health, have risen with the naira cost of spare parts, building materials and pharmaceuticals, while the real return on the fixed-income instruments that dominate insurance investment portfolios has been negative for extended periods.

Against this background the industry has nevertheless recorded striking nominal growth. Gross premiums written rose from ₦1.003 trillion in 2023 to ₦1.56 trillion in 2024 and ₦2.30 trillion in 2025, a year-on-year increase of 47.3 per cent, while total industry assets reached ₦4.79 trillion at the end of 2025 (National Insurance Commission [NAICOM], 2026). Interpreting such figures is precisely the analytical problem this study addresses: nominal premium growth of 47 per cent in an environment of roughly 30 per cent inflation represents a far more modest real expansion, and may reflect the repricing of existing exposures rather than genuine market deepening.

The theoretical literature is divided on the direction of the effect. Money illusion and premium-repricing arguments suggest that insurers, being able to adjust premium rates at renewal, may benefit from moderate inflation, and some Nigerian evidence reports a significant positive relationship between inflation and gross premium income (Ehiogu, Eze, & Nwite, 2021). The opposing view, associated with the erosion-of-solvency argument, holds that inflation reduces the real value of insurers' assets and weakens the solvency margin, with life business especially exposed because benefits are denominated in fixed nominal amounts over long horizons (Chilekezi, 2024). Epetimehin and Fatoki (2011) found that persistently high Nigerian inflation constrained industry growth, while Asinya (2018), using an ARDL framework on 1981 2016 data, established a long-run relationship between inflation and insurance claims costs.

This divergence of findings, coupled with the structural break introduced by the 2023 reforms and by the Nigerian Insurance Industry Reform Act (NIIRA), 2025 which raised minimum capital to ₦15 billion for non-life, ₦10 billion for life and ₦35 billion for reinsurance businesses and introduced risk-based capital supervision (Federal Republic of Nigeria, 2025) makes a re-examination of the inflation performance relationship both timely and necessary.

1.2 Statement of the Problem

Nigerian insurance companies are operating under the highest sustained inflation in a generation, yet the empirical evidence on how this affects their performance is inconsistent and, in important respects, dated.

First, existing Nigerian studies report contradictory results: some find a positive and significant effect of inflation on gross premium income, others find that inflation erodes profitability and solvency. This contradiction may arise because studies use different performance proxies gross premium income, profit before tax, return on assets, claims ratio, solvency margin without distinguishing between nominal and real effects.

Second, most available studies terminate their data before 2022 and therefore predate the subsidy removal, exchange-rate unification, and the inflation surge that followed. Their coefficients may not describe the current regime.

Third, the interaction between inflation and the regulatory environment has not been examined. Recapitalisation under NIIRA 2025 obliges insurers to raise substantial nominal capital at precisely the time when inflation is eroding the real value of retained earnings, yet no study has assessed how the two forces jointly affect performance.

The problem, therefore, is that insurers, regulators and investors currently lack reliable, up-to-date empirical evidence on whether and how inflation affects the financial performance of Nigerian insurance companies, and on the magnitude of that effect. This study addresses this problem.

1.3 Aim and Objectives of the Study

The aim of this study is to examine the effect of inflation on the financial performance of insurance companies in Nigeria.

The specific objectives are to:

1. assess the effect of the inflation rate on the gross premium income of insurance companies in Nigeria;

2. examine the effect of the inflation rate on the profitability (return on assets) of insurance companies in Nigeria;

3. determine the effect of the inflation rate on the claims ratio of insurance companies in Nigeria;

4. evaluate the moderating influence of interest rate and exchange rate on the inflation performance relationship; and

5. establish whether a long-run equilibrium relationship exists between inflation and insurance company performance in Nigeria.

1.4 Research Questions

1. What effect does the inflation rate have on the gross premium income of insurance companies in Nigeria?

2. What effect does the inflation rate have on the return on assets of insurance companies in Nigeria?

3. What effect does the inflation rate have on the claims ratio of insurance companies in Nigeria?

4. To what extent do interest rate and exchange rate moderate the relationship between inflation and insurance company performance?

5. Is there a long-run equilibrium relationship between inflation and insurance company performance in Nigeria?

1.5 Research Hypotheses

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

H₀₁: Inflation rate has no significant effect on the gross premium income of insurance companies in Nigeria.

H₀₂: Inflation rate has no significant effect on the return on assets of insurance companies in Nigeria.

H₀₃: Inflation rate has no significant effect on the claims ratio of insurance companies in Nigeria.

H₀₄: Interest rate and exchange rate do not significantly moderate the relationship between inflation and insurance company performance.

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

1.6 Significance of the Study

The study is significant to insurance company management, who require evidence on the transmission of inflation to premium adequacy and claim costs in order to design repricing and indexation strategies. It is significant to NAICOM, which must assess whether the capital thresholds introduced by NIIRA 2025 remain adequate in real terms and whether risk-based capital calibration should incorporate an explicit inflation risk charge. It is significant to the Central Bank of Nigeria and fiscal authorities, for whom the insurance sector's response to inflation is one channel through which monetary policy affects financial stability. It is significant to investors and policyholders, who bear the consequences of eroded solvency margins. Finally, it is significant to the academic literature, which it extends by supplying post-2023 evidence on a relationship whose earlier estimates were obtained under a materially different macroeconomic regime.

1.7 Scope of the Study

The study covers insurance companies licensed by NAICOM and operating in Nigeria. Where a time-series design is adopted, the study covers the period from 2000 to 2025, a span of twenty-six years, chosen to capture both the pre- and post-consolidation eras and the recent inflation surge. Where a panel design is adopted, the study covers listed insurance companies on the Nigerian Exchange Group with complete annual financial statements over the study period. The independent variable is inflation, proxied by the headline inflation rate and the Consumer Price Index; control variables are interest rate, exchange rate and firm size. Performance is measured by gross premium income, return on assets and the claims ratio. Data are drawn from NAICOM Annual Reports and Market Performance Bulletins, the CBN Statistical Bulletin, National Bureau of Statistics publications, and audited company financial statements.

1.8 Limitations of the Study

(i) Data availability and consistency: some Nigerian insurers file late or restate accounts, and the transition to IFRS 17 in 2023 changed the measurement of insurance revenue and liabilities, creating a discontinuity in the series that requires careful handling. (ii) Proxy limitation : headline inflation may not reflect the specific cost inflation faced by insurers, which is driven by motor spare parts, construction and medical costs; sectoral price indices are not consistently published. (iii) Endogeneity insurance sector activity and macroeconomic conditions are jointly determined, so estimated coefficients may reflect simultaneity; instrumental variable or dynamic panel techniques will be required to mitigate this. (iv) Sample size the number of listed insurance companies with complete data is modest, restricting the degrees of freedom available in panel estimation. (v) Structural break the 2023 reforms constitute a regime change that may limit the stability of estimated parameters across the full sample.

1.9 Operational Definition of Terms

Inflation: A sustained rise in the general price level of goods and services in an economy over time, measured here by the year-on-year percentage change in the Consumer Price Index.

Gross premium income (GPI): The total premium written by an insurer before deduction of reinsurance and commissions.

Return on assets (ROA): Profit after tax expressed as a percentage of total assets; a measure of the efficiency with which assets generate earnings.

Claims ratio: Total claims incurred expressed as a proportion of net premium earned.

Solvency margin: The excess of an insurer's admissible assets over its liabilities, used as a measure of its capacity to meet obligations.

Insurance penetration: Gross premium income expressed as a percentage of Gross Domestic Product.

Risk-based capital (RBC): A capital requirement calibrated to the specific insurance, market, credit and operational risks carried by an insurer, as introduced under NIIRA 2025.

References

Asinya, F. A. (2018). Insurance claims and inflation rate in Nigeria: An ARDL approach. Journal of Economics and Sustainable Development, 9(14), 55 63.

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

D'Arcy, S. P., Au, A., & Zhang, L. (2009). Property liability insurance loss reserve ranges based on economic value. Variance, 3(1), 42 61.

Ehiogu, C. P., Eze, O. R., & Nwite, S. C. (2021). Effect of inflation rate on insurance penetration of Nigerian insurance industry. International Research Journal of Finance and Economics, 5(1), 1 13.

Epetimehin, F. M., & Fatoki, O. (2011). The impact of inflation on the insurance industry in Nigeria. European Journal of Social Sciences, 26(3), 388 394.

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

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

Ogunleye, O. O., Adeyemi, K. S., & Olaniyan, N. O. (2024). The impact of inflation on medicine prices in Nigeria: A comparative analysis of public and private pharmacies. Pan African Medical Journal, 49, 23. https://doi.org/10.11604/pamj.2024.49.23.44392

Okiche, E. L., Nwankwo, O., & Ezeh, C. (2022). Determinants of the growth of the Nigerian insurance industry. International Journal of Research and Innovation in Social Science, 6(8), 412 424.

Webb, I. P., Grace, M. F., & Skipper, H. D. (2002). The effect of banking and insurance on the growth of capital and output. Journal of Financial Issues, 2(2), 1 32.