THE EFFECT OF INTEREST RATE CHANGES ON LIFE INSURANCE BUSINESS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Life insurance is the most interest-sensitive class of insurance business. Three features account for this. First, life contracts are long-dated, so premiums calculated today are discounted over horizons of twenty, thirty or forty years, and small changes in the assumed rate of interest produce large changes in the present value of liabilities. Second, life offices accumulate substantial investment funds against those liabilities, so the yield available in the market determines the return that supports reserves, bonuses and annuity payments. Third, life insurance competes for household savings with bank deposits, treasury bills and other interest-bearing instruments, so the prevailing rate of interest influences the demand for savings-oriented life products directly.

Nigeria has recently experienced one of the sharpest interest rate cycles in its modern monetary history. When the current Central Bank of Nigeria governor assumed office in September 2023, the Monetary Policy Rate (MPR) stood at 18.75 per cent. It was raised by 400 basis points to 22.75 per cent in February 2024, climbed to 27.25 per cent by September 2024, and reached 27.50 per cent the highest MPR ever recorded in Nigeria where it was retained through the May and July 2025 meetings of the Monetary Policy Committee (Central Bank of Nigeria, 2025). Easing began in September 2025 with a reduction to 27.00 per cent, and the rate stood at 26.50 per cent following the July 2026 meeting.

For Nigerian life offices, this cycle has cut in several directions at once. High nominal yields on federal government securities improve the investment return on existing funds and make annuity pricing more attractive, which is consistent with the striking growth of the annuity segment annuities contributed 44.3 per cent of all life premiums in 2025, exceeding individual life at 36.2 per cent and group life at 19.5 per cent (National Insurance Commission [NAICOM], 2026). At the same time, high rates depress the market value of long-dated bonds already held, create reinvestment uncertainty when rates subsequently fall, and intensify competition from deposit and money-market products for the savings naira. Where rates are high in nominal terms but real returns are compressed by inflation running above twenty per cent, the savings element of endowment and whole life products loses its appeal entirely.

The empirical literature on the relationship is unsettled. Ehiogu, Eze and Nwite (2022), examining Nigerian data from 2010 to 2020 with cointegration and ordinary least squares techniques, found that interest rate instability posed a significant challenge to life annuity business while inflation did not. International work on asset–liability management under interest rate risk emphasises duration matching and the sensitivity of embedded options and guarantees to rate movements. What is missing is contemporary Nigerian evidence spanning the 2023–2026 tightening and easing cycle, and evidence that distinguishes between the effects of interest rates on different segments of life business annuity, individual life and group life which theory suggests should respond in different directions.

1.2 Statement of the Problem

Nigerian life insurers are operating under an interest rate regime whose volatility has no recent precedent, and they are doing so with limited actuarial capacity for asset–liability management. The problems this creates are concrete.

First, reinvestment and guarantee risk. Products sold during the high-rate period embed guarantees priced off yields of twenty-seven per cent or more. If rates continue to ease, insurers will be obliged to honour those guarantees while reinvesting maturing assets at materially lower yields. NAICOM's circular requiring life insurers to appoint a qualified actuary for asset–liability matching in annuity business, effective February 2025, is a direct regulatory acknowledgement of this exposure.

Second, contradictory empirical evidence. Studies differ on whether interest rate increases expand or contract life business in Nigeria, partly because they use different dependent variables gross premium, new business, surrender rates, investment income, profitability and partly because most terminate before the 2023 regime change.

Third, the segment aggregation problem. Existing Nigerian studies typically treat "life insurance business" as a single aggregate. Yet rising rates should plausibly stimulate annuity sales while depressing demand for savings-linked endowment products. Aggregating the two conceals offsetting effects and may explain why studies reach inconsistent conclusions.

Fourth, the absence of real-rate analysis. With inflation above twenty per cent for much of the study period, nominal interest rate movements say little about the real return offered to policyholders. No Nigerian study has systematically distinguished nominal from real rate effects on life business.

The problem, therefore, is that Nigerian life insurers, regulators and policyholders lack current, segment-disaggregated evidence on how interest rate changes affect life insurance business.

1.3 Aim and Objectives of the Study

The aim of this study is to examine the effect of interest rate changes on life insurance business in Nigeria.

The specific objectives are to:

1. examine the trend of interest rates and life insurance business indicators in Nigeria over the study period;

2. determine the effect of interest rate changes on life insurance gross premium income in Nigeria;

3. assess the effect of interest rate changes on annuity business relative to individual and group life business;

4. examine the effect of interest rate changes on the investment income and profitability of life insurance companies;

5. determine whether a long-run equilibrium relationship exists between interest rates and life insurance business in Nigeria; and

6. establish the direction of causality between interest rate movements and life insurance business indicators.

1.4 Research Questions

1. What has been the trend of interest rates and life insurance business indicators in Nigeria over the study period?

2. What effect do interest rate changes have on life insurance gross premium income in Nigeria?

3. Do interest rate changes affect annuity business differently from individual and group life business?

4. What effect do interest rate changes have on the investment income and profitability of life insurance companies?

5. Is there a long-run equilibrium relationship between interest rates and life insurance business in Nigeria?

6. What is the direction of causality between interest rate movements and life insurance business indicators?

1.5 Research Hypotheses

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

H₀₁: Interest rate changes have no significant effect on life insurance gross premium income in Nigeria.

H₀₂: Interest rate changes have no significantly different effect on annuity business than on individual and group life business.

H₀₃: Interest rate changes have no significant effect on the investment income of life insurance companies in Nigeria.

H₀₄: There is no significant long-run relationship between interest rates and life insurance business in Nigeria.

H₀₅: Interest rate changes do not Granger-cause changes in life insurance business indicators in Nigeria.

1.6 Significance of the Study

For life insurance companies, the study informs product design, crediting rate strategy and asset–liability matching, matters of direct solvency consequence given the concentration of the life book in annuity business. For NAICOM, it supplies evidence bearing on the calibration of interest rate risk within the risk-based capital framework of NIIRA 2025 and on the adequacy of the asset–liability matching requirements imposed by the 2025 annuity circular. For the Central Bank of Nigeria, it identifies a transmission channel of monetary policy that is seldom examined in Nigerian macroeconomic research, namely the effect of the policy rate on long-term contractual savings. For PenCom and pension fund administrators, who supervise the retiree annuity market, the findings bear on the comparative attractiveness and security of annuity versus programmed withdrawal options. For policyholders and annuitants, the study clarifies how the rate environment at the point of purchase affects the value of the contract they receive. For scholarship, it supplies post-2023 Nigerian evidence on a relationship whose earlier estimates were obtained under a materially different rate regime.

1.7 Scope of the Study

The study covers life insurance business in Nigeria over the period 2005 to 2025, a span of twenty-one years chosen to include the post-consolidation era, the Pension Reform Act annuity market, and the recent tightening and easing cycle. The independent variables are the Monetary Policy Rate, the average deposit and lending rates, and the yield on federal government securities, with the real interest rate constructed by deflating nominal rates by headline inflation. The dependent variables are life insurance gross premium income disaggregated into annuity, individual life and group life; new business volume; investment income; surrender and lapse experience where data permit; and profitability. Control variables include inflation, exchange rate, GDP per capita and stock market return. Data sources are the CBN Statistical Bulletin and Monetary Policy Committee communiqués, NAICOM Annual Reports and Market Performance Bulletins, the Nigeria Insurance Digest, National Bureau of Statistics publications, and audited financial statements of life insurance companies. The study does not cover non-life business except where a composite insurer's accounts require segmental separation.

1.8 Limitations of the Study

(i) Segment data availability NAICOM's published disaggregation of life business by annuity, individual and group lines is a relatively recent reporting practice, so a consistent segment series may not extend across the full study period. (ii) IFRS 17 discontinuity the change in insurance revenue and liability measurement from 2023 creates a break in the reported series that must be handled explicitly. (iii) Multicollinearity interest rate, inflation and exchange rate have moved together closely in Nigeria since 2023, which complicates the isolation of the interest rate effect and may inflate standard errors. (iv) Endogeneity monetary policy responds to macroeconomic conditions that also affect insurance demand, so estimated coefficients may reflect simultaneity. (v) Short post-reform window the easing phase beginning September 2025 provides few observations, limiting inference about asymmetric responses to rate increases and decreases. (vi) Lapse and surrender data Nigerian insurers do not consistently publish surrender experience, which is theoretically the most interest-sensitive variable of all.

1.9 Operational Definition of Terms

Interest rate: The price of money, expressed as a percentage per annum; measured here principally by the Monetary Policy Rate and by market yields on federal government securities.

Monetary Policy Rate (MPR): The benchmark rate at which the Central Bank of Nigeria lends to deposit money banks, serving as the anchor for other rates in the economy.

Real interest rate: The nominal interest rate adjusted for inflation, representing the actual purchasing-power return to the lender or saver.

Life insurance business: Insurance contracts contingent on human life, comprising individual life, group life and annuity business.

Annuity: A contract under which the insurer pays a periodic income to the annuitant, typically for life, in exchange for a lump sum consideration.

Asset–liability matching (ALM): The alignment of the duration, currency and cash-flow profile of an insurer's assets with those of its liabilities.

Reinvestment risk: The risk that cash flows from maturing assets must be reinvested at yields lower than those originally assumed.

Surrender: The voluntary termination of a life policy by the policyholder before maturity in exchange for the surrender value.

Duration: A measure of the sensitivity of the present value of a cash-flow stream to a change in the rate of interest.

References

Central Bank of Nigeria. (2025). Monetary policy decisions: Communiqués of the 300th and 301st meetings of the Monetary Policy Committee. CBN. https://www.cbn.gov.ng/MonetaryPolicy/decisions.html

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Dickson, D. C. M., Hardy, M. R., & Waters, H. R. (2020). Actuarial mathematics for life contingent risks (3rd ed.). Cambridge University Press.

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