THE IMPACT OF CLAIMS MANAGEMENT ON THE PROFITABILITY OF INSURANCE COMPANIES IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Claims settlement is the moment at which the insurance promise is either kept or broken. For the policyholder it is the only tangible benefit of years of premium payment; for the insurer it is simultaneously the largest single item of expenditure and the principal determinant of reputation. Claims management the process by which claims are notified, investigated, adjusted, settled or repudiated, and recorded therefore sits at the intersection of cost control and customer retention, and its effect on profitability runs in two opposing directions.

The cost channel is straightforward. Claims incurred are the dominant expense of an insurance company, so the loss ratio is a first-order determinant of underwriting profit. Tighter claims control accurate reserving, effective fraud detection, disciplined adjustment, subrogation and salvage recovery reduces claims cost and raises profit. The reputation channel runs the other way. Prompt, fair settlement builds confidence, drives renewal and referral, and expands premium income; delayed or disputed settlement destroys trust and depresses future business. Nigerian empirical work reflects both. Yusuf and Dansu (2014) examined the effect of claim cost on insurers' profitability in Nigeria, and subsequent studies have found that the claims ratio significantly affects profitability while reinsurance claims do not. Oladunni and Olaolu (2024) found that claims settlement in both life and non-life business had a statistically significant effect on profitability, and other recent Nigerian work has reported a positive relationship between claims settlement and investment income, interpreting this as evidence that settlement builds public confidence and thereby attracts premium.

The Nigerian industry context sharpens the question considerably. In 2025 gross claims fell by seven per cent to ₦724.7 billion, from ₦779.5 billion in 2024, while gross premium written rose 47.3 per cent to ₦2.30 trillion an apparently favourable movement in the loss ratio. Yet the settlement rates beneath that figure are less reassuring: the non-life segment settled 75.5 per cent and the life segment 65.5 per cent of reported claims (NAICOM, 2026). A falling claims figure accompanied by settlement rates in that range may reflect improved underwriting and efficiency, or it may reflect claims being delayed, disputed or repudiated. The distinction matters enormously for the interpretation of the industry's recent profitability, and it is the interpretive problem at the heart of this study.

Regulation has now made the issue explicit. NIIRA 2025 introduced what the Presidency described as zero tolerance for delayed claims settlement, together with policyholder protection funds for insolvency cases (Federal Republic of Nigeria, 2025). Insurers that have historically managed their loss ratio partly through settlement delay will find that route closed.

1.2 Statement of the Problem

Nigerian insurance companies face a claims management problem that is simultaneously a profitability problem and a trust problem, and the empirical literature has not resolved the relationship between the two.

First, contradictory findings. Some Nigerian studies report that claims settlement significantly affects profitability; others report no significant influence of total claims settlement on profitability; still others report that the relationship is positive rather than negative, running through confidence and premium growth. This divergence suggests that studies are measuring different constructs claims cost, claims ratio, settlement speed, settlement rate under the single label of claims management.

Second, settlement rates raise questions the aggregate figures cannot answer. With a third of reported life claims and a quarter of reported non-life claims unsettled in 2025, it is not established whether the industry's improving loss ratio reflects efficiency or non-payment. Profitability achieved by the second route is not sustainable and is now regulatorily prohibited.

Third, the trust deficit. Consumer surveys have reported declining trust in Nigerian insurers, and low trust is consistently cited as a constraint on insurance penetration, which remains below one per cent of GDP. If poor claims experience is the mechanism linking the two, then claims management is not merely an internal cost matter but the binding constraint on market growth.

Fourth, fraud contaminates the cost side. Insurance fraud, including fabricated and inflated claims, is documented in the Nigerian market, so observed claims cost reflects both genuine loss and leakage. Studies that treat claims cost as a homogeneous expense cannot separate the profitability effect of legitimate settlement from that of fraud leakage.

The problem, therefore, is the absence of clear evidence on how the distinct dimensions of claims management affect the profitability of Nigerian insurance companies.

1.3 Aim and Objectives of the Study

The aim of this study is to examine the impact of claims management on the profitability of insurance companies in Nigeria.

The specific objectives are to:

1. examine the claims management practices adopted by insurance companies in Nigeria;

2. determine the effect of the claims ratio on the profitability of insurance companies in Nigeria;

3. assess the effect of claims settlement speed and settlement rate on profitability;

4. examine the effect of claims handling expenses on profitability;

5. determine the effect of claims management on premium growth and policyholder retention; and

6. identify the constraints limiting effective claims management in the Nigerian insurance industry.

1.4 Research Questions

1. What claims management practices are adopted by insurance companies in Nigeria?

2. What effect does the claims ratio have on the profitability of Nigerian insurance companies?

3. What effect do claims settlement speed and settlement rate have on profitability?

4. What effect do claims handling expenses have on profitability?

5. What effect does claims management have on premium growth and policyholder retention?

6. What constraints limit effective claims management in the Nigerian insurance industry?

1.5 Research Hypotheses

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

H₀₁: The claims ratio has no significant effect on the profitability of insurance companies in Nigeria.

H₀₂: Claims settlement speed has no significant effect on the profitability of insurance companies in Nigeria.

H₀₃: Claims handling expenses have no significant effect on the profitability of insurance companies in Nigeria.

H₀₄: Claims management has no significant effect on premium growth and policyholder retention.

H₀₅: There is no significant difference in the effect of claims management on profitability between life and non-life insurance companies in Nigeria.

1.6 Significance of the Study

For insurance companies, the study clarifies whether tightening claims control or accelerating settlement is the more profitable strategy, and identifies which dimensions of claims management actually carry earnings consequences. For NAICOM, it supplies evidence bearing on the enforcement of the prompt settlement provisions of NIIRA 2025 and on whether settlement performance should form part of supervisory assessment. For claims managers and loss adjusters, the findings translate operational practice into financial outcome, supporting the business case for investment in claims technology and staff capability. For policyholders and consumer advocates, the study addresses the central complaint against the Nigerian insurance industry with evidence rather than anecdote. For the Nigerian Insurers Association and the Chartered Insurance Institute of Nigeria, the identified constraints indicate where industry-level intervention would be most effective. For scholarship, the study attempts to resolve the contradictory findings of the existing Nigerian literature by disaggregating claims management into cost, speed and rate dimensions rather than treating it as a single variable.

1.7 Scope of the Study

The study covers insurance companies licensed by NAICOM and operating in Nigeria, with the quantitative component focused on companies listed on the Nigerian Exchange Group for which audited financial statements are available. The temporal scope runs from 2014 to 2025, a twelve-year period covering the pre- and post-IFRS 17 eras and the NIIRA 2025 reform. The independent variables are the claims ratio (net claims incurred to net premium earned), the claims settlement rate (claims settled to claims reported), claims settlement speed where data permit, and claims handling expenses. The dependent variables are return on assets, return on equity, underwriting profit and net profit margin. Control variables include firm size, premium retention, expense ratio, investment income and leverage. Where primary data are collected, respondents are claims officers, underwriters and managers of the sampled insurers. Data sources are audited annual reports, NAICOM Annual Reports and Market Performance Bulletins, and the Nigeria Insurance Digest.

1.8 Limitations of the Study

(i) Settlement speed is not publicly reported Nigerian insurers do not routinely disclose average claim settlement duration, so this dimension may have to be captured by primary survey rather than secondary data, with the reliability limitations that implies. (ii) Repudiation is not separately disclosed reported claims that are declined are not distinguished in published accounts from those still under investigation, so settlement rate is an imperfect measure. (iii) IFRS 17 discontinuity the change in the recognition of insurance revenue and claims expense from 2023 breaks the comparability of the series. (iv) Reserving discretion incurred claims include management estimates of outstanding and IBNR reserves, which are subject to judgment and can be used to smooth reported profit. (v) Fraud is unobserved fraudulent claims inflate reported claims cost but are not separately identified. (vi) Sample size the population of listed Nigerian insurers is small, constraining panel estimation power. (vii) Response bias insurers surveyed on claims performance have an evident incentive to overstate it.

1.9 Operational Definition of Terms

Claims management: The end-to-end process by which an insurer receives, investigates, evaluates, settles or declines, and records claims under its policies.

Claim: A demand by an insured for indemnity under an insurance contract following an insured event.

Claims ratio (loss ratio): Net claims incurred expressed as a proportion of net premium earned.

Claims settlement rate: The proportion of reported claims that the insurer settles within a defined period.

Claims settlement speed: The average elapsed time between claim notification and final settlement.

Incurred but not reported (IBNR): Claims that have occurred but of which the insurer has not yet been notified, for which a reserve must nevertheless be established.

Repudiation: The insurer's rejection of a claim on the ground that it falls outside the terms of the policy.

Subrogation: The insurer's right, after indemnifying the insured, to pursue a third party responsible for the loss.

Profitability: The capacity of the insurer to generate earnings relative to its revenue, assets or equity, measured here by return on assets, return on equity, underwriting profit and net profit margin.

Underwriting profit: Net premium earned less net claims incurred and underwriting expenses, excluding investment income.

References

Edike, J. B., Norteh, D., & Aneke, J. I. (2025). Insurance claims settlement and profitability of insurance establishments in Nigeria. Advance Journal of Banking, Finance and Investment, 9(3), 30–52.

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.

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

Oladunni, O. E., & Olaolu, E. D. (2024). Effect of claims settlement on profitability of insurance business in Nigeria. Journal of Quantitative Finance and Economics, 6(1), 27–46.

Opoku, K., Yiadom, E. B., Gubareva, M., & Mendes, L. (2024). Financial performance dynamics of insurance companies: Evidence from Ghana. Cogent Economics & Finance, 12(1).

Wetnwan, S., Taiya, H. M., & Pwagusadi, J. S. (2024). Effects of claims settlement on profitability of insurance companies in Nigeria. International Journal of Financial Research and Management Science, 4(2), 13–20.