THE IMPACT OF REGULATION ON NIGERIA INSURANCE COMPANIES
CHAPTER ONE
INTRODUCTION
1.1.BACKGROUND TO THE STUDY
Insurance as a concept has economic, sociological and legal dimensions that make it difficult to define from the prism of one viewpoint. To the lawyer, insurance is a contract whereby a person called the insurer or assurer, agrees in consideration of money called the premium paid to him by another person, called the insured or the assured, to indemnify the latter against loss resulting to him on the happening of certain events. To the economist, on the other hand, insurance is a device for the transfer of some economic loss from the insured who otherwise would have borne the risk, to an insurer in return for a premium. To the sociologist, insurance is viewed as a device whereby the participants provide financial compensation or succour to those among them encountering the many misfortunes or contingencies that befall humanity. From whatever perspective insurance is viewed, it connotes the existence of risk and a protection against that risk. It is principally intended to be a contract of indemnity (except for life insurance), meaning that it is for the reinstatement of the insured to the original position he occupied before the loss.
Flowing from the above is the fact that the insured event must be an uncertain event, both as to its occurrence and its severity. Thus the insurance contract is termed aleatory, meaning it depends on chance or contingency. Secondly, the insured cannot make a profit from his loss. This fact is well illustrated in the words of Brett, L.J. in Castellainv. Preston in the following timeless words:
The very foundation, in my opinion, of every rule which has been applied to insurance law is this, namely, that the contract of insurance contained in a marine or fire policy is a contract of indemnity and of indemnity only,…and if ever a proposition is brought forward which is at variance with it, that is to say, which either will prevent the insured from obtaining a full indemnity or which gives the insured more than a full indemnity, that proposition must certainly be wrong.
It is in that sense that insurance is distinguished from wagering contracts which may include a chance of profiting from the occurrence of an event. It is for these reasons too that the rules as to the existence of insurable interest, observance of good faith, proximate cause, contribution and subrogation are key elements of insurance.
Insurance is very important as an aid to trade and general economic stability for many reasons. It ensures the spread of risks. The insurance premium paid is typically small compared to the magnitude of the overall probable loss. However, the little contributions of the many into the common pool ensure that the few who suffer loss could be compensated to the full extent of the loss suffered irrespective of the quantum of the contribution. Consequently, insurance is a source of security against business failures and stimulus to business whereby entrepreneurs would rather apply for investment the resources they otherwise would have set aside to meet contingencies. The insurance industry is also to be credited for evolving advanced and modern measures of loss prevention and control through risk improvement practices such as risk surveying, and the funding of researches into alarm systems, safes and fire prevention and containment equipment. Ultimately this benefits society at large as losses, such as fire gutting a factory, may occasion loss of earning of several persons upon whom many more are dependent. Lastly, insurance provides funds for investment in the economy at large thereby boosting
economic growth.
Regulation is the promulgation of prescriptive rules as well as the monitoring and enforcement of these rules. Regulation as a form of intervention is advanced or designed to prevent the creation of monopoly power and or its abuse, ensure safety and soundness of the regulated activity, and make less likely the occurrence of actions that generate significant negative spillovers, or externalities. Several of the regulatory measures applicable to insurance in Nigeria are contained as statutory provisions while others are prescribed in reliance on powers derived from statutes.
The necessity for regulation of insurance is rooted in both the legal, sociological and economic importance of insurance. One justification for regulation is the need to ensure financial security by ensuring that insurance companies have a reasonable level of capital to support the business written and enable them to withstand ‘shocks’ or unforeseen losses arising out of the business. This challenge is met by the prescription of solvency limits which ensure solvency and the insurer’s ability to pay claims in the future. Regulation will ensure standardized policy coverage, require minimum coverage, and require fair claims processing. Allied to the foregoing, insurance regulation guarantees protection for policyholders.
