INFLUENCE OF MARKET RISK ON THE PERFORMANCE OF INSURANCE COMPANIES IN NIGERIA - Project Topics & Materials - Gross Archive

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INFLUENCE OF MARKET RISK ON THE PERFORMANCE OF INSURANCE COMPANIES IN NIGERIA
ABSTRACT

The performance of any business firm not only plays the role to improve the market value of that specific firm but also leads towards the growth of the whole sector which ultimately leads towards the overall prosperity of the economy. Assessing the determinants of the performance of organizations has gained importance in the corporate finance literature; however, in the context of insurance sector, it has received little attention particularly in Nigeria. Accordingly, this study investigated the impact of market risk (Interest rate and Foreign exchange rate, on performance of insurance companies in Nigeria. Return on total assets (ROA) - a key indicator of insurance company's performance- is used as dependent variable while interest rate and foreign exchange rate are independent variables. The sample includes 7 insurance companies over the period 2012-2017. The audited annual reports (Balance sheet and Profit/Loss account) of insurance companies were obtained from National Insurance Commission (NAICOM) and insurance companies’ annual publication reports. The results of regression analysis reveal that interest rate are not statistically significant and negatively related with return on total asset; however, foreign exchange rate is statistically significant and positively related with ROA. Thus, foreign exchange is an important determinants of performance of insurance companies in Nigeria. But, interest ratehave statistically insignificant relationship with ROA.
 TABLE OF CONTENT
 CHAPTER ONE
INTRODUCTION
1.1 Background of the study
The Insurance Industry in Nigeria is a vital part of the entire financial system. Insurance companies provide individual and businesses with a broad spectrum of financial security products and contribute to financial intermediation, thus enhancing a nation’s financial and economic escalation. The financial system of an economy has a strong and recognized correlation with its development. As such, their success means the success of the economy; their failure meansfailure to the economy (Ansah-Adu, Andoh, and Abor, 2012).
In his study,Zarruk (1989), considering risk management by the financial institutions, found that risk-averse financial institutions operate with a smaller risk rate spread than risk-neutral ones, while Paroush (1994) explains that risk aversionraises the optimal interest rate.
1.2. MARKET RISK
Market risk is the risk of losses in position arising from movements in market prices (Wikipedia). Also market risk can also be seen as the risk of loss due to the factors that affect an entire market or asset class.
It is define by investopedia to be the ‘’risk to an institution resulting from movements in market prices, in particular, changes in interest rate, foreign exchange rate, equity price and commodity price’’. Market risk is the risk of loss in the value of a financial institution’ proprietary trading holdingsin equity, debt, Fx or commodity instrumefnts, due to fluctuations in market prices.
    Market risk is also known as undiversifiable or systemic risk because it affects all assets classes and is unpredictable. An investor can only mitigate this type of risk by hedging a portfolio. Poor market risk management practices can lead to significant losses very quickly in volatile market conditions and also complete institutional collapse in sever situations. The most spectacular recent case of market risk management failure was the bankruptcy of Bear sterns, a U S investment bank with substantial proprietary trading activities, at the start of the global financial crisis.
A 1995 survey of major financial firms in United State of America (USA) revealed that at least 90% of the financial institutions are using some form of financial engineering to manage market risks which are: Interest rate, Foreign exchange rate, commodity price risks. Banks, insurance firms, saving and Loan firms are also in derivatives markets. There is substantialcommonalityin the underlying rationale techniques that are employed, although thetype of risks confronting managers varies across industries.
The global financial crisis of 2007 shown that financial markets are becoming more integrated more complex, and more volatile than what was previously commonly believed. The important of market risk management will thus increase going forward.
The management of market is highly complex to limit the size of market risk exposures, to allow insurers to achieve profit targets and insurance company needs to have an understanding of the size of potential loss that can be incurred under extreme market volatility. The degree of financial leverage, foreign exchange rate exposure and interest rate risk can be uses as an indicators of market risk. Degree of financial leverage (DFL) is best used to help companies determine their financial leverage risk level, it is practically a measure of degree of financial risk, thus the higher the ratio, is more risky the business is considered to be, as it relies too much on debts and any changes within the economic environment or in interest rates may have an extremely negative impact on how the business evolves.The foreign exchange rate exposure of a firm is a measure of the sensitivity of its cash flows to changes in exchange rates (Volatility)
1.3. STATEMENT OF THE RESEARCH PROBLEM
    The loss of finance as a result of the instability of the market has resulted to decline in the return on investment (ROI) of insurance institutions in Nigeria, which has also undermined the growth of insurance industry in Nigeria. This has also resulted to the steady decline of the economic base and foreign reserve of the Nigeria state.
Against this backdrop, the following research questions arises:
What is the relationship between market risk and performance of insurance institutions in Nigeria?This includes:
To what extent does foreign exchange influence performance of insurance institutions?
Of what impact is interest rate on the performance of insurance institutions in Nigeria?
1.4. OBJECTIVE OF THE STUDY
The objective of this study is to empirically examine the determinant of performance of insurance institutions in Nigeria insurance sector
The specify objectives are to:
Examine the relationship between market risk in the performance of insurance institutions in Nigeria
To know the stability level of Nigeria Market
To know if Nigeria market is safe for investment for insurance companies.
1.5. SCOPE OF THE STUDY
The study is confined to investigate the effect of market risk in insurance industry in Nigeria.
1.6. THE RELEVANCE AND SIGNIFICANT OF THE STUDY
It is hope that the findings of this study will serve as a guide in the quest to find the best way of measuring and hedging market risk.
This study will also be of important to investors, as this would help in knowing the true state of the Nigeria Market.
This will also help the insurance companies in seeing the effect of market risk on their investment
It will also provide the public on the knowledge of market risk.
1.7. RESEARCH HYPOTHESIS
The hypotheses formulated for this study are:
Ho1:  There is nosignificant relationship between interest rate and performance of insurance institution
Ha1: There is significant relationship between interest rate and performance of insurance institution
H02: There is nosignificant relationship between Foreign exchange and performance of insurance institution
Ha2: There is significant relationship between Foreign exchange and performance of insurance institution

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