Performance Evaluation in Service
Organizations: Case study Insurance Industry
The insurance decree o f 1991 was ed to repeal and expand the former insurance laws. This new decree as observed by insurance practitioners contained more s t r i g e n t provisions, thus making it more d i f f i c u l t for insurers to cope w i t h t h e requirements.
This research was conducted to evaluate the performance of insurers who are the pivot o f the insurance i n d u s t r y a n d whom mostly the regulations concern. The evaluation was on some o f t h e i r operational areas like solvency, reserves and investment for a period of 5 years(1992 to 1996) when this law was in force.
T h e e v a l u a t i o ~w~a s considered necessary so as t o assess how well the i n d u s t r y is doing faced with distress syndrome which has been reported as existing in the insurance industry. The findings revealed that although the operators kept the required solvency margin and contingency reserve, there has been delay in claims settlement arld some times claims are n o t p a i d at all. It was also discovered that f o r a l l the years reviewed, the insurers consistently kept less reserves for unexpired r i s k s arid
outstanding claims. Since these reserves represent their l i a b i l i t y to the insured, their a b i l i t y to settle claims promptly would be
Furthermore, the legal requirements that 35% o f total assets be invested in government securities was greatly flawed. This suggests t h a t t h e government is denied the huge funds at the disposal o f insurance i n d u s t r y a n d these funds would v i most likely be invested in riskier projects. The implications of these findings a the policy holders whom the law is meant to protect has not received such protection.
This could be responsible for the delay and non settlement o f claims which characterize insurance business in Nigeria and is weakening the industry. Also the reduced investment in government security would make it d i f f i c u l t f o r the government to invest funds from insurers into productive sector of the economy. Again in vesting in riskier projects would further jeopardize the interest of policy holders who may loose their money .
The information gathered was however used to make useful recommendations which, i f implemented, would hopefully keep this important sub-sector of the financial sector o f the economy alive
Performance evaluation is the assessment or measurement o f performance of employees, management, entire organization or industry
against the goals earlier set. The aim of such measure i s t o obtain feedback about effectiveness. To measure performance in a service organization like insurance industry is often d i f f i c u l t .
The d i f f i c u l t y arises from the absence of a tangible product which could be stored and sold later. Insurance companies rather provide financial services by accepting “risk” from individuals and businesses for a pren~iurn. In return for the premium they (the insurance companies) pay a certain amount earlier agreed upon, in the future and if loss occurs, to the insured. It is necessary, therefore, to find an effective and logical means of measuring the performance of a service organization such as the insurance industry.
It is obvious that there are many areas of an organizations performance that could be measured. It could be earning, managerial efficiency, customer satisfaction, growth, market share, product quality or cost control. Each of these measures the performance of an aspect of a company’s operation that may be of interest to the user. But whatever performance is being assessed, according to Szillaggi F. Wallace
(1980) there must be a standard or goal to which it would be compared. Fertig et al (1972) noted however that some o f the performance
measures have proved not to be useful in service organizations. An example of these is earning. Earning computation in a service organization,according to them, has the following shortcomings which make it less useful as a measure of performance: – A number of insurance costs are period not product costs. – Premium collected from insureds are not regarded as earning at the period they are received rather they are reported as earned over the l i f e of the policy.
– Commissions to agents are regarded as expense at the time the policy is sold. Again, as a result of th special feature of insurance of handling two related but dissimilar lines of business at the same time (First, insurers accumulate premiums collected from policy holders from which claims are settled when losses occur and secondly, they invest the funds to earn a return while it is held) some of the ways other
industries like manufacturing industry could be assessed may not be useful. In this study, the performance of companies in the insurance
industry would be assessed and compared to the standards set in the law regulating insurance operations. More specifically, their
performance would be assessed in areas of solvency, investment and reserves.
BACKGROUND OF T H E STUDY
”All losses are restored and sorrows ad ” William Shaloespaar (Sonnet 30) Service organisations o f f e r services to t h e i r clients and receive payment in r e t u r n for such services. They do not handle tangible products l i k e t o i l e t soap o r motor car. Their products cannot be stored and sold to customers in a l a t e r period. These features distinguish service organisations from others l i k e the manufacturing organisations.
Examples of service organisations include law firms, chartered accounting firms and insurance firms. Also, as earlier mentioned, due to the nature of service organizations, the usefulness of earning as a measure o f performance is highly reduced. Hence the need to assess performance u s i n g o t h e r measures. In t h i s research, the insurance i n d u s t r y is the case study, so it will be necessary for us to understand the nature o f t h e i r services.
The business o f insurance is best described by a biblical injunction in Galations 6: 2 which says ” Bear ye one another burden1′.
Vanghan and Elliott (1978) described it as an intricate mechanism having two fundamental characteristics: – Transferring o r s h i f t i n g r i s k from one individual to a group. – Sharing losses, on some equitable basis, by all members o f the group. On individual basis, they stated that it is an “economic device” whereby the individual substitutes a small certain cost (the premium) for a large uncertain financial loss (the contingency insured against) The primary function . insurance performs is the creation of security b y providing protection.
The individual o r group is provided freedom from the burden o f uncertainty. Insurance business is broadly grouped into two classes, the
l i f e assurance business and the general business. The life assurance business involves the protection against losses resulting from accident o r loss o f life. It could be i n d i v i d u a l o r group life. The second class o f insurance business, the general business covers every
other area outside life.
These two classes o f business are distinct in ways other than the one stated above. The premium collected from l i f e business are held for long usually over a year a n d t h u s could be invested over a long term. On t h e o t h e r hand, the general business contract is usually annual thus liabilities resulting from it are usually discharged within one year. This presupposes that premium from such business in t h e c u r r e n t year cannot be invested over a l o r y term. In Nigeria insurance business has been receiving increased attention from the government.
This is manifested in the several promulgation regulating the a c t i v i t i e s o f this sector. tn 1976 a decree was promulgated regulating the activities o f this sector. In 1991 a decree was promulgated which expanded and repealed the 1976 insurance decree. Now t h e r e i s another insurance decree of 1997 which f u r t h e r enlarged and repealed the 1991 decree. Earlier than 1976, legislation on the sector was not o f major concern, but since 1976 each new legislation has become more and more stringent.
Why has government d i r e c t e d a t t e n t i o n on the insurance sub-sector? The interest or increased attention according to Vauyharl
E Elliott (1978, p.132) is because insurance l i k e banking is “vested in the public interest.” This means that insurance affects many
people and l o protect public welfare therefore, government needs to regulate their activities. I r l Nigeria the case of distress now
plaguing the banking industry is a further pointer to the need for regulation to prevent distress ill the insurance i l l d u s t r y .
Secondly, r e g u l a t i oi n i s necessary t o prevent excessive competition. In Nigeria the rate of growth of insurance
firms and brokerage firms has been very impressive . The number of insurance companies rose fro~n 109 in 1990 to 145 in 1994. The implication of this for the industry is that competition has become very severe giving rise to what Ogunkanrni (1977,P.28)described as “practices which are unwholesome”. The danger in too much competition in the insurance industry is the j%simplify that while vying for business, companies may under estimate future losses and as a result fail. Thirdly, the insurance contract i s v e r y complicated in nature taking it d i f f i c u l t f o r the insured to understand. Legislation ensures
that contracts offered to the public are Cair. Omodu (1977 p. 28) stated that! ‘ in Nigeria “it will n o t be an exasperation to say that less than tell percent of the population know what insurance is all about.” The need for protection of the public i s therefore more. Another important reason for regulation is the solvency question. insurance product is a promise. In r e t u r n f o r the premium, the company promises to pay the insured a specified sum upon t h e occurrence of the event insured against.
The ability o f the insurance company to fulfill this promise t o t h e insured depends on i t s financial solvency. This fact accounted for the inclusion in the 1991 decree on insurance a provision called the solvency margin. This is aimed at strengthening the position o f insurance firms and thereby improve their ability to settle claims. Section 20 of 1991 insurance decree sub section (1) stipulates t h a t every i l l s u r e r in general business shall maintain a solvency margin, being the excess of the value of admissible assets in Nigeria over its liabilities ill Nigeria consisting of:-
(a) reserve for unexpired r i s k ,
(b) reserves for outstanding claims, and
(c) reserves for claims incurred but not yet reported.
Section 20(2) requites t h a t the solvency margin shall not be less than 1 5 h f g m s premium income less the reinsurance premium paid out during the immediately preceding accounting year. Section 20(2) excludes moneys owed by policy holders, brokers or agents by way of premium due but not received by t h e i n s u r e r from the list o f admissible assets. Very stiff penalties await defaulters of this provision. Section 20(7) stipulates that arr insurer’s license shall be cancelled for failure to make up solvency margin within the stipulated time period.
This legal provision is aimed at ensuring t h a t insurance companies are in a position to settle claims with minimum delay to safeguard the
insuring public and maintain confidence which is fast dwindling bn the insurance sub-sector. On the issue of investment as an important reason why government should regulate insurance operation Fertig et al (1972) had this to say “the investment side of the insurance business is so important that many fear that the financial strength of insurance companies may become greater than i s socially desirable!’ The insurance industry plays very major role as financial intermediaries by making funds available for investment both in the capital and money market c , In some cases too they are involved in lending.
As a result o f the huge sums available to them, government legislation tends to direct investment to sound and socially desirable sectors
for the b e s t i n t e r e s t o f the economy. This often run c o n t r a r y to the desire o f the insurance firms that p r e f e r higher paying but o f t e n r i s k i e r investments. The insurance decree o f 1991 Sect. 21 (1) provided that every i n s u r e r transacting business in Nigeria shall invest in Nigeria assets equivalent to the amount o f funds shown in the balance sheet and revenue account o f the insurer. Sect 21 ( 2 ) authorized areas they could invest in are as following : – Securities specified under the trustee investment act; Share in o r other securities o f a society registered under a law relating to co-operative societies; Loans to building societies approved by the commission; Loan on real property, machinery and plant in Nigeria. Loan on l i f e policies within t h e i r surrender values; Cash deposits in or b i l l s o f exchange accepted by licensed banks; and Such investments as may be approved. Subsection 21 (3) f u r t h e r specified that not less than 35% o f the insurer’s
total assets shall be invested in government securities.
Sect 21 (4) stipulates that no i n s u r e r shall: (a) in respect o f non-life business invest more than 25% o f i t s assets in real property; o r
(b) in respect o f i t s l i f e insurance business, invest more than 35% o f i t s assets in real p r o p e r t y .
The foregoing provisions are aimed at directing the insurance funds to preferred sectors of the economy. Also it is designed to curtail investment in very r i s k y ventures that could result in the collapse of insurance firms. An important provision in the decree is the sealing placed on general business funds t h a t can be invested in long term securities and real p r o p e r t y .
This will further improve l i q u i d i t y as claims can be settled more readily and thereby ensure that insurance companies remain solvent. Another crucial area of insurance operation that government legislation is necessary to control is reserves. As mentioned earlier, insurance industry operates in a unique way by collecting in advance
for a product that w i l l be delivered in the f u t u r e .
It is very necessary therefore that there should be some recognition of the obligation to policy holders by providing for unearned premium. Insurance business can only operate soundly on t h e advance premium basis b y providing
f o r t h e i r future obligations. This provision is made by the creation of reserves. Such reserves are liabilities which represent the present value of their obligations to policy holders.
Regulation of reserves is a critical area in insurance supervision and that is why the government in each insurance law stipulates the nature and amount of reserves that companies must maintain. Reserves are very important in showing the financial stability and solvency of the firms as we recognize that they are true liabilities. According to lrukwu (1997) reserves represent an insurer’s major o r principal liabilities.
They do not represent funds set aside to meet up contingencies. They are actual measurement of a company’s liabilities
to policy holders and claims that must be offset by assets. Understating The foregoing provisions are aimed at directing the insurance funds to preferred sectors of the economy. Also it is designed to curtail investment in v e r y r i s k y ventures that could result in the collapse of insurance firms.
An important provision in the decree is the sealing placed on general business funds t h a t can be invested in long term
securities and real p r o p e r t y . This will further improve l i q u i d i t y as claims can be settled more readily and thereby ensure that insurance companies remain solvent. Another crucial area of insurance operation that government
legislation is necessary to control is reserves.
As mentioned earlier, insurance industry operates in a unique way by collecting in advance for a product that will be delivered in the f u t u r e . It is very necessary therefore that there should be some recognition of the obligation to
policy holders by providing for unearned premium. Insurance business can only operate soundly on the advance premium basis by providing for their future obligations. This provision is made by the creation of reserves.
Such reserves are liabilities which represent the present value of their obligations to policy holders. Regulation of reserves is a critical area in insurance supervision and t h a t is why the government in each insurance law stipulates the nature and amount of reserves that companies must maintain. Reserves are very important in showing the financial stability and solvency of the firms as we recognize t h a t they are true liabilities.
According to lrukwu (1997) reserves represent an insurer’s major o r principal liabilities. They do not represent funds set aside to meet up contingencies. They are actual measurement of a company’s liabilities to policy holders and clairns that must be offset by assets. Understating reserves imply that the net worth of the company is overstated. In Nigeria, insurance decree No. 58 of 1991 in section 19(1) outlined the types of reserve which every insurer must maintain for each class of insurance business.
(a) reserves for unexpired risks
(b) reserves for outstanding claims; and
(c) contingency reserves to cover fluctuations in securities and variation in statistical estimates. Sectio~l 19(2) specified the magnitude of reserves that should be maintained in general business. reserves for unexpired risk should be credited with 45% of tlle total premium and for marine cargo 25% of total premium. reserves for outstanding claims should be credited with amount equivalent to all outstanding claims plus 10% of estimated figure of claims incurred but not yet reported as at the end of the previous year. contingency reserves should be credited with 3% of total premium or 209, of net profit which ever is greater and this should accumulate until it reaches the minimum paid up capital or 50% of net premiums which ever is greater. Section 19(3) provides for reserves that should be maintained for life business: General reserve fund should be credited with an amount equal to the net liabilities on policies in force at the time o f t h e a c t u r i a l valuation.( t i )
Contingency reserves should be c r e d i t e d with 1% o f the gross premiums o r 10% of p r o f i t s which ever is greater and t h e reserve should accumulate until it reaches the minimum paid-up capital. These provisions may seem h a r d o n practitioners but they are necessary if the i n d u s t r y must survive. These legal provisions on solvency, investment and reserves are aimed a t e n s u r i n g t h a t the i n d u s t r y operation sound financial . standing.
Such soundness is necessary if claims must be settled readily as they occur to- increase the confidence o f t h e p u b l i c on insurance operations. Also, the financial good health o f the i n d u s t r y will ensure survival, growth and p r o f i t a b i l i t y f o r t h e shareholders. All these will lead to economic advancement a n d g r o w t h o f the nation.
It is against t h i s background t h a t t h i s research i s c a r r i e d o u t to assess how the i n d u s t r y has been adhering to these regulations. Adherence would indicate that the nation’s aims and ‘aspirations are being met while non adherence would indicate danger and call for action.
Performance Evaluation in Service
Organizations: Case study Insurance Industry
STATEMENT OF THE PROBLEM
The insurance i n d u s t r y holds a lot of funds accumulated from premium collected from i t s various classes of businesses. These funds enable them perform v i t a l roles in the economy such as financial intermediation and fund mobilization. Other functions which they perform include provision of conducive environment for business by giving protection against uncertainties to the insured.
These roles are very crucial for the people, businesses and the national economy in general. To ensure that the industry operate effectively and to maintain adequate control, government has repealed and expanded laws governing the operation of insurance in Nigeria. These laws were aimed at checking problems of the insurance industry which include among others: –
* The influx of companies into the insurance industry resulting in v e r y s t i f f competition and giving rise to unwholesome practices.
* The temptation of insurers to invest in high risk, high yield
projects with the huge funds at their disposal so as to make
* Delay and often non settlement of clairus when losses occur and
* Financial distress.
These problem would obviously hinder the a b i l i t y of the insurance industry to operate efficiently and effectively.
The government legislation’ aims and purposes are laudable, but the problem is the adherence of companies in the insurance industry to the provisions of the law. This problem of adherence i s v e r y crucial because adherence
to the provisions of the law would make for a stable and financially strong industry which would be able to perform its roles towards the policy holders, the shareholders and the national economy effectively and e f f i c i e n t l y .
The s t u d y therefore assessed the performance of insurers in some of the operational areas of solvency, investment and reserve to determine if the legal provisions are adhered to.
The government is now more poised to make the insurance i n d u s t r y operate more soundly. This is because organisations in insurance i n d u s t r y offer financial services vital for economic g r o w t h a n d development
of any nation. In Nigeria, the insurance i n d u s t r y has made remarkable contribution as investment intermediaries i n capital formation and investment markets. Through their operation, they have increased the size o f invest-able funds available and provided conducive atmosphere for business.
A.K. Oniwinde (1996 p.7) put it more succinctly when he described insurance business as “The concept, philosophy and technique of g e ~ w r a t i n g short medium and long term savings which are subsequently transformed into long term investment that has helped some organized businessmen to expand and to create new companies, which has enabled
these organization to offer employment to the masses. It is because of these important roles which the insurance i n d u s t r y performs that has necessitated an evaluation or assessment of t h e i r operation in areas of solvency, investment and reserves against the provisions of the law in these areas. The evaluation,it is IVJped, w i l l reveal the practices of firms in the i n d u s t r y in complying with these crucial legal provisions.More specifically, the research is expected to:
Performance Evaluation in Service Organizations: Case study Insurance Industry