Background of the study
This study examines the factors that influence the techniques of
credit risk modeling for life insurers in Nigeria - a major developing
economy of sub-Sahara Africa. Credit risk is the risk of default on a
debt that may arise from a borrower failing to make required
payments.In the first resort, the risk is that of the lender and
includes lost principal and interest, disruption to cash flows, and
increased collection costs. The loss may be complete or partial and can
arise in a number of circumstances
Life insurance provides risk protection for low income earners
and is part of the growing international micro-finance industry that
emerged in the 1970s (Churchill, 2006, 2007; Roth, McCord and Liber,
2007; Matul, McCord, Phily and Harms, 2010). Approximately, 135 million
people worldwide currently hold life-insurance policies with annual
rates of growth in some emerging markets estimated to be up to 10% per
annum (Lloyd’s of London, 2009). However, this number of life-insurance
policies represents only about 2% to 3% of the potential market (Swiss
Re, 2010 p.9). By protecting low income groups from the vulnerability
of loss and shocks, life-insurance is increasingly being spouted as a
formalized risk management solution to world poverty and a key driver
of economic growth and entrepreneurial development in low income
countries such as those of west Africa (Churchill, Phillips and
Over the last decade, a number of the world’s major banks have
developed sophisticated systems to quantify and aggregate credit risk
across geographical and product lines. The initial interest in credit
risk models stemmed from the desire to develop more rigorous
quantitative estimates of the amount of economic capital needed to
support a bank’s risktaking activities. As the outputs of credit risk
models have assumed an increasingly large role in the risk management
processes of large banking institutions, the issue of their potential
applicability for supervisory and regulatory purposes has also gained
prominence. This review highlighted the wide range of practices both in
the methodology used to develop the models and in the internal
applications of the models’ output.
This exercise also underscored a number of challenges and
limitations to current modeling practices. From a supervisory
perspective, the development of modeling methodology and the consequent
improvements in the rigor and consistency of credit risk measurement
hold significant appeal. These improvements in risk management may,
according to national discretion, be acknowledged in supervisors’
assessment of banks’ internal controls and risk management practices.
From a regulatory perspective, the flexibility of models in responding
to changes in the economic environment and innovations in financial
products may reduce the incentive for banks to engage in regulatory
capital arbitrage. Furthermore, a models-based approach may also bring
capital requirements into closer alignment with the perceived riskiness
of underlying assets, and may produce estimates of credit risk that
better reflect the composition of each bank’s portfolio. However,
before a portfolio modeling approach could be used in the formal
process of setting regulatory capital requirements, regulators would
have to beconfident that models are not only well integrated with
banks’ day-to-day credit risk management, but are also conceptually
sound, empirically validated, and produce capital requirements that are
comparable across institutions.
Statement of the general problem
Credit risk for life insurers in Nigeria has generated a lot of
misconceptions and misinterpretations as regards its importance, the
best techniques in its modeling, its benefits to life insurers and most
importantly in the socio economic development of Nigeria.The confusion
of methods to employ in reducing the risk involved with credits to
life insurers both on the part of the insurers and the financial
institution in question
Credit availability to insurers have also been a very
controversial issues as most insurers complain of not been assisted
Objectives of the study
The following are the aims and objectives of the study
- To know the best techniques of credit risk modeling for life insurers.
- To examine the impact of credit risks on life insurers.
- To examine the benefits of credit to life insurer.
- To examine the relationship between credit and performance of insurers.
- To know if credit facilities are readily made available to insurers.
Significance of the study
This study will be important to insurance companies in the
management of credit risks when it comes to life insurers. This study
also will be of importance to Nigerians in unraveling the importance of
credit to their profitability. The study will be important to the
government and insurance stakeholders on the best method of credit risk
modeling techniques for life insurers. This study will be important to
insurers in knowing the best method of repaying their loans or
Scope and limitation of the study
This study is on the techniques of credit risk modeling for life
insurers with the Nigerian insurance company serving as its case study.
Limitation of the study
Financial constraint- Insufficient fund
tends to impede the efficiency of the researcher in sourcing for the
relevant materials, literature or information and in the process of
data collection (internet, questionnaire and interview).
Time constraint- The researcher will
simultaneously engage in this study with other academic work. This
consequently will cut down on the time devoted for the research work.
- What are the best techniques of credit risk modeling for life insurers?
- What impactdo credit risks have on insurance companies?
- What are the benefits of credit to the life insurer?
- What is the relationship between credit and performance of insurers?
- Are credit facilities readily made available to insurers?
H0: credit risks negatively affect insurance/financial institutions.
H1:credit risks positively affect insurance/financial institutions.
H0: credit risks taken by insurance/financial institutions are low.
H1: credit risks taken by insurance/financial institutions are high.
Definition of terms
- Credit risks: A credit risk is the risk of
default on a debt that may arise from a borrower failing to make
required payments. In the first resort, the risk is that of the lender
and includes lost principal and interest, disruption to cash flows,
and increased collection costs.
- Model: a thing used as an example to follow or imitate.
- Insurance: an arrangement by which a company
or the state undertakes to provide a guarantee of compensation for
specified loss, damage, illness, or death in return for payment of a
- Life insurance: insurance that pays out a sum of money either on the death of the insured person or after a set period.
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