Resilience of Nigerian Insurance Companies to Systemic Financial Shocks: A Stress Testing Framework

This study develops and applies a stress testing framework to assess the resilience of Nigerian insurance companies to systemic financial shocks, drawing on actuarial risk quantification methods and regulatory stress testing principles. The COVID-19 pandemic, the 2020 oil price crash, and the 2023 foreign exchange reform demonstrated the interconnectedness of insurance company balance sheets with macroeconomic conditions. Actuarial stress testing provides a structured approach for quantifying insurer vulnerability to adverse economic scenarios before they materialize. This study constructs a three-scenario stress testing framework covering a moderate economic recession, a severe currency depreciation event, and a combined inflation and equity market shock, calibrated to Nigeria's historical economic volatility. Financial data from 20 licensed insurance companies for 2022 are used as the stress testing baseline. Each scenario is applied to insurer balance sheets using actuarial shock factors calibrated from historical data, affecting investment portfolios, claims inflation, premium collection, and reserve adequacy simultaneously. Findings reveal that 7 of the 20 sampled companies breach the minimum solvency margin under the severe combined shock scenario, with life insurers more vulnerable to investment return shocks and non-life insurers more sensitive to claims inflation. The study concludes that systemic vulnerability in the Nigerian insurance sector is material and concentrated among smaller, less diversified companies. It recommends NAICOM introduce mandatory annual stress testing disclosures for all licensed insurers above a minimum premium threshold.

Keywords: stress testing, insurance resilience, systemic risk, solvency, Nigerian insurance.