The Effect of Reinsurance Arrangements on the Financial Stability of Nigerian General Insurance Companies

This study examines the effect of reinsurance arrangements on the financial stability and claims-paying capacity of general insurance companies in Nigeria. Reinsurance is a primary risk management tool for insurers, enabling them to limit exposure on individual large risks and protect against catastrophic aggregate losses. In Nigeria, where insurer capitalization levels are modest relative to the size of risks underwritten, reinsurance plays an especially critical role in maintaining market solvency. This study adopts an ex-post facto research design, using financial data from the annual reports of 15 licensed general insurance companies for the period 2018 to 2023. Reinsurance utilization is measured by the ceded premium ratio and reinsurance recovery ratio. Financial stability is assessed using solvency margin, liquidity ratio, and combined operating ratio. Panel data regression with fixed effects estimation is employed. Findings reveal that companies with ceded premium ratios above 40 percent demonstrate significantly better solvency margins and lower loss volatility compared to those relying primarily on net retention. However, excessive reinsurance cession is associated with reduced profitability due to high fronting costs. Nigeria Re and African Reinsurance Corporation are identified as the dominant local reinsurance counterparties. The study concludes that well-structured reinsurance programs significantly improve financial stability in Nigerian general insurance companies. It recommends that NAICOM establish minimum reinsurance program quality standards and encourage greater use of local reinsurance capacity to reduce foreign exchange outflows.

Keywords: reinsurance, financial stability, general insurance, solvency margin, Nigeria Re.