March 13, 2010

Industries Felled by Corruption 1: Insurance

“Obedience to law cannot be legislated. No matter how good the law is, someone who really wants can find a way to break it without being caught”.
This article is a follow up on my earlier article (see ). I was gladdened when this week a journalist, Anna Bernasek, published a book “The Economics of Integrity”. I read an interview she gave to Laura Fitzpatrick (see ). From that interview I would recommend that book to all Nigerians, from the politician to the man on the street.
The point of this discuss is this: Various routine acts by ordinary folks have contributed immensely to the poverty, corruption and failures we see today in the country. Unwittingly Nigerians cry at the political leaders but I know that they are not the only problem the country faces. Like someone said “the leaders did not come from mars, they are Nigerians and are as much guilty”. It will take a firm commitment from each and every citizen to beat corruption.
One of the causalities of corruption of which I am about to discuss here is the Insurance Industry. To understand this fact let’s look at how insurance works. (See )
How Insurance Works
The fundamental logic in insurance is simple even though the act of insurance has grown into a very complex industry in many developed economies: The payments (called premiums) of the many pay for the losses of a few. The underlying principle is that a very large number of people pay quiet insignificant amounts of their income into a pool and the pool is exposed to equally few significant claims. So in practice if a million people are covered against motor vehicle accidents, for example, and they each pay 100 naira/month, the pool immediately has 100million/month to cover all losses and pay for the administrative costs. The claims of the few are paid from that pool. Because there are far more people contributing to the pool than making claims, there is always enough to pay the claims – even large single claims like when someone’s car is stolen or written off as a result of a car collision, or many smaller claims like those resulting from a natural disaster. However, large disasters do come close to emptying the pool.
How corruption Works
This description is in fact academic, in practice a likely scenario is this: I buy a car (worth N600,000 for example) to insure it the insurance company sends me to an assessor for an inspection. As a “corrupt” person I offer the assessor money and influence the assessment. The assessor accepts the “tip”, he thinks nothing of it so he fails to record that my car has scratches or even dents and that my windscreen is chipped or even cracked. So a few days or months after I sign on I make a claim for those damages from the pool. Another insured person has a minor accident but he calculates that his car is insured for far more than it is actually worth at the moment; so he reports the accident. When the assessor comes for inspection he ‘tips” him and gets the car written off so the insurance company pays him the market value of the car. So several little acts of unwise acts by many participants and the “large pool” is going down fast. The insurance company realises this and its, equally corrupt corporate leaders, instead of tackling the problem, what do they do - they plot ways of avoiding to pay out. They devise dubious contracts or add spurious clauses in contracts of insurance. Because the “large pool” is also depleted they begin to default in paying salaries and in paying for other administrative expenses and many companies hire insurance salesmen to hard sale coverage. A whole chain of events follow. The insurance workers now elevate the act of taking “tips” to institutional levels, the insurance company finds clauses in its contracts that saves them from paying out even when they should and even when the pool is not depleted, the insured public losses faith in insurance companies and buys less and less coverage. At the same time many people get more pay outs then they are covered for. In fact some people have been known to organize their own accidents just to claim from the pool. Because rules do not matter anymore, what matters is who you know or where you come from etc. the whole industry crumbles and millions of jobs are lost. This was exactly how the insurance industry in the country failed. It was a combination of factors bordering on individual and institutional malpractices.
When I bought my first motor cycle the law required that I have insurance. How did I get the insurance? Someone gave me a piece of paper with the stamp of an insurance company (Atlantic Insurance Company Limited policy number MC/0046/IS/2000) and that was the coverage the motor cycle needed to operate on the roads. Was that cover actually from the insurance company? I still do not know. The fact is an insurance salesman could be selling that paper without the knowledge of his company itself. If I had an accident could I get any form of pay out from the insurance company? Absolutely, no! In fact going to the insurance company to make a claim was never in my mind, all it was to me at that time was just something I needed to put my bike on the road earning some money for me as a means of public transport. And their are millions of bikes like this in Nigeria today, 99% of them would have this sought of insurance. No premiums paid (just a once off fee, collected by a “stamp insurance salesman”) and no cover provided. What is the effect of this? Accidents happen lives are ended in one way or the other, either economically, physically or both and poverty is passed on from generation to generation. And it all starts when one man accepts a “tip” unwittingly.  
Insurance for insurance companies
Of course their is what is called reinsurance. When the pool comes close to emptying, another pool from which insurance companies can draw to pay claims is the reinsurance pool. Some of the premiums are used by insurance companies to buy reinsurance – which is insurance for insurance companies. Sometimes losses are so big that there is no way that an insurance company can cover the costs. is an extra layer of protection against large losses. This is where I believe legislation can be of help in helping stabilize the industry. Reports are that the National Insurance Commission () is now equipped to regulate the industry. But that would be at best half of the problem solved. The administrators and the public must realise that the failure of the industry is a major contributor to the encyclical nature of poverty in the country.
No Insurance, No economy
In other countries, say India, the contribution of insurance to the GDP is about 2.25% for life insurance alone. (see ) In Nigeria the virtual absence of life insurance would be the major contributor to the cyclical poverty in the country. Because insurance does not work in the country millions of people are just an accident away from bankruptcy and economic doom. Because insurance does not work millions of Nigerians have nothing to pass on to their kids but poverty. Their lives are not insured and so the children practically use their own life's to bury them when they die and have nothing to show for it. Because insurance does not work millions of cars in Nigeria are not even roadworthy – there are no vehicle service plans, no vehicle warrantees, no coverage of any kind. A death in a typical Nigerian family is both an economic and a physical demise for the dead and for the survivors, and this more so because of the traditional view of having elaborate ceremonies at every turn whether it is death, a birth, or a marriage. Because insurance does not work, many people cannot afford a lawyer to defend their rights so they put up with all sorts of abuses and they perpetuate their conditions. If only the people would realise there mistakes and change their ways, it all starts from accepting a “tip”, just one unethical act and a whole industry fails. The bribe you may accept, your failure to do your job strictly by the rules, your acceptance of mediocrity instead of resigning, just that one act is the beginning of multitude of failures for generations of people including your children – integrity is indeed a wealth creator. And it starts from the individual.
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