Assessing the Risk Contribution of Gross Claims from different Lines of Businesses within the Nigerian Insurance Sector

An Application of the CAPM Model

Abstract

At the industry-level, premiums and claims are realized from different lines of insurance businesses. Although the premiums are used by the government and other stakeholders to promote economic growth, the frequency and volume of claims accumulated can drastically impede this growth. Hence in this paper, we consider gross claims from six lines of insurance businesses at the macro-scale drawn from a two-year company-based series. We further assume that they form a portfolio of industry-level gross claims and use the  total gross claims as a proxy for the claims market. The Capital Asset Pricing Model is then applied to estimate the degree of risk contributed by each line of business to the portfolio based on the linear regression technique. As a measure for comparison, a multiple linear regression model that incorporates size and value, which are proxied by gross premiums and claims ratio, is employed. The specific and systematic risks are estimated and an optimization operation on the gross claims, using simulated data, is performed. The findings show that the oil&gas line of business displays the highest sensitivity with the claims market and hence possesses the largest systematic risk, while engineering displays the lowest sensitivity. From the optimization analysis, the simulated industry portfolio with the highest expected claim has its highest weight assigned to oil&gas. This industry-level analysis, with its added policy implications, can serve as a benchmark for individual insurance companies in Nigeria who cover multiple lines of insurance policies.