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INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS FACTOR ANALYSIS OF INVESTMENT DECISION IN NIGERIAN INSURANCE COMPANIES
ENOMA ANTHONY (Ph.D) Economics Department Ambrose Alli University, Ekpoma, Nigeria ISEDU MUSTAPHA Banking and Finance Department Ambrose Alli University, Ekpoma, Nigeria Abstract

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This paper presents the results of an investigation of those factors that influence managers investment decision making in Nigerian insurance companies. Apart from the economic and risk factors that are common in literatures in assessing assets choice of insurance company in most investment decision making. Other factors, such as political, social, religious and government regulation were among the factors examined. In this study, the data generated were subject to factor analysis to know what the insurance staff and brokers in insurance firm perceived and identified as the possible factors influencing investment decision in insurance companies in Nigeria. Based on their respond and analysis, it was asserted that investment decision making and risk assessment are multi criteria processes that cannot be defined or captured only by rigid mathematical quantitative factors. Qualitative decision making such as political, social religious and government intervention are among those factors that influence manager investment decision making in insurance company in Nigeria. Keywords: Factor Analysis, Nigerian insurance companies, Investment decision. 1. Introduction This paper examines those factors that influence investment decision in Nigerian insurance companies. Attempt is made to evaluate investment decision in Nigerian insurance companies based on both qualitative and quantitative factors. The reason is that qualitative judgment should also take precedence over the reliance on purely quantitative data but should not dominate in investment decision for details on this see Jong, Nigel and Michael (2009). Most investment decisions in financial institution are based on risk analysis, the risk preference of individual and expected returns on investment. For example the work of Tobin and Marwowitz (1952) centred on expected risk and returns on various portfolios in asset choice of financial institution. In particular, an efficient portfolio of assets choice is the one that, for a given expected returns has the lowest possible exposure to risk or for a given level of risk has the highest expected returns. The logic of Tobin and Markowitz (1952) was expanded in the capital asset pricing model (CAPM). The CAPM is based on rational choice of the individual investor. Variances of this model exist in literatures. While not going into the logic and framework of each model, it is pertinent to mention that these models based investment decision on measured risks. Most of these orthodox investment decisions theories based on risk have been criticized for their neglect of organizational framework or behavioural framework on environment in which investment decision are made for details see Akinwale and Abiola 2008.
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In organizational investment decision making according to Tunde 2007, managers takes into consideration in their investment decision the influence of cultural, political, personality, risk factor and environmental influence before concluding on investment decision. In this sense, investment decision is not just a mathematical selection of expected returns on various risk profile but on a whole range of factors. These factors could have a profound effect on investment decision in an organization. Managers are seen as decision-makers who act to promote, protect and preserve the organization s value rather than seeking to maximized pay off or utility. In particular, decisions based upon calculated probabilities are backward looking while managerial decisions are forward looking (Akinwale, 2006). In the light of the above survey, this paper reports on those factors influencing investment decision of insurance companies in Nigeria. A whole lot of factors are considered to affect insurance company investment decision in Nigeria. They include government regulation, social, political, risk factor, religious and economic factors. These whole ranges of factor are assumed to affect the investment decision of insurance company in Nigeria. The selections of those factors in this study are based on empirical literature and outcome of pilot study conducted. For easy comprehension this paper is structured accordingly. Section (I) Present the introduction, section (II) Present the literature review while section (III) is concern with research method, Section (IV) Present data analysis and results. Section (V) Conclude the study based on the analysis. 2. Literature Review Literature on investment decision making in Nigerian insurance company or other financial institution is scanty both in theoretical and empirical studies. However results in most literatures suggest the influence of risks and economic factors dominating investment decision both in developed and developing countries. For example orthodox financial theory base assets choice of any financial institution on expected utility or returns and the associated risk factor with such choice. This is prominent in the works of French and French (1997), Osawronyi( 2007). These orthodox financial theories have been criticized by most corporate managers like Ihunda and Negerbo (2004). They see investment decision making as a complex choice about corporate goals, the means to achieve them and choice to attain the strategic direction of the company. Top management in most companies are responsible for defining the rate at which companies grow in size, dividends of share holders and fund to be retained for future internal investment. They equally assess the impact of external factor, or environmental factors on investment decision of the firm. Some of the basic environmental factors that require efficient management decision for effective analysis include: 2.1 Economic Environment This entails the prevailing gross domestic product, per capital income, level of consumption, the economic needs of the people and projected economic situation of the economy in the nearest future, like the exchange rate situation, inflation, inputs prices and output prices, production processes etc. i. Political Environment: This include factors like good democratic governance, effective electoral process, strong government institution like the legal system tax structure civil service, the entrenchment of the rule of law.

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ii. iii.

iv.

Social cultural religious environment: These include factors like marriage institutions, acceptable values, like, dislikes, religious extremist etc. Government Environment: Management must be aware of political and regulatory environment of the company in terms of pending regulation, changes in government regulation and changes in public option. Risk Base Decision: Risk in this light include those predictable uncertainty that could be measured such as market risk, i.e. the change in the net asset value due to changes in interest rate, exchange rate; operational risk i.e. risk that results from daily transaction such as failure to meet regulatory required; performance risk those losses due to the failure to properly monitor employee performance on the job for details on this see David (1997).

Prior to Nigerian s independent insurance companies in Nigeria were basically foreign. Their operations were limited to commerce along the West Africa coast. Mostly British companies were granted insurance cover. By 1960 the numbers of companies conducting insurance business rose from three to twenty-three still largely dominated by foreign firms. Government domination and the setting up of national Insurance Corporation of Nigeria (NICON) in 1969 provided a way for more indigenous as well as more foreign owned insurance companies to be establish in Nigeria. By 2001, insurance companies rose from 83 in 1984 to 118. The insurance companies are broken down into life and non life insurance. These two branches of insurance companies are regulated by national insurance commission. The insurance companies mobilized long term fund and act a financial intermediaries. Fund from these companies are invested in highly liquid assets to make it easy to promptly meet and settle claims. By 2005, as a result of the financial reforms in insurance companies, the total registered companies dropped from 118 in 2001 to 27 in 2005. The reform increases the capital base of life insurance from 25 million to 2 billion and non life from 30 million to 3 billion and reinsurance from 100 million to 10 billion. The essence of the reform was to increase the standard of the companies to undertake higher venture and to meet international standard in insurance business. Flowing from this, insurance companies must seek safety in their investment choice so a not to jeopardize their ability to increase the shareholders profit. In this light a while lot of factors must be consider in any asset choice. 3. Research Methods The researchers adopted random sampling method in selecting insurances workers and broker in the insurance industries for questionnaire administration. Data from the respondents were analyzed using factor analysis. The objective was to know what insurance workers and brokers perceived and identified as possible assets choice of investment decision of insurance companies in Nigerian. A 24 item likert type instrument was administered on 600 subject of which 485 were correctly completed. The likert type items were scored as follows: 4 for strongly agree (5A), 3 for Agree (A), 2 for disagree (DA), 1 for strongly disagree (SD). The data generated were returned by 260 insurance workers and 225 insurance brokers. The quality of the overall presentation of the questionnaire in terms of length, conciseness and attractiveness of design were important in ensuring a high completion rate. For this reason the questionnaires were kept short and easy to complete by busy executive.

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Two types of validity of instrument were of concern in this study. First, the content/face validity and secondly, the construct validity. The content / face validity was ensured by the researcher s initial interaction with some insurance executives experts. This interaction resulted in the generation of 24 items in the questionnaire. The content validity is often achieved through factor analysis (Unagbro and Osawonuyi (2009)). The procedure for this is reported in the section of data analysis. The reliability of data generated with the questionnaire was estimated using crombach Alpha techniques and this was found to be 0.7178 for 21 items after three items regarded as poor or do not belong to factors influencing investment decision in insurance companies were sieved out by factor analysis techniques. The questionnaires also contain some demographic characteristics of the respondents. 4. Method of Data Analysis The methods of data analysis are in two stages. First, we present the descriptive statistics of the data set which gives the mean and standard derivation of the sample population of each decision variable. Secondly, the factor analysis by principal component was adopted in the data analysis for the purpose of partitioning of the experimental variable into factors that influence the asset portfolio choice of insurance companies in Nigeria. The purpose of factor analysis is to summarize pattern of interrelationship among variables and establish levels of variance in decision variable as they influence a given phenomenon. The following test instruments were used under factor analysis. i. Kalser-mayer Olkin (Kmo) and Bartlett s test. This is to test the appropriateness of the sample from the population and the suitability of factor analysis. It tests the null hypothesis that the population correlation matrix is an identity. Communality Total variance explained (Eigen values) Rotated component matrix.

ii. iii. iv.

5. Data Analysis and Results We present below the analysis of primary data generated in this study. Table I: Descriptive Statistic

Meax(x) 1 2 3 4 5 6 7 8 9 10 11 Component q20 q12 q25 q23 q13 q11 q9 q2 q19 q6 q19 4.830 4.821 4.790 4.780 4.754 4.653 4.601 4.589 4.550 4.550 4.550

Standard deviation (d2) 0.281 0.358 0.414 0.521 0.626 0.631 0.732 0.811 0.801 0.721 0.631
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12 13 14 15 16 17 18 19 20 21 22 23 24 q6 q22 q7 q4 q10 q15 4.501 4.492 4.403 4.350 4.350 4.150 0.951 0.841 0.732 1.010 0.630 1.121

q1 q16 q18 q15

3.862 3.753 3.612 3.533

0.976 1.571 1.604 0.760

The descriptive statistics given in table (1) gives the mean and standard deviation of the sample population on each decision variable. The results shown evidence that the economic factors and risk factors are rated higher than other variables that affects asset choice management of insurance companies in Nigeria. This is indicated by 4.830, 4.821 in the mean value and 0.281 and 0.358 in the standard deviation in table (1) above. Table II: Kaiser-Mayer-Olikin (KMO) and Bartlett s Test of Sphericity Kaiser-Mayer-Olikin (KMO) Measure of sampling adequate Bartletts Test of Sphericity 0.863 Chi-Square DF Pro Value Sig 2780.945 275 .0000

From table II, the kaiser-Mayer-Olikin measure of sampling adequacy gives a value of 0.863. The KMO is close to 1 which represent a perfectly adequate sample and bartlett s test show a chi-square of 2780.945 and a significance level of I percent i.e .0000 which is an indication of the adequacy of the sample. The results from the two test instrument show that we can now apply factor analysis in this study.

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Table III: Communalities Extraction 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 0.871 0.770 0.719 0.536 0.813 0.614 0.734 0.666 0.736 0.803 0.710 0.657 0.651 0.567 0.637 0.755 0.699 0.820 0.531 0.675 0.658

Table III shows that the proportion of the variance of a variable is explained by common factor. The values are approximately (1) indicating that the communality common factor extracted explained all the variance in the variable.

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Table IV: Total Variance Explained (Direct Method of Extraction) Component Initial Eigen Value Total Percentage of Variance

Extraction Sum. Of Square Loading Cumulative Percent 19.602 26.601 33.336 38.223 43.034 47.431 51.63 55.783 59.783 63.346 70.865 74.278 77.401 80.519 83.609 86.669 89.380 92.071 94.371 96.572 97.573 98.572 98.724 100.186

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

4.578 2.411 1.411 1.237 1.201 1.103 1.097 1.056 .970 .913 .899 .861 .853 .800 .798 .776 .729 .673 .641 .598 .571 .533 .499 .479

19.602 6.999 6.735 4.887 4.811 4.397 4.199 4.179 4.011 3.859 3.810 3.519 3.413 3.128 3.090 3.060 2.711 2.891 2.300 2.201 2.000 1.201 1.151 1.010

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From the outcome in table IV, it shows that a maximum of eight factors could be obtained because the initial Eigen value in column 2 is greater or equal to 1. The social science rule stipulate that only factor with Eigen value of 1 and above are considered meaningful for interpretation for detail see Chemeka (2004). In order to achieve a meaningful factor loading, the principal component matrix (1) rotated by orthogonal transformation by varinax, equamax and quatimax and them by oblique transformation by promax. We however present the results of quatimax because it produces the best rotation. It tends to minimize the number of factors used to explain each variable. After a careful examination of the results of orthogonal and oblique rotation, the following six factors grouping were obtained. (a) i. ii. iii. iv. (b) i. ii. iii. iv. (c) i. ii. iii. (d) i. ii. (e) i. ii. (f) i. ii. iii. Economic Factors Return on investment Company stocks / shares Welfare (measured by per capital income) Inflation rate Risk Factors Riskness of asset. Security of asset Performance risk Operational risk Political Factors Democratic governance Nationalist consideration Government regulation Religious factors Religious crisis Religious doctrine Social Factors Marriages Values Others Traditional belief Military dictatorship Government Security

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Table V: Rotated Component Matrix
1 Q20 Q12 Q21 Q18 Q23 Q13 Q11 Q17 Q9 Q2 Q19 Q6 Q22 Q3 Q7 Q4 Q10 Q5 Q24 Q14 Q1 .699 .499 .475 .469 .451 356 341 .714 .712 .707 .705 .614 .612 .567 485 -.456 .425 .321 .311 .307 323 .385 -3.17 .413 .476 2 3 4 5 6 7 8

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Q16 Q18 Q15 .396 .689 .439 .422

Extraction method: principal component analysis. Rotation method: Quartimax with Kaiser Normalization. Rotation converged after 8 iteration From the factor extraction, five factors are meaningfully related for the purpose of analysis. However three factors had a discordant loading making a total of (8) for analysis. Table (v) revealed that 6 variable / items converged under factor/component( 1) , while 4 variable / item in the other component of these, item 15 have significant loading under two factor / component. In thesame vein items 21,2, 7,6 and 8 had significant loading under five components ,ie,5,6,7 and 8. It is further revealed that items3, 24 and 14 had no significant loading under any component. It is therefore concluded that 485 insurance workers and insurance brokers sampled were able to perceive 21 out of 24 variables as factors influencing investment decision in insurance companies in Nigeria. Out of the 24 possible factors listed in the questionnaire that influence investment decision in insurance companies in Nigeria, insurance workers and brokers perceived and identified 21 possible factors. The items were classified into six. (a) i. ii. iii. iv. v. vi. (b) i. ii. iii. iv. (c) Economic factors The level of income in the economy determines the investment decision in insurance companies. The economic indicator such as a per-capita consumption influence investment decision in insurance companies. Return on investment in insurance companies facilitates further investment. The inflationary rate in the economy affects the level of investment decision in insurance companies. The profit rate determines the level of investment in asset of the insurance companies. The economic environment as indicated by deregulation determines the level of investment of insurance companies. Risk Factors Effective internal control and operation can help to determine the level of investment in insurance company. Associated risk factors determine the level of investment in asset choice of insurance companies. Insurance investment is based on high risk high returns. Insurance companies take into consideration risk element in investment decision. Political Factors i.Tight government regulation reduces investment decision in insurance companies. ii.A civilian regime is better than military regimes in development of insurance companies.

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iii.Policy guideline help to determine the conduct of insurance companies in investment risk taxing in Nigeria. iv.Strong legal institution determines the level of investment risk taking in Nigerian insurance companies. (d) Religious Factors Religious crisis such as the constant fighting in Northern Nigeria can affect investment decision in insurance companies in Nigeria. ii. Religious belief system affect could be relevant in investment decision. iii. Religious education can affect positive attitude toward insurance practices in Nigeria. iv. Religious institution could help to influence positive behaviour toward insurance companies. (e) Social Factors i. ii. Others Age of people could determine the investment decisions of insurance companies The cherished values can influence positive attitude torward insurance companies. i.

i. Military dictatorship influence insurance decision in Nigeria ii. Traditional belief can affect investment decision insurance company iii. Government securities affect investment decision in Nigerian insurance companies. 6. Conclusion The research presented in this paper shows the richness of influence upon investment decisions in Nigerian insurance companies. The use of factor analysis demonstrate the influence of economic, risk, political, religious and social factors on investment decision in insurance companies in Nigeria. Decision making in business is very vital in the area of management research in both developed and developing economy. For example the influences of the competency of social, political and religious factors are concepts that stand outside the orthodox research approach. Orthodox financial decision making model are mainly based on risk and economic factors. Further research into these six factors could add further to the growth and development of a more comprehensive asset portfolio investment decision making especially in developing economy.

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References

Akinwale, S.O. (2006): Asset Portfolio Decision Making Process of Nigerian Insurance Companies , Ph.D Thesis, Manchester Metropolitan University. Akinwale, S.O. and Abiola R.O. (2008): Mathematical Basic of Asset Portfolio Decision Making: A Study in a Developing Economy , Finance and Banking Review Vol. 2 No. 1. Chemeke S.C. (2004): Factor Analysis of the Performance of Industrial Attachment Projects in Nigeria Ph.D Thesis of the Federal University of Technology, Akure. Child, O. (1975): The Essentials of Factor Analysis, London. Holt Rinehart and Winston. David .I. (1997): Decision Management Benin City Amoni Publisher. French N. and French S. (1997): Decision Theory and Real Estate Investment Journal of Property Valuation and Investment Vol2, No8. Ihunda, G.C. and Ngerebo T.A. (2004): The Effrect of Worker Participation in Decision Making: The Nigerian Experience (A Comporative Study of Public and Private Sectors) International Journal of Economic Development. Vol. 4. No.1&2. Jong H. Nigel H. and Michael (2008): Never Again? Risk Management in Banking Beyond the Credit Crisis KPMG International. Osawonuyi O.I. (2007): Portfolio Theory and Optional Development of International Reserves in a Developing Country the Nigerian Economic and Financial Review Vol. 7, No. 2. Tobin J. and Markowitz H. (1952) Economic Models of Portfolio Choice The Economic Review Vol. 58. Tunde P. (2007): The Social Dimensions in Investment Decision in Nigerian Banking Sector Journal of Academic Vol. 3 No. 5. Unugbro, A.O. and Osamwonyi I.O. (2009): Causes of Frauds in the Nigerian Banking Industry: A Factor Analysis . The Nigerian Journal of Economic and Management Studies Vol. 4 No. 1.

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