THE EFFECT OF RISK MANAGEMENT ON BUSINESS PERFORMANCE INSURANCE COMPANIES IN LAGOS STATE (A CASE STUDY OF STACO INSURANCE PLC, LAGOS STATE, NIGERIA)
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THE EFFECT
OF RISK MANAGEMENT ON BUSINESS PERFORMANCE INSURANCE COMPANIES IN LAGOS STATE
(A CASE STUDY OF STACO INSURANCE PLC, LAGOS STATE, NIGERIA)
ABSTRACT
The study
examined the effect of risk management on business performance insurance
companies in Lagos State, a case study of Staco Insurance Plc, Lagos state,
Nigeria.
The survey
research design was used in the study. The study made use of primary data to
draw out information from the respondent which was sourced using questionnaire.
The design was used to explain the relationship between dependent and
independent variables.
The Taro
Yamane formula was used to select 177 respondents, to make room for challenges
which include incomplete questionnaire, non-return of questionnaires and
non-respondents 30% was added to which equals 230
The data was
analyzed using a descriptive and inferential statistical method, Regression
analysis was used to analyze the effect of risk management on the business
performance of Staco Insurance Plc. The r2 value and the beta coefficient as
well as its significance was analyzed and examined on all dimension
relationship. The multiple regression analysis was carried out using
Statistical Package for Social Science (SPSS).
The result
of the study showed that; risk identification has a direct effect on
productivity of Staco Insurance Plc (P <0.05). Risk evaluation has a direct
effect on corporate image of Staco Insurance Plc (P <0.05). Risk monitoring
has a direct effect on profitability level of Staco Insurance Plc (P <0.05).
The study
concluded that the risk management process adopted by an organization is
significant in influencing or effecting an organization or firms business
performance.
The study
suggest that; The management of Staco Insurance Plc in Lagos state, to put in
place cost-effective measures for the constant and timely risk identification
processes in order to spot the entry of any risk that might pose as a treat to
the establishment of effective and efficient business performance of Staco
Insurance Plc.
CHAPTER ONE
INTRODUCTION
1.1 Background to the study
Risk
management is a crucial discipline in business, particularly the insurance
business (Omasete, 2012). However, it should be noted that risk management goes
far back in time even before people could understand that the various practice
they were involved in, was apparently the practice of the management of risk.
Actually, it was stated in history that some historians believe that the
earliest method of managing risk came about because of gambling. It was stated
that thousands of years before the internet users could play online poker,
people in diverse ancient society played games with dice and bones. In
addition, people played games that developed into chess and checkers well over
two thousand years ago. Some of the historical evidence that gave rise to
probability theory of gaining being the sole originator of risk management was
from the writings of various famous authors. It was stated that the famous
mathematicians wrote each other about games of chance in the 1600s, a communication
that is believed to have given rise to resent probability theory used today
(Angus, 2015).
On the other
hand, it was stated according to Angus (2015) that in the risk management:
history, definition and critique that the recent conditions for managing risk
came about after world war II, but the discipline mostly began as a study of
using insurance to manage risk. Soon after, from 1950s to the 1970s, risk
managers began to realize that it was too costly to manage all risk with
insurance, so the discipline began to expand to substitutes to insurance. Such
examples include training and safety programs as an alternative for insurance.
However,
according to the Market Business News (2018) organizational performance which
is also known as business performance can be categorized into two which is the
“organizational” and the “performance”. Organization is said to be the
adjective of organization, is considered an organized group of individuals with
a specific purpose, while the performance is regarded the process or action of
performing a function or task, and when put together, organizational
performance is said to be how successfully an organized group of people with a
particular purpose perform a function. It was further stated that performance
management process has become renowned or eminent in recent years as way of
providing a more incorporated and continuous approach to the management of
performance.
Lately,
according Omasete (2012) businesses are known to place huge emphasis on risk
management as this determines their survival and business performance.
Insurance companies are into the risk business and are based in the under write
or cover for various types of risks for individuals, businesses and companies.
Hence, it is necessary that insurance companies manage and identify their
organizations risk exposure and conduct proper analysis to avoid and treat
losses due to the compensation claims made by the insured. However, it was
stated by Kadi (2014) that majority of insurance companies cover insurable
risks without taking note of the proximate cause. That is, most insurance
companies underwrite or cover insurable risk without conducting appropriate
analysis of the expected claims from clients and without putting in place a
mechanism for identifying appropriate risk reduction methods.
Nevertheless,
it should be taken into consideration that, poor management of risk by
insurance companies, leads to accretion of claims from the clients, therefore
leading to augmented losses and poor business performance (Magezi, 2014).
However, it was further stated that the risk behavior of manager affect risk
management activities, that is, a strong risk management framework can help
companies to reduce their exposure to risks, and enhance their business
performance.
Insurance
companies on the other hand are known to have increased their focus on risk
management over the recent years. According to Meredith (2014) she suggested
that there should be cautious decision, by management of insurance companies,
of insurable risks in order to avoid excessive losses in resolving claims. It
was stated that if the insurers, who are regarded as risk-bearing institutions
can and do fail, if risks are not managed effectively.
In spite of
this, it should be taken into consideration that the main function of an
insurance company is its capability to share risk across diverse participants
(Merton, 2013). This however points out that the management of risk should be
the main aspect in the operations of insurance companies, which then leads to
the main focus of this study, that is, to understand how this insurance
companies manage the various risk that exist for their client, how they manage
their own respective risk while protecting clients against such risk and how
such risk management affect their business performance.
1.2 Statement of the Problem
Insurance
companies are in the main business of managing risk. The companies manage the
risks of both their clients and their own risks. This then requires the
incorporation of risks management into the companies systems, processes and
culture.
However,
according to Chris (2017) Staco Insurance Plc, like most of the other insurance
companies in Nigeria, has continued to struggle, partly as a result to low
patronage and the on-going recession. The economic dilemma occasioned by high
inflation and the resulting low unusable income in a recession environment
impacted negatively on the insurance industry. Hence, there has been a decrease
in the revenues of insurance operators as a number of clients continued to
place risks on shorter periods of cover, therefore reducing premium payable on
their policies.
According to
a Nigerian insurance industry report (2017) like most other insurance
industries, are all affected by the macroeconomic environment. The downturn in
Nigeria’s fortunes which had its basis at declining global crude oil prices
since 2014 has triggered changes in the consumption or patronage pattern of
insurance product in recent times. It was stated that various non-life business
segment have experienced in the life business segment. It was further stated
that in 2016 the customer price index (CPI), which is used to measure inflation
rose to 18.6%, which was known to be the highest ever in over a decade, was to
have impacted the value of long term savings but as a result to the high
inflation environment, long term saving as began to lose value over some time
(at an average inflation of 18.6%, ₦100 is saved but now at the same range, it
worth’s only ₦45 in 5 years and ₦8 in 15 years), and this has discouraged
saving and consequently, caused a preference to invest in high yielding
securities. However, it was stated that rising inflation also has direct impact
on the industry’s operating cost which has reduced in profit. As at 2016, about
28% of the insurance industry’s GPI was paid out as underwriting expenses
including acquisition and maintenance cost (Ada, 2017)
In spite of
this, research in the area of risk management and business performance
insurance company is very limited according to Omasete (2012), as such; this
research is an organized examination and contribution on the subject matter of
risk management and business performance of insurance company in Nigeria.
1.3 Objective of the Study
Generally,
the objective of this study is to examine how business performance is affected
by the management of risk in Staco Insurance Plc. The specific objectives of
this study are to:
Examine the effect of risk identification
on the productivity of Staco Insurance Plc in Lagos state.
Ascertain the influence of risk evaluation
on corporate image of Staco Insurance Plc in Lagos state.
Determine the extent to which risk
monitoring influence the profitability level of Staco Insurance Plc Lagos
state.
Examine the combined effect of risk
management variable on the business performance of Staco Insurance Plc Lagos
state.
1.4 Research Questions
The
following question will be answered in the course of the study,
What effect does risk identification have
on the productivity of Staco Insurance Plc in Lagos state?
What influence does risk evaluation have on
the corporate image of Staco Insurance Plc in Lagos state?
To what extent does risk monitoring affect
the profit of Staco Insurance Plc in Lagos state?
What combined effect does risk management
variables have on the business performance of Staco Insurance Plc in Lagos
state?
1.5 Research Hypotheses
H01: Risk
identification has no significant effect on the productivity of Staco Insurance
plc in Lagos state.
H02: Risk
evaluation has no significant influence on the corporate image of Staco
Insurance Plc in Lagos state.
H03: Risk
monitoring does not significantly affect the profit of Staco Insurance Plc in
Lagos state.
H04: Risk
management variables have no significant combined effect on business performance
of Staco Insurance Plc in Lagos state.
1.6 Operationalization of the Variables
Y= f(X)
Where,
X =
independent variable
Y =
dependent variable
Where,
Independent
variable
X = Risk
management (RM)
Dependent
variable
Y= Business
Performance (BP)
X= (x1, x2, x3)
Y= (y1, y2, y3)
Where,
x1 = Risk
Identification (RI) y1 =
Productivity (P)
x2 = Risk
Evaluation (RE) y2 = Corporate
Image (CI)
x3 = Risk
Monitoring (RM) y3 = Profitability
Level (PL)
Sample
Equation,
y1 =
f(x1)…………………………………..fn (1)
y2 =
f(x2)…………………………………..fn (2)
y3 =
f(x3)…………………………………..fn (3)
Y = f(x1,
x2, x3)…………………………...fn (4)
Regressionally,
where;
y1 = α1+
β1x1 + µ………………………………………eqn (1)
y2 = α2+
β2x2 + µ……………………………………...eqn (2)
y3 = α3+
β3x3 + µ………………………………...……eqn (3)
Y = α1 +
β1x1 + β2x2 + β3x3 + µ………………….…….eqn (4)
Substitutional
Model
P = α1 + β1
(RI) + µ…………………………………….eqn (1)
CI = α2 + β2
(RE) + µ…………………………………..eqn (2)
PL = α3 + β3
(RM) + µ………………………………….eqn (3)
BP = α4 + β1
(RI) + β2 + β3 (RM) + µ…………………..eqn (4)
Where;
α1,α2, α3,
α4 depicts how well employ is retained in the absence of risk identification,
risk evaluation and risk monitoring.
β1, β2, β3,
β4 measures how a change in the various independent variable will affect the
dependent variables.
µ captures
the influence of other variables that affect (Business Performance) but which
are not explicitly included in the model.
1.7 Scope of the study
This study
focused on the effect of risk management on business performance in Staco
Insurance Plc in Lagos state. The study covered Staco Insurance Plc located in
Lagos state, Nigeria because the headquarters are located there and Lagos state
is considered the economic hub of the country. The total number of employees in
Staco Insurance Plc formed the population of the study, since some had the
opportunity to lead team at one point or the other in the course of carrying
out their duties in insurance system and study frame is 2018.
1.8 Significance of the study
This
research work is important to all stakeholders in the organization such as the
shareholder, the management, and the general public in the following ways;
Firstly, the
study is important to the shareholders in the organization in showing how risk
management will enhance business performance, resulting in increase in the
profit margin.
In addition,
the study is also important to the management of the organization as regards
the policies to adopt that will definitely improve the risk management system
in order to enhance business performance in line with insurance company’s
management system. This is because effective and efficient risk management is
an essential instrument for strengthening the business performances of
insurance companies.
In
conclusion, this research is free to
anyone who intends to conduct further study on the issue of risk management and
business performance of insurance company in Nigeria, because there is still no
clear proof that the implementation of risk management leads to better business
performance in insurance industry.
1.9 Definition of operational terms
Risk:This is
any event or circumstance that could adversely affect the achievement of
business objectives of one or multiple companies (Jan, Vanessa, Wiebke,
&Aykut, 2017).
Risk
Management:This is the coordination of activities which are related to the
monitor and control of risk (Jan, Vanessa, Wiebke, &Aykut, 2017)
Business
Performance:It refers to an organization ability to attain its goals by using
resources in an efficient and effective manner (Daft, 2014)
Insurance
Company:This is a business that provides coverage, in the form of compensation
resulting from loss, damage, injury, treatment or hardship in exchange for
premium payment (Business Dictionary, 2018).
Risk
Identification:This is considered as the fundamental step to detect the
uncertain events that can upset the good working order in the supply chain
(Ennouri, 2013).
Risk
Evaluation:It is the process used to compare the estimated risk against the
given risk criteria so as to determine the significance of the risk (Business
Dictionary, 2018).
Risk
Monitoring:It is the process which tracks and evaluates the levels of risk in
an organization (Business Dictionary, 2018).
Productivity:This
is said to be a ratio between the output volume and the volume of inputs (Paul,
2013).
Corporate
Image:This is said to be the mental picture that stakeholders have in relation
to the way they perceive a company (Bouchet, 2014).
Profitability
Level:This may be defined as the ability of a given investment to earn a return
from its use (Monica, 2014).
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