ABSTRACT
SMEs are noted as the foundation of the emerging private sector in developing countries and government’s assistance is paramount to sustaining contribution to the country’s economy enhance (World performance of SMEs, little or no attention is given to the sector to become business recovery conscious in moments when disaster strikes. Events such as violent floods, fire outbreaks, traffic accidents, occupational hazards, accidental damage to properties and harm caused to lives, theft and armed robbery, as well as other unforeseen events have slowed down private sector investment activities, and in some instance discontinued the existence of businesses. The need to possess appropriate insurance policy cover is significant and beneficial to both public and private stake holders; and more importantly to the survival and success of the Small and Medium Enterprises (SMEs) sector. The survey involved the collection of data using questionnaire and observation as a complement. In all 184 questionnaires were administered. The data gathered were primary in nature and then analysed using frequency counts, cross tabulation, graphs and percentages. The basic motive of this research was to establish whether SMEs within the Uyo area use non-life insurance as a risk management tool. The results have shown that most of the SMEs do not have insurance policies for their businesses, and the level of information on insurance is relatively low. Owners of SMEs are required to be educated on the need to have insurance and appropriate insurance to recover business losses associated with their operations through periodic workshops organised by industry players. The need to enforce the Insurance Act on fire and liability insurance to ensure compliance is paramount to enhancing business recovery mechanism for the sector.
CHAPTER ONE
INTRODUCTION
1.1 Background of the study
Life is full of risks; expected or unexpected. In recent years there have been a lot of disasters and uncertainties affecting personal lives and the business environment across the globe. These events have had adverse effects on the socioeconomic activities on developed and developing nations; particularly Nigeria. There have been violent floods, fire outbreaks, traffic accidents, occupational hazards, accidental damage to properties and harm caused to lives, theft and armed robbery, as well as other unforeseen events that impact negatively on various economic ventures; especially the private sector investment activities. These mishaps remind us of the need to adopt risk management measures. Risk is everywhere but the business world is much exposed to it. To overcome the losses arising from these risks some take up insurance, others do not. Risk management had been practised for thousands of years (Bernstein, 1996). However, the formal risk management concept existed only in the twentieth century (Merna& Al-Thani, 2005). The concept that began as a field in the early 1950s was limited in scope to pure loss exposures where risks were managed through controlling and financing techniques. Insurance has been the most popular financing approach in managing corporate risk. It has been used to manage property, liability, and related insurable risks. Most of the risk management definitions stressed on two key points: firstly, risk management is concerned with pure risk and secondly, the risk management process (Vaughan & Vaughan, 2003). Generally, the role of risk management is to reduce property, human, and financial losses (Eick, 2003). Panigrahi (2012) defined risk management as an ongoing process that can help enhance operations, prioritize resources, ensure regulatory compliance, achieve performance targets, improve financial performance and ultimately, prevent loss/damage to the entity. Specifically, the purpose of risk management within an organisation is “to reduce the possibility of future events harming an organisation and control the probability that results will deviate from the expected” (Zech, 2001, p.2), to reduce the cost of pure risks and set out safety and disaster management by providing adequate coverage through an insurance technique (Baranoff, 2004) and, “to enable an organisation to progress towards its goals and objectives” (Williams, Smith & Young, 1995, p.27). The basic techniques of risk management are risk avoidance, risk reduction, risk retention and risk transfer. Nevertheless, insurance is used as the most common risk transfer mechanism. Insurance is a contract in which one party agrees to indemnify (compensate) another party in the event of loss or damages caused by risks specified in the contract, in exchange for the payment of a certain amount known as the “insurance premium” to the first party. The premium could be arranged to be paid as a lump sum amount or it could be paid as periodic amount. Insurance is a useful tool for managing risks. It is an important aspect of any operations including SMEs in order to protect assets and to reduce losses. Instead of protecting properties and lives physically, insurance serves to protect the business against adverse financial consequences of losing properties and lives. Thus, a business suffering from losses would be able to recuperate and rebuild their business by utilizing the compensation paid by insurance companies. SMEs business owners should be aware of the benefits of incorporating insurance in to their operations. The immediate effect of utilizing insurance in a business is two-fold; it gives protection against losses and it influences the success of loan applications with banks and financial institutions. Hence, it is imperative to ensure the adequacy of insurance coverage undertaken. Adequate insurance coverage signifies that a company’s risks are well-covered under a good risk management strategy. Aizenman and Marion (1999), highlight the adverse effects of risks on investment using macroeconomic data from more than forty (40) developing countries. They emphasized the fact that the uncertainty about business decisions in the future and the resulting gains cannot be optimistic. Despite efforts by successive governments through economic reforms to heighten the private sector to complement government’s investments and enhance economic growth, the sector’s response is relatively low; and this could be attributed to their risk averse attitude. Entrepreneurs make decisions regarding their investment in a dynamic and risky environment. The outcomes of their decisions are generally not conclusive due to the uncertainties associated with the future outcomes. Variability in future outcomes is the biggest source of risk, particularly among Small, and Medium Scale Enterprises (SMEs). The use of insurance as a risk mitigation tool provides confidence and prospects in successful business decisions, however to some degree. The basic function of insurance is risk transference; risk is transferred from one party (the insured) to another party (the insurer). The transfer of risk by no means eliminates the possibility of misfortune, but the insurer provides financial security and tranquility for the insured when the insured risk occurs. In return, an insured pays a premium in a very small amount when compared with the potential losses that may be suffered.
1.2 STATEMENT OF THE PROBLEM
Risk is one of the most overlooked areas in SMEs in spite of the fact that it is clear to most entrepreneurs that, operating any business involves risk such as losses associated with property, income, injury and liability. These risks are inevitable to most entrepreneurs in businesses. Prudent business owners take steps to minimize the risk of their businesses in other to maximize returns on investments. A good risk management system is a continuous process of analysis and communication to select the appropriate tool to manage risk. Failure to improve the risk management process can cause severe financial loss and damage to reputation. This will be reflected in stakeholders’ confidence and trust. Having a good risk management system in place will impress the lender and may make the difference in obtaining the funds. It can be an information system about how business is doing as well as a system to control risk. However, risk is one of the most overlooked areas in small businesses in spite of the fact that it is clear to most small business owners that operating any business involves risk. SMEs still respond reactively to risk by utilizing risk avoidance and risk transfer techniques (Smit, 2012). SMEs experience difficulty in securing finance because of the high level of risk and insufficient level of return associated with the Industry. It is in view of the above that necessitate the need for the study.
1.3 OBJECTIVE OF THE STUDY
The main objective of this study is to evaluate the role of insurance in minimizing business risk, with emphasis on small scale business, but to aid the completion of the study, the researcher intend to achieve the following specific objective;
- i) To examine the role of insurance in minimizing business risk in small and medium scale enterprise in Nigeria
- ii) To examine the relationship between business risk management strategies and the survival of SMEs in Nigeria
iii) To ascertain the impact of insurance policy on the survival of SMEs on the event of loss
- iv) To assess the benefits SMEs derive from using insurance as a risk management tool
1.4 RESEARCH QUESTION
The following research questions were formulated by the researcher to aid the completion of the study;
- i) Does insurance play any role in minimizing business risk in small and medium scale enterprise in Nigeria?
- ii) Is there any relationship between business risk management strategies and the survival of SMEs in Nigeria?
iii) Does insurance policy have any impact on the survival of SMEs on the event of loss?
- iv) Are they benefits derived by SMEs from using insurance as a risk management tool?
1.5 SIGNIFICANCE OF THE STUDY
It is believed that at the completion of the study, the study would help identify the reasons for the level of patronage of insurance as a risk transfer mechanism and create a changed behavior of the owners of SMEs. The research would benefit, risk managers, business consultants and business continuity consultants by identifying areas that they might need to consider when preparing disaster recovery plans, particularly for SMEs. Findings that emerged from the study would serve as a spring board to generate interest for further research into the other aspects of insurance challenges. The research work would also be of enormous assistance to various levels of educational institutions in the country, especially the universities as reference material for further studies and research work on insurance as a risk management strategy. The study would further contribute to the existing literature on mitigating and providing confidence to entrepreneurs in their investment decisions. Also, the insurance 6 regulator in the country should find it useful to adopt pragmatic means to enforce the unenforced insurance Acts in the country. Lastly, it might influence the level of premium incomes of non-life insurance companies in the country.
1.6 SCOPE AND LIMITATION OF THE STUDY
The scope of the study covers the role of insurance in minimizing business risk with emphasis on small and medium scale enterprises SMEs. But in the cause of the study, there are some factors that limited the scope of the study;
Financial constraint– Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.
1.7 OPERATIONAL DEFINITION OF TERMS
Insurance
Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss An entity which provides insurance is known as an insurer, insurance company, insurance carrier or underwriter
Business
Is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is “any activity or enterprise entered into for profit.
Business risk
Business risk is the exposure a company or organization has to factor(s) that will lower its profits or lead it to fail
Risk management
Risk management is the identification, evaluation, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events or to maximize the realization of opportunities
1.8 ORGANIZATION OF THE STUDY
This research work is organized in five chapters, for easy understanding, as follows
Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding. Chapter five gives summary, conclusion, and recommendations made of the study
