Effects Of Risk Management Practices On The Performance Of Insurance Companies In Nigeria

Project and Seminar Material for Insurance

Abstract

Risk if not well managed could lead to collapse for most organisations especially those whose core business deals with day to day handling of risk. Risk management should, therefore, be at the core of an organization’s operations by integrating risk management practices into processes, systems and culture of the entire organization. This involves identifying and analysing risks, developing and implementing risk handling techniques and monitoring the progress of these in order to avoid and/or reduce the impact of risk on the financial performance of the firm. The objective of the study was to establish the effect of risk management practices adopted by Nigerian insurance companies on the financial performance of these companies. The study used both primary and secondary data.

Primary data was collected through questionnaires eliciting response from the selected respondents. Secondary data was collected by use of desk search techniques from published reports as well as data from financial statements maintained by the organizations. The results were presented using tables and charts. The study established that a majority of insurance companies in Nigeria had adopted risk management practices in their operations and that this had a strong effect on their financial performance. Risk identification was found to be the most significant in influencing financial performance, followed by risk mitigation, risk management program implementation & monitoring and risk assessment & measurement respectively. This study concludes that there is a positive relationship between the adoption of risk management practices and the financial performance of insurance companies in Nigeria.

Chapter One

Introduction

1.1 Background to the Study

Insurance companies play an important role in the financial services sector of most countries by lowering total risk, contributing to economic growth and efficient resource allocation, reducing transaction costs, creating liquidity, facilitating economies of scale and spreading financial losses (Duompos, Gaganis, and Pasiouras, 2012). They do this through underwriting of risks inherent in most sectors of the economy and provide a sense of peace to most economic entities. Consequently, the financial performance of insurers is of major importance to various stakeholders such as shareholders, policyholders, agents and policymakers (Charumathi, 2012).

Due to globalization and intense competition, risks are increasing and risk management is becoming an integral part for the success of almost every organization, especially for the insurance sector because of their high-risk businesses, as the risks are associated with every client in the business and their own risk. Insurance companies are in the core business of managing risk (Gupta, 2011). The companies manage the risks of both their clients and their own risks. This requires an integration of risk management into the companies’ systems, processes and culture (Eric, 2005).

The risk management process consists of a series of steps, which are establishing the context, identifying, analyzing, assessing, treating, monitoring and communicating risks, which allow continuous improvement of decision making (Ross et al., 2009). By implementing risk management insurance organization can reduce unexpected and costly surprises and effective allocation of resources could be more effective. It improves communication and provides senior management a concise summary of threats, which can be faced by the organization, thus ultimately helping them in better decision making.

Financial performance is a measure of a firm’s overall financial health over a given period of time. It can be measured from various perspectives including: solvency, profitability, and liquidity. Solvency measures the amount of borrowed capital used by the business relative to the amount of owner’ equity capital invested in the business. For insurers, profitability is the excess of revenues from underwriting activities over the costs incurred in generating them (Almajali et al., 2012).

The financial performance of an insurance company depends on many other factors, some of which are difficult to quantify, including the quality of its management, organizational structure and systems and controls in place. An assessment of financial soundness thus needs to take into account both quantitative and qualitative indicators to achieve an acceptable degree of reliability (Udaibir et al., 2003).

According to Njogo (2012) risk management is the identification, assessment and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events. Risks can come from uncertainty in financial markets, project failures, legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attacks from an adversary. Risk management ensures that an organization identifies and understands the risks to which it is exposed. Effective risk management seeks to maximize the benefits of a risk while minimizing the risk itself.

Various authors have asserted that risk management (RM) often leads to enhanced organisational performance. Proper and efficient RM by insurance firms is essential to the survival of most organizations and will generally influence their financial performance. A structured RM approach is therefore essential for achievement of better organizational results (Ashby et al, 2013; Banks, 2004). Thus, this study explores the impact of risk management on the performance of insurance companies in Nigeria.

1.2 Statement of the Problem

Whether in the insurance industry or any other sector of the financial system, a company’s risk management procedure is widely believed to be crucial to the success of the enterprise as it acts as a powerful brake on the possible deviations from the predetermined objectives and policies. This means that an insurance firm that lacks adequate risk management technique is prone to fraud, bankrupt, static, experience retardation of growth or even die a natural death a result of sub-optimal performance.

Insurance firms in Nigeria over time have shown an irregular trend in performance; ranging from some recording financial losses to some being pushed out of business. This may not be unconnected to inadequate liquidity management, underpricing, management issues and high tolerance to investment risks.

While much empirical works have given diverse reasons for the poor financial performance of insurance companies, research evidence on the effects of risk management on the corporate performance of insurance firms in the Nigerian context is scanty. Thus inadequate risk management could be negatively affecting the financial performance of insurance companies in Nigeria. Although prior research studies such as Hermanson and Rittenberg (2013); Kiragu (2014) suggest a link between risk management and organisational performance, majority of these studies have concentrated mostly in banks and other financial institutions and the available studies so far have dealt exclusively with large financial institutions in advanced countries. Little is known, at present, about the influences of risk management on the corporate performance of insurance companies in Nigeria. It is in an attempt to fill this gap that this study seeks to assess the effect of risk management on the performance of insurance companies in Nigeria.

1.3 Objectives of the Study

The primary purpose of this study is to examine the impact of risk management on the performance of insurance companies in Nigeria. Other specific objectives are:

To examine the impact of risk management on the performance of insurance companies in Nigeria.
To find out the relationship between risk selection and financial performance of insurance companies in Nigeria.
To measure the impact of risk management on demand for insurance in Nigeria.

1.4 Research Questions

The study is being guided by the following research questions:

Will there be a relationship between risk transfer and performance of insurance companies in Nigeria?
Will risk retention have a significant impact on financial performance of insurance companies in Nigeria?
Will there be a relationship between risk management and demand of insurance in Nigeria?

1.5 Research Hypotheses

Ho; There is no significant relationship between risk transfer and performance of insurance companies in Nigeria.
Hi; There is a significant relationship between relationship between risk transfer and performance of insurance companies in Nigeria.
Ho; Risk retention has no significant impact on financial performance of insurance companies in Nigeria.
Hi; Risk retention has a significant impact on financial performance of insurance companies in Nigeria

1.5 Scope of the Study

In view of the study, the research takes into consideration the insurance industry in Nigeria. The study is purposed to examine how the administration of risk influences the performance of insurance company in Nigeria. However the research will focus on selected Insurance companies in Nigeria critically discussing the causes of insurance risk and investigating the significance of risk management practices in insurance companies in Nigeria.

1.6 Significance of the Study

This study will be significant to insurance companies, general public, students and the insurance regulators as it will offer valuable contributions from both a theoretical and practical perspective. Theoretically, it will contribute to the general understanding of risk management practices and their effect on financial profitability.

The study will enable Insurance companies in Nigeria to improve their risk management process and to adopt efficient strategies to improve firm profitability through the risk management processes. This will enable the insurance companies to perform better and to grow their businesses and maintain a competitive advantage.

Apart from benefiting the insurance companies, the general public will benefit from the study through improved insurance services and better management of risks. This will result to affordable rates of insurance premiums and reduction in levels of non-payment and fraud.

The study will be helpful to the government in setting regulations on insurance practices in Nigeria and safeguarding the resources of the country. Embarking on this research aims at contributing to the body of knowledge by critically studying to what extent the risk management has influence the profitability of insurance company.

1.7 Organization of the Study

The study is divided into five chapters. Chapter one deals with the study’s introduction and gives a background to the study. Chapter two reviews related and relevant literature. The chapter three gives the research methodology while the chapter four gives the study’s analysis and interpretation of data. The study concludes with chapter five which deals on the summary, conclusion and recommendation.

Chapter Five

Summary, Conclusion and Recommendation

5.1 Introduction

It is important to reiterate that the objective of this study was to examine effects of risk management practices on the performance of insurance companies in Nigeria.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in examining the effects of risk management practices on the performance of insurance companies in Nigeria.

5.2 Summary

This study was undertaken to examine the home factors that serves as determinants for the performance of secondary school students. The study opened with chapter one where the statement of the problem was clearly defined. The study objectives and research hypotheses were defined and formulated respectively. The study reviewed related and relevant literatures. The chapter two gave the conceptual framework, empirical and theoretical studies. The third chapter described the methodology employed by the researcher in collecting both the primary and the secondary data. The research method employed here is the descriptive survey method. The study analyzed and presented the data collected in tables and tested the hypotheses using the chi-square statistical tool. While the fifth chapter gives the study summary and conclusion.

5.3 Conclusions

In view of the findings, this study established that “financial risk management practices have impact on the performance of insurance firm”. Risk management has assumed a noteworthy part in insurance companies despite the fact that it has its‟ ruins and in this manner the study brought into light a portion of the fundamental effect of risk management on profitability of risk insurance companies. The study uncovered that “strategic risk management practices increases the profitability of insurance company”. Greater part of the respondents affirmed that insurance activities are extensively isolated into life and non-life insurance, and firms having some expertise in either classification face distinctive risks.

In particular, these two sorts of activities oblige firms to hold distinctive specialized procurements, by excellence of both reasonable practices and regulatory mandates. The study ascertained that “operational risk management practices have positive influence on the profitability of insurance firm”. Insurance companies will build their benefit in the event that they gather operational risk information appropriately (connect losses resulting from a unique event) and stay to the full range of their business exercises.

5.4 Recommendations

In line with the findings and conclusions of the study the researcher made the following recommendations for policy and practice:

The study likewise suggests that the management of insurance companies should persistently assess their risk management practices to check whether they are still handy notwithstanding a ceaselessly changing working environment, for case the new regulatory pressures of dissolvability and Basel regulatory regimes. An open gathering for talking about organizations’ risk capabilities, for example, where it stands regarding methodology, people, procedures, innovation and information should be organized regularly. The management of insurance companies should set up savvy measures for convenient risk identification and viable risk relief in order to guarantee that their financial related execution is not affected contrarily.
The administration ought to influence information technology in risk management by introducing information systems that can carry out risk assessment and estimation more precisely and for checking their risk management programs for adequacy. This should further be complimented via training of workers on risk management strategies of the firm, with obviously characterized parts and obligations regarding risk management.
The usage and embedding of risk management practice should be a developmental procedure not a revolutionary one. Insurance companies could confront various issues all through the usage process since individuals over the organization require more opportunity to process the progressions connected with risk management practice execution. Implementing risk management practice revolutionarily could keep the effective inserting and comprehension of its procedures.
The users of risk information, including the board, should likewise secure no less than an essential risk background. This could help them comprehend the significance of risk management and what is going on in an everyday premises. Just along these lines they will be in a position to give proper backing.

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