The Effect of Risk Management on Business Performance Insurance Companies in Lagos State (a Case Study of Staco Insurance Plc, Lagos State, Nigeria)

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 of  The Effect of Risk Management on Business Performance Insurance Companies in Lagos State (a Case Study of Staco Insurance Plc, Lagos State, Nigeria)

INTRODUCTION

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.

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.

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:

1. Examine the effect of risk identification on the productivity of Staco Insurance Plc in Lagos state.
2. Ascertain the influence of risk evaluation on corporate image of Staco Insurance Plc in Lagos state.
3. Determine the extent to which risk monitoring influence the profitability level of Staco Insurance Plc Lagos state.
4. Examine the combined effect of risk management variable on the business performance of Staco Insurance Plc Lagos state.

Research Questions

The following question will be answered in the course of the study,

1. What effect does risk identification have on the productivity of Staco Insurance Plc in Lagos state?
2. What influence does risk evaluation have on the corporate image of Staco Insurance Plc in Lagos state?
3. To what extent does risk monitoring affect the profit of Staco Insurance Plc in Lagos state?
4. What combined effect does risk management variables have on the business performance of Staco Insurance Plc in Lagos state?

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.

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.

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.

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.

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).