Risk Management and Financial Performance of Insurance Companies in Nigeria - A Study of Selected Insurance Companies

Reference code: C085

ABSTRACT

This research work set out to investigate the risk management practices of insurance companies in Nigeria. In order to achieve the purpose of the study, three (6) hypotheses were formulated and data collected from primary sources through the issue of ninety five (95) structured questionnaires to the executives of selected insurance companies and analysed using Pearson Coefficient of Correlation on Statistical Package For Social Sciences (SPSS).  The data analyses revealed among other things that: Management of insurance companies engage in good risk management practices by implementing appropriate risk management, closely monitoring organisational activities to identify risk prone areas and take appropriate actions to forestall the occurrence of such risk. We also noted in our data analyses that a good number of insurance companies in Nigeria has adequate risk management strategies in place. We also found that on the whole, the risk management practices of the insurance companies were positively correlated with the financial performance of the organisations. This implies that as the insurance companies continually engaged in proper risk management practices and strategies, the financial performance is predicted to be on the increase and vice versa. On the basis of the findings, we concluded that: the risk management practices implemented by insurance companies in Nigeria positively and significantly affect their financial performance. Hence, we recommend that: Insurance companies continue to adhere strictly to best practices in risk management as is obtainable in the insurance industry. This will help not only to boost their financial performance but also to protect themselves from catastrophic losses that may impact negatively on the industry as a whole. We also recommend that insurance companies to continue to create awareness among their staff and also provide adequate training that will help to boost their ability to withstand large losses.

BACKGROUND TO THE STUDY

......... For a long time, financial performance has been perceived only through its ability to obtain profits. This changed over time, today the concept of performance having different meanings depending on the user perspective of financial information. A company can be categorized as performing if it can satisfy the interests of all stakeholders: managers are interested in the welfare and to obtain profit, because their work is appreciated accordingly; owners want to maximize their wealth by increasing the company’s market value (this objective can only be based on profit).

Current and potential shareholders perceive performance as the company’s ability to distribute dividends for capital investment, given the risks they take; commercial partners look for the solvency and stability of the company; credit institutions want to be sure that the company has the necessary capacity to repay loans on time (solvency); employees want a stable job and to obtain high material benefits; the state seeks a company to be efficient, to pay its taxes, to help creating new jobs, etc.

The classic corporate governance focused on maximizing shareholder value as a measure of the financial performance of organisations. This provides a conceptual and operational framework for evaluating business performance. The value of shareholders, defined as market value of a company is dependent on several factors: the current profitability of the company, its risks, and its economic growth essential for future company earnings. 

All of these are major factors influencing the market value of a company. Other studies (Brief & Lawson, 1992; and Peasnell, 1996) argue the opposite, that financial indicators based on accounting information are sufficient in order to determine the value for shareholders. A company’s financial performance is directly influenced by its market position. Profitability can be decomposed into its main components: net turnover and net profit margin. Ross et al. (1996) argues that both can influence the profitability of a company one time. If a high turnover means better use of assets owned by the company and therefore better efficiency, a higher profit margin means that the entity has substantial market power.

Risk is another important factor influencing a firm’s financial performance. Since market value is conditioned by the company’s results, the level of risk exposure can cause changes in its market value. Thus, the ability of the organisation to manage its operating risks will to a large extent determine how successful it is in discharging its obligations to stakeholders as enumerated above. Identification and management of risk has become an integral part of a sound management and governance framework. In recent years, corporate failures have increased the need for effective risk management. Merely recording history of performance measures is insufficient. Risk management and performance measurement should be linked together to enable enterprises to define and guide its overall risk profile, as well as to shape its strategic direction.

Ferreira (2006) defined risk management as involving managing to achieve a proper balance between realizing opportunities for gains while minimizing losses. As this definition implies, risk management is an integral part of a good management practice and an essential element of excellent corporate governance. Risk management is a repetitive process that constitutes steps that when taken consequently; it facilitates improved decision-making and performance. The present research presents a holistic investigation into the many facets of risk and how to effectively manage risk in order to maximize the financial performance of the business organisation ........

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TABLE OF CONTENT

CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY 1
1.2 STATEMENT OF RESEARCH PROBLEM 3
1.3 PURPOSE OF THE STUDY 7
1.4 STATEMENT OF RESEARCH QUESTION 8
1.5 RESEARCH HYPOTHESES 8
1.6 SIGNIFICANCE OF THE STUDY 9
1.7 SCOPE AND LIMITATION OF STUDY 10
1.8 ORGANIZATION OF STUDY 10
1.9 DEFINITION OF TERMS 11

CHAPTER TWO
REVIEW OF RELEVANT LITERATURE
2.1 INTRODUCTION 12
2.2 THEORETICAL FRAMEWORK 12
2.3 NATURE OF RISK MANAGEMENT 16
2.4 METHODS OF RISK MANAGEMENT 18
2.4.1 Establishing the context18
2.4.2 Risk Identification 18
2.4.3 Risk Assessment 21
2.4.4 Risk Avoidance: 26
2.4.5 Risk Reduction: 26
2.4.6 Risk sharing: 28
2.4.7 Risk retention: 29
2.5 RISK MANAGEMENT PLAN 30
2.6   RISK MANAGEMENT & FINANCIAL PERFORMANCE 32

CHAPTER THREE
RESEARCH METHODOLOGY
3.0 INTRODUCTION 35
3.1 RESEARCH DESIGN 35
3.2 POPULATION OF THE STUDY 36
3.3 SAMPLING PROCEDURE AND SAMPLE SIZE DETERMINATION 36
3.4 INSTRUMENTS FOR DATA COLLECTION 37
3.5 OPERATIONAL MEASURE OF VARIABLES. 37
3.6 DATA ANALYSIS TECHNIQUE 39

CHAPTER FOUR
RESULTS AND DISCUSSION
4.0 INTRODUCTION 41
4.1 PRESENTATION OF DATA41 41
4.2 DATA ANALYSIS 44
4.2.1 RESEARCH QUESTION ANALYSES 44
TEST OF HYPOTHESES 57
4.3 DISCUSSION IF FINDINGS 60

CHAPTER FIVE
SUMMARY CONCLUSIONS AND RECOMMENDATIONS
5.1 SUMMARY 63
5.2 CONCLUSIONS 64
5.3 RECOMMENDATIONS 65
BIBLIOGRAPHY 66
APPENDICES 75


Reference code: C085

Reference code: C085

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