- Background to 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.
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
Despite efforts by successive governments through economic reforms to
heighten the private sector to complement government’sinvestments and
enhance economic growth, the
sector’s response is relatively low; and thi
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 tranquillity
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 (Morton, 1999).
Insurance as a risk management tool in Nigeria is made extensive and
mandatory by the Insurance Act, 2006 (Act 724). The Act makes it
compulsory for private commercial property owners such as hotels,
restaurants, hospitals and clinics, Auto shops, manufacturing firms and
many other related businesses to obtain fire and liability insurance
just as it is compulsory for vehicle owners to obtain the Third Party
Motor Insurance cover under the compulsory third party
motor insurance Act 1958 (Act 42). Sections 1 not construct or cause
to be constructed a commercial building without insuring with a
insurer the liability in respect of construction risks caused by
negligence or the negligence of servants, agents or consultants which
may result in bodily injury or loss of life to or damage to property of
any workman on the site or of any member of the public; every commercial
building shall be insured with an insurer against the hazards of
collapse, fire, earthquake, storm and flood, and an insurance policy
issued for it; the insurance policy shall cover the legal liabilities of
owner or occupier of premises in respect of loss of or damage to
property, bodily injury or death suffered by any user of the premises
andical thir satisfaction and financial leverages to investors buying
insurance to safeguard business interests.
The compliance of the Act (Act 724) is in doubt: as the 2007, ENGAS
company filling station gas explosion at Asokwa in Ashanti Region did
not fulfil its obligation per the law; the 2011 fire explosions at the
Western Steel and Forging Ltd in Tema caused injury, death and damages
to people and properties; also, the destruction of properties at
Kantamanto Market and the VRA computer room (housing its server) by fire
evidence the need for insurance covers to minimize the effects of
hazards to SMEs, Government Agencies and Departments; hence, the call on
government with other stakeholders to assist victims.
- Problem Statement
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.
SMEs in Nigeria serve as vital indicative sources of growth,
technological innovation and flexibility. However, they are saddled with
towards growth and development strategies. SMEs are exposed to many
risks in their ordinary
course of business, such as interest rate risk, foreign exchange
risk, market risk, natural disasters, political risk, and technological
risk and so on, that minimize their profit by increasing their
financial losses. However, insurance enshrined in sections 183 and
184 of the Insurance Act, 2006 (Act724) to serve as a buffer in the
event of mishaps is not given the attention it deserves regardless of
its significance to mitigate the effects of risks resulting from
disasters or unexpected events. In Uyo, the level of patronage of
insurance by SMEs as a risk transfer mechanism to mitigate risks such as
collapse of building, fire outbreaks, accidents, burglary, business
interruptions, and dishonesty of personnel tend to be wavy. What were
the recovery measures in the wake of the potential losses and financial
In view of this, the researcher examined the extent to which non-life insurance was used as a risk management tool by SMEs.
- Objectives of the Study
The research broadly sought to assess the extent to which SMEs adopt
insurance as a risk management and minimizing tool and the benefits
there in. Specifically, the research intended to achieve the following
- Identify what business risk(s) SMEs face;
- Examine the response of SMEs towards the use of non-life insurance to mitigate pure risk(s);
- Assess the benefits SMEs derive from using insurance as a risk management tool;
- Identify any problems SMEs encounter in using insurance; and
- Find out solutions to the challenges that SMEs encounter in using insurance.
- Research Questions
The main research question addressed was: do SMEs use insurance to
mitigate business risk(s)? The specific related questions to solve the
research problem included the following:
- What were the risk exposures that an SME was faced with?
- Did entrepreneurs of SMEs have enough insurance for their businesses?
- What was the level of response to using insurance as a risk management tool?
- What benefits did SMEs derive from using insurance as a risk management tool?
- What were the problems that SMEs encounter in using insurance?
- What were the solutions to overcome the challenges that SMEs encountered in using insurance?
- Significance/Justification 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 behaviour
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
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.
- Method of the study
The researcher made use of the survey method to generate primary data
to achieve the objectives of the study, (Zikmund, 2000). A multiple
stage sampling design was used to draw sample frame to avoid any bias.
First, the metropolis was clustered into three electoral constituencies,
constituting 19(nineteen) towns (Figure 3.1). A cluster sampling of
4(four) small scale businesses, 5(five) medium scale businesses were
taken from each sample elements from the: central, south and north
constituencies respectively. Nine (9) business units were clustered from
each town. SMEs were divided into different clusters according to the
number of employees. A total of 171 registered and non-registered SMEs
were sampled and questioned. Different clusters of SMEs had the same
number of employees as one sub-cluster. All thirteen insurance companies
in the metropolis were
respondents to section “C” of the question were contacted.
Primary data was collected from respondents per the questionnaire. In
gathering data, the researcher self-administered 13% of the
questionnaire, while 87% of the remaining questionnaires were
administered by trained personnel to administer and gather information
from the entrepreneurs. The rationale for using this approach was to
allow the respondents ample time with monitoring to answer at their own
pace without taking them away from their work. The trained personnel
read and interpreted questionnaires to non-literate respondents. In
answering the questionnaire, the
respondents were asked to indicate their responses to the questions
on a five point Likert scale, ranging from 1 (strongly disagree) to 5
(strongly agree), (Likert, 1932). Also closed and opened ended response questions were analysed.
The researcher made use of qualitative and quantitative survey design
for this study. The design involved the collection of data concerning
the study. Frequency tables and percentages (%), figures and cross
tabulation were used in analyzing the data with the aid of Statistical
Package for the Social Sciences (SPSS).
- Scope and Limitation of the Study
The study covered the use of insurance as a risk management tool by SMEs, evidence and
prospects in the metropolis. Four categories of insurance protection
were classified for any businesses: property, liability, people and
income (Dorfman, 2008). These categories remained the focal points of
reference in the research. Indemnification and risk pooling of the
various categories of insurable risks enhance commercial transactions
and the provision of credits by reducing losses. The research took a
period of five months.
Uyo Metropolis was one of the 20 administrative districts in the
region of the area of study. It is the central business district and the
capital of the northern region. The Metropolis shares boundaries with
Savelugu-Nantong to the North West, Yendi to the East and Gonja to the
The Uyo metropolis is the political, economical and financial capital
of the region. The major government departments, NGOs and ministries
have Uyo as the operational centre.