The Effect of Risk Management on Business Performance
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:
- Examine the effect of risk identification on the productivity of Staco Insurance Plc in Lagos state.
- Ascertain the influence of risk evaluation on corporate image of Staco Insurance Plc in Lagos state.
- Determine the extent to which risk monitoring influence the profitability level of Staco Insurance Plc Lagos state.
- Examine the combined effect of risk management variable on the business performance of Staco Insurance Plc Lagos state.
Our focus in this chapter is to critically examine relevant literature that would assist in explaining the research problem and furthermore recognize the efforts of scholars who had previously contributed immensely to similar research. The chapter intends to deepen the understanding of the study and close the perceived gaps.
Precisely, the chapter will be considered in two sub-headings:
- Conceptual Framework
- Theoretical Framework and
- Empirical Studies
- Summary of the review
CONCEPTUAL FRAME WORK
Risk has been defined in a number of ways, which are almost never entirely true or false, but are useful tools for abstraction and creating common focal points (Rosa 1998 in Habegger, 2008). A dictionary definition considers that risk is ‘the chance of injury, damage or loss’ (Webster, 1983 in Habegger, 2008). Following that perspective risk would not be predestined, but subject to human agency (Habegger, 2008). Additionally we might distinguish between the meaning of the concept in technical and non-technical contexts. Therefore in technical contexts, the concept of ‘risk’ could have specific meanings which are widely used across disciplines, ranging from ‘the cause of, the probability of, or an unwanted event which may or may not occur’ to a decision that has been made under the condition of known probabilities. Risk is defined as the uncertainty associated with a future outcome or event (Banks, 2004). Further, risk is a concept that denotes a potential negative impact to an asset or some characteristic of value that may arise from some present process or future event (Douglas and Wildavsky, 1982). Rosa (2003 in Habegger, 2008) added to this conception the element of uncertainty, by defining risk as a situation or an event where something of human value (including humans themselves) is at stake and where the outcome is uncertain. In the same manner, Terje and Ortwin (2009) consider that although there wouldn’t be an agreed general definition of risk in the literature, there might be some common characteristics that we can mention: 1. Risk equals the expected loss (Willis, 2007)
- Risk equals the expected disutility (Campbell, 2005) 3. Risk is the probability of an adverse outcome (Graham and Weiner, 1995) 4. Risk is a measure of the probability and severity of adverse effects (Lowrance 1976).
- Risk is the fact that a decision is made under conditions of known probabilities (Knight, 1921).
- Risk is the combination of probability of an event and its consequences (ISO, 2002).
- Risk is defined as a set of scenarios, each of which has a probability and a consequence (Kaplan and Garrick 1981; Kaplan 1991)
Rejda (2008) defines risk management as the process through which an organization identifies loss exposures facing it and selects the most appropriate techniques for treating such exposures. Risk management is an essential component of strategic management of an organization. It is an ongoing process of risk assessment through different tools and methods which identify all possible risks, determine which risks are critical to solve as soon as possible and then execute strategies to deal with these risks (Tariqullah and Habib, 2001). An efficient and effective risk management is the need of each and every organization and is one of the key responsibilities of firms in the insurance industry. However effective risk management boosts the performance of an organization. The past poor performances uncovered shortcomings in the performance and risk management practices with many banks taking on excessive risk with too little regard for long run performance (Sitanta, 2011).
Risk management is an effective technique for minimizing undesirable effects of risks and optimizing the benefits of risky situations (Essinger and Rosen, 1991). Chapman and Ward (1997) describes the aim of risk management as process enhancement that is established through systematic identification, evaluation and mitigation of project risks. According to these definitions risk management is defined as measures that are taken to decrease the potential risky consequences of specific phenomenon namely price variation, accidents, political hazards, disruption in supply of raw material, economic development, etc. Such risks represent a wide spectrum of company’s risks that are dealt with by various specialists. In other word, effective risk management deals with market risks that the company is facing and tries to take advantage of business opportunities that these risks might have. It is an effective tool of contending with external market threats that are out of management control and result in reduction of profit variances (AliBaba and VazirZanjani, 2009). The tools and facilities that management uses to face external market threats are financial hedging, insurance contracts, management controls systems, transportation of resources and careful decisions that are made to improve company’s profitability. All of the aforementioned movements are made to reduce adversity of situations that the company might face with. Currently to cover the market risks, companies do risk management through derivatives via using insurance coverage and through examining integrative risk management approaches. In addition, in comparison with past risk management motivations, and historical financial obligations, there is higher tendency to risk management now. Indeed, it is obvious that company’s accountability depends to its ability to utilize the new opportunities that are derived from changes in environment.
In risk management, a prioritization process must be followed whereby the risk with the greatest loss and greatest probability of occurrence is handled first and risks with lower loss are handled later (Kiochos, 1997, and Stulz, 2003). There is however, no specific model to determine the balance between risks with greatest probability and loss and those with lower loss, making risk management difficult.
Banks (2004) notes that the key focus of risk management is controlling, as opposed to eliminating, risk exposures so that all stakeholders are fully aware of how the firm might be impacted. The firms in the Tourism sector borrow a lot from the risk management process just like other sectors as suggested by Kiochos (1997).
According to Kiochos (1997), the risk management process involves four steps: identifying potential losses, evaluating potential losses, selecting appropriate risk management techniques for treating loss exposures and implementing and administering the risk management program. Kimball (2000) concurs that risk management is the human activity which integrates recognition of risk, risk assessment, developing strategies to manage it and mitigation of risk using managerial resources. Generally, a proper risk management process enables a firm to reduce its risk exposure and prepare for survival after any unexpected crisis.
AREA OF STUDY
STACO Insurance Plc emerged in July 1994 as a result of discreet acquisition and restructuring carried out on Alpha Insurance Plc.It was incorporated in Nigeria with RC. No. 167274 on 10th October 1991 and subsequently licensed to transact all classes of Insurance business with Registration No. RI 135 and RI 135L on 1st October 1994. The company under the new name commenced General Insurance Business and Special Risks with registration No. RIC 038.Owned by Nigerians who have distinguished themselves in their various business endeavours and manned by seasoned professionals who have proven integrity in the Nigerian Insurance Industry. Staco Insurance Plc covers non-life insurance for fire, general accident, motor vehicle, oil and gas, marine, aviation, bond and engineering. Other insurance products cover fidelity guarantees, professional indemnity, goods-in-transit, employer liability, burglary, public liability and group/personal accident as well as transportation insurance which includes motor, marine hull and cargo and aviation insurance. Fire and bond insurance products cover fire and special perils, homeowner/holder, all-risks, engineering and bond insurance.
Research designs are perceived to be an overall strategy adopted by the researcher whereby different components of the study are integrated in a logical manner to effectively address a research problem. In this study, the researcher employed the survey research design. This is due to the nature of the study whereby the opinion and views of people are sampled.
POPULATION OF THE STUDY
According to Udoyen (2019), a study population is a group of elements or individuals as the case may be, who share similar characteristics. These similar features can include location, gender, age, sex or specific interest.
The emphasis on study population is that it constitute of individuals or elements that are homogeneous in description.
The survey for this study was conducted to find the effect of risk management on business performance. The respondent who are Staff of Staco Insurance Plc forms the population of the study.
Statistic derived from the Human Resources Department of Stanco Insurance Plc show that the total population of the company is 78.
DATA PRESENTATION AND ANALYSIS
This chapter present and analyzes data collated from the field survey. 65 questionnaires was issued to staff of Stanco Insurance Plc.However 60 questionnaires was returned and validate for the study. This is because most officers were not able to complete the research questions as at the time of retrieval.
CONCLUSION AND RECOMMENDATION
This chapter summarizes the findings into the effect of risk management on business performance using Staco Insurance Plc as a case study.
Summary of the Study
The focus of the study examined the effect of risk identification on the productivity of Staco Insurance Plc in Lagos state. It ascertained the influence of risk evaluation on corporate image of Staco Insurance Plc in Lagos state. It determined the extent to which risk monitoring influence the profitability level of Staco Insurance Plc Lagos state. It examined the combined effect of risk management variable on the business performance of Staco Insurance Plc Lagos state.Simple random sampling was used in the study as staff of Staco Insurance Plc form the population.Data was presented and analyzed using frequency and tables.Hypothesis was tested using Chi-Square statistical tool.
CONCLUSION AND RECOMMENDATION
In this research, the relationship between total risk management and the company’s performance level is investigated. First, the results of hypotheses testing shows that there is a risk management has a significant on business productivity. If companies try to control unfavorable conditions that result from exposure to risk, they can improve corporate performance. Second, if companies invest in intellectual capital and extend or create certain valuable, rare, unique and unchangeable resources, they will have better performance and can benefit from competitive advantage. Naturally, such investment requires extensive investment in specific resources for companies that have used innovation and engaged in business activities especially in industries that have high growth levels and such growth level is supported by human intellectual capital. In other words, the results showed that there is significant positive relationship between functional behavior of management that is considered as their performance indicators and the total risk management that indicates activities and behaviors of directors. If management considers innovation and invention in their activities, the company will certainly have higher levels of knowledge and level of human intellectual capital will be improved. Results show the effect of investment in innovations, research and development and intellectual capital on corporate performance levels.
Therefore, the results of the findings recommends that managers are to admit the importance of managing all kinds of risks that company may face with as the results also show that more investment in this field would improve corporate performance level, stabilize the profitability and give more confidence to major investors to invest their resources in company.
Finally, due to the impact of total risk management on company performance, functional behaviors of management should be considered in investors’ decision making.
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