1.0 BACKGROUND OF THE STUDY
Insurance is a security device used by the inured to protect himself against a risk purchased from the insure and the right to be indemnified if the risk should materialize. The purchase price which the insured pays the insurer is known as the premium, often paid on monthly or annually basis and the insurer in return compensate the insured in event of loss.
THE DEVELOPMENT OF INSURANCWE INDUSTRY IN Nigeria begins in 1950 during the colonial era period characterized by a market dominated by Europeans company which virtually held the monopoly of insurance business over the continent of Africa. At that time most Nigerians citizens are not aware of insurance and it importance. After Nigeria independence in 1960 most of the industries managed by the Europeans are been taken over by Nigerians. As they begin to managed those companies, the awareness of insurance and it importance was known.
In the 1980, insurance companies operating in Nigeria begins to grow in numbers and the need to enlighten the citizens on insurance was carried out by some of the employee of those companies. Who went to the street to educate they people on the danger of risk that might occur in many ways, such as fire, theft, accident, rain storms etc. and the responsibility of the insurance is to compensate the unfortunate person who has suffered losses by placing him in the same position as he was before. However, some people agreed to take up an insurance policy but the number of those that patronize the company at that time was very few.
In Nigeria today, most industries and commercial business have insurance cover. This is because insurance ensure the growth and development of all industries and business established and spread all over the country. Apart from business most people don’t insure their houses, cars farms etc. they show reluctant attitude towards taking up insurance policy for such assets and also think it’s a waste of money. Giving great consideration to the above statement, the researcher is compelled to carry out a research on the topic in question an assessment of adequate risk recognition and management in Nigeria insurance companies. In order to re-oriented the people toward changing their attitude and belief about insurance industries.
1.1 STATEMENT OF THE PROBLEM
The insurance industry over the years has been going through a lot of problems, which hinders their effectiveness and efficient rendering of services. These include.
- Lack of survey of risk transferred by the insurance companies, as such risk are just assumed without properly scrutinizing the situations and circumstance surrounding such risk.
- Lack of adequate claims settlement procedures which are characterized with bureaucracy.
- Lack of proper fixed and computed premiums which endangers the solvency and profitability of the insurance companies.
OBJECTIVES OF THE STUDY
The following are the objectives of this study?
- To assess hoe insurance companies render their services.
- To determine the effectiveness of how they handle the risk that is being transferred to them.
- To encourage insurance companies to have financial strength that will contain the risk of losses that they have agreed to assure.
1.2 FORMULATION OF HYPOTHESIS
Null hypothesis (Ho( insurance is not a security device used by the insured to protect himself against a risk.
Alternative Hypothesis (H1) insurance is a security device used by the insured to protect himself against a risk.
1.3 SCOPE OF THE STUDY
The scope of this study will be based on risk recognition and management in the insurance industry with specific interest on lead way assurance firm from 2008 to 2010.
1.4 SIGNIFICANCE OF THE STUDY
1. The research write up will serve as a source of data for subsequent project and research work.
2. The write up will also help in creating awareness among the insuring public on the relevance and value of the services offered by the insurance industry.
3. The research study shall be an immense reference materials to students and other researchers who might want to expands the research topic.
1.5 HISTORICAL BACKGROUND OF THE CASE STUDY
Leadway Assurance company limited was in corporate in 1970 as a limited liability company. The company started it operation as a direct motor insurance company and further expanded in the early 80’s to cover more risk.
The company’s remarkable success has been possible as a result of its sound professional and business standards backed by the uncompromising level of integrity of its Directors. Such uncompromising level of integrity was instilled by it late founder sir (DR) Hassan .O. Odukale as an honest businessman, the founding managing Director sir Odukale nurtured the company to an eviable position in the Nigeria insurance industry. Leadway is a private company with 28 share inventors and trust corporation. The statutory deposit of leadway with the C.B.N as at 2002 stands at over 13.5 million being 15% of their statutory paid up capital as provided by pre 2003 insurance act. This further affirms their position as a full fledge composite insurance company under writing all classes of insurance in Nigeria.
The company, however announced it achievement of 5.5 billion capital base as at April 30, 32006 which implied that the company has already met the statutory of N5 billion capitalizations for composite firms. The company authorized share capital has raise from 2 billion to 4 billion in order to meet statutory requirements and accommodate increasing need for higher capital structure. The increase as given the company the necessary leeway to keep increase its paid up capital steadily and also enable it to accommodate new investors.
1.6 DEFINITION OF TERMS
- Proposal forms: This is a document that is drafted by the insurer to seek answers to the main materials aspect of the risk that will be insured.
- Premium: This is an amount that the insured pays at every month ort annually to the insurer
- Proximate Cause: It used to determine whether the loss sustained by the insurer was cased by the risked insured against.
- Cover: Protection provided by the insurance company to the insured against a risk.
- Indemnity: This is process whereby the insurance company compensates the insured in the event of loss.
- Insurer: An insurer is the insurance company who managed risk that was insured.
- Re-Insurance:Is a process whereby the insurance transfer part of the risk it assumed to another insurance company.
REVIEW OF RELATED LITERATURE
This chapter will review some writer opinion on insurance in relation to the topic of this project. Issues to be discussed include types of risk, source of risk, concept of risk, management of risk, treatment of risk etc.
2.1 THE CONCEPT OF RISK
Risk has been the subject of study by different scholars over the years with several meaning and definitions. But the most accepted definitions are that of J.E Banister and P.A Bawcutt (1980). They define risk as follows:
- Risk is the object doubt concerning the outcome of a given situation.
- Risk is the uncertainty as to the occurrence of an economic loss.
- Risk is the combination of hazards.
- Risk is the chance of loss.
- Risk is the uncertainty of financial loss.
- Risk is the uncertainty in respect of future earning, cash flow and the assets of undertaking.
- Risk is the possible outcome which may occur at some future time.
- Risk is the probability of adverse returns from investment.
However is can be insured in the insurance industry in order to reduced losses. Because the insurer does not eliminate loss and cannot stop disaster or misfortune from happening but helps to compensate the victim.
2.2 TYPES OF RISK
The following are some types of risk that can be insured. According to David L. Bickel Haupt (1974) these include;
1. Speculative Risk: This can occur as a result of gain or the possibility of loss. Many business risks fall into the category of speculative risk, such as risk associated with changes in customers taste, change of government policy, price of raw materials availability of foreign exchange etc.
2. Fundamental Risk: This arise from social, economic and political pressures occurring within the society and from purely physical phenomena that affects whole community. Such as technology, unemployment, war, inflation, political instability, flood, windstorms, drought volcanic, earthquakes etc.
3. Particular Risk: This are personal risk arising from individual event such as the burning of house, robbery of a bank and an act of personal negligence.
4. Systematic Risk: This type of risk affects all companies either big or small, as a result of the system in which the company operates. Its an uncontrollable risk which cannot be prevented from happening. Examples are interest rate, inflation rate, competition, legal environment, cultural environment, demand and supply etc.
5. Unsystematic Risk: This is an internal risk, that is peculiar to a particular companies. Example is fire disaster, fraud, strike, bank robbery etc.
2.3 SOURCE OF RISK
The following are some common source of risks. James S.T Satldra G.G and Robert E.H (2001) state some of those source of risk. These consist of:
1. Property Risk: Business that own rent or use property may be damaged, destroyed or stolen. If the damage is extensive, the business may be shut down temporarily thereby incurring a loss as a result of replacing the damage property.
2. Liability Risk: This occurs as a result of payment made to compensate injured parties as well as to punish those responsible for the injures, even when an individuals is eventually absorbed of its liability.
3. Financial risk: This is a risk that is speculative in nature and can impact on firm’s earnings. Examples of those financial risk include credit risk, foreign exchange risk, commodity risk and interest rate risk
4. Life, health and loss of income risks: Business and individual faces risk associated with health problems. A person who become ill or injured in accident will incur expenses for medical treatment. And the cost a business arranged to pay those expenses for their employees, regardless of whether sickness or injury will result to loss of income.
2.4 RISK IDENTIFICATION
According to Irukwu, S.O (1991) state that identification of risk in an organization requires a knowledge of the organization the market in which it operates and climatic environment in which it exists. Failure to identify risk may result to major loss which will leave the organization exposed to the chance of incurring such loss. The techniques used in identifying risks are check list, financial statement analysis, flowchart, contract analysis, on site inspection and statistical analysis of past losses.
2.5 RISK EVALUATION
Evaluation of loss frequency an analysis of the size or severity of the loss is helpful considering the most probable size of any losses that might occur and the maximum possible losses that may happen as part of the overall risk evaluation. Irukwu , S.O (1989) further state that, the formation of a sensible decision about the way a risk should be handle requires information regarding values at risks or potential liabilities. And the estimated frequency of loss of different sizes which include losses caused by interruption to business.
2.6 RISK TREATMENT
These has to do with the selecting of most effective risk management techniques. According to Irukwu, S.O (1989) state that, the basic methods for handling risks are risk avoidance, risk reduction and risk transfer. Each of these method will be discussed below:
- Risk avoidance: This is a conscious decision not to expose oneself or one’s firm to a particular risk of loss. Risk avoidance can be said to decrease one’s chance of loss to zero. For instance a firm may avoid introducing a new product, if the method of production is hazardous.
- Risk retention: This is a method of risk treatment that is employed when there are simply no alternative available. Risk retention strategies involve the intention to pay for losses as they occur, without making any funding arrangement in advance of a loss.
- Risk transfer: This involves the shifting or transfer of risk to another party through payment by one party (transferor) to another party (transferee or risk bearer). The transferee agrees to assure a risk that the transferor desire to escape.
2.7 MANAGEMENT OF RISK
After sources of risk are identified, a decision have to be made on how the risk should be handle. For instance a pure risk that is not identified, does not disappear. Therefore, if a risk is not identified, the business or individual will loss the opportunity of consciously deciding on the best techniques for dealing with the risk. The process used to systematically manage risk exposure is known as risk management.
Irukwu, S.O (1991) define risk management as the protection of assets, earnings and liabilities of people and enterprises with maximum efficiency and at minimum cost.
2.8 THE VALUE OF RISK MANAGEMENT
Risk management is a function of business management aimed to explore some of the basic concept of risk, to analyze the nature of loss associated with risk and to see how risk may be managed. It has equally been defined as the protection of assets, earning, liabilities and people of an enterprise with maximum efficiency and minimum cost. Insurance News (1998) defined management interms of organizing of activities and controlling of resources in such a manner as to achieve some described objectives for an industrial or commercial firm. The objective may be to maximize profits or to achieve some combination of several objectives. The Insurance News (1998) also defined risk management as the process of planning, organizing and controlling of activities and resources in order to minimize the impact of the uncertainly event.
2.9 INSURANCE AND RISK MANAGEMENT TECHNIQUES
Falegan (1991) define insurance as a device for reducing risks by combining a specific number of exposure unit to make their individual losses collectively predictable. The predictable loss is then shared proportionately by all units in the combination.
According to Agbadua, O.B (2002) Insurance can be define as a contract by one person called the insurer undertaken in return for agreed consideration called the premium to pay to another person called the insured. As a money or its equivalent on the happening of a specified event.
Risk management techniques consist of check list, financial statement analysis flow chart, contract analysis on site inspection and statistical analysis of past losses.
2.10 THE NIGERIAN INSURANCE INDUSTRY
According to Insurance News (1998), the niegrian insurance market has evolved over the years and can easily be described as one of the major player in African and indeed international insurance business. The market is an open dynamic and competitive and hosts the highest number of insurance company in any country in African. The market is made up of insurance companies, reinsurance companies, brokers and agents, loss adjusters and other insurance related institutions. The insurance sector is made up of large number of companies with varying sizes among which is the NICON insurance corporation owned by the federal government of Nigeria and a few other equally strong insurance companies. The total number of registered insurance companies operating in the country stood at 135 as at 31 December 1996. Over 70 percent of the income of the market is controlled by only about 30 companies. The insurance Decree 1997 classified the operations of insurance companies on the following basis:
1. Life Assurance
2. General insurance excluding special risk
3. General insurance including special risk
2.11 INSURANCE REGULATION
The law regards insurance as a contract of special class known as contract of utmost good faith. The rules applicable to special contract has the doctrine of disclosure of material facts by the parties involve in the contract.
Insurance News (1998); further state the industry regulated decree.
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