THE ROLE OF INSURANCE IN RISK MANAGEMENT OF SMALL AND MEDIUM SCALE ENTERPRISES (SMES) IN AKWA IBOM STATE

THE ROLE OF INSURANCE IN RISK MANAGEMENT OF SMALL AND MEDIUM SCALE ENTERPRISES (SMEs) IN AKWA IBOM STATE

CHAPTER ONE

INTRODUCTION

Background of 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 optimistic. Despite efforts by successive governments through economic reforms to heighten the private sector to complement government’s investments and enhance economic growth, the sector’s response is relatively low; and this could be attributed to their risk averse attitude. 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).

1.2 PROBLEM STATEMENT

Some of the problems are inability of the small business owners to attract short and medium term loan from commercial banks due to the following facts:

1. Most of them are not credit worthy
2. Inability to repay previous facilities earlier granted to them by the banks

iii. Inability to revive the business after a loss

1. Inadequate insurance cover to attract indemnification and recovery of the loss.
2. Inadequate government grants to SMEs to expand business.

THE ROLE OF INSURANCE IN RISK MANAGEMENT OF SMALL AND MEDIUM SCALE ENTERPRISES (SMEs) IN AKWA IBOM STATE