Full Project-PROCEDURE, PROBLEM AND PROSPECTS OF PERSONAL INCOME TAX ADMINISTRATION IN NIGERIA: A CASE STUDY OF OYO STATE BOARD OF INTERNAL REVENUE
1.1 BACKGROUND OF THE STUDY
The major reason of all established business is profit as they meet human demonstrable needs and want, and continue to dominate the market, but every economic activity is faced with both internal and external risks. At times, these risks involve noticeable losses that could deprive a profit-making company from surviving in the market if effective management is not established. Considering the increasing in risks in organizations, managing risk is a matter of necessity. Risk management is the total process of identifying, controlling and minimizing the influence of uncertain events. This days, businesses put great emphasis on hazard administration as this determines their survival and business performance. Insurance companies are in the risk business and as such cover various types of risks for individuals, businesses and companies. It is therefore, necessary that insurance companies manage their risk exposure and conduct proper analysis to avoid losses due to the compensation claims made by the insured. However, Kadi (2003) stated that “most insurance companies cover insurable risks without carrying out proper analysis of the expected claims from clients and without putting in place a mechanism of identifying appropriate risk reduction methods”.
Poor management of risk, by insurance companies, leads to accumulation of claims from the clients hence leading to increased losses and hence poor financial performance (Magezi, 2003). Risk management activities are affected by the risk behaviour of managers. A robust hazard administration framework can help organizations to reduce their exposure to risks, and enhance their financial performance (Iqbal and Mirakhor, 2007). Further; Mikes and Kaplan (2014) argued that “the selection of particular risk tools tends to be associated with the firm’s calculative culture and the measurable attitudes that senior decision makers display towards the use of risk management models. While some risk functions focus on extensive risk measurement and risk based performance management, others focus instead on qualitative discourse and the mobilization of expert opinions about emerging risk issues.” Lately, insurance companies have increased their focus on hazard administration. Meredith (2014) advised that there should be careful judgment, by management of insurance companies, of insurable risks in order to avoid excessive losses in settling claims. It follows that administration of hazard is an important factor in improving financial performance (Okotha, 2003). Sanusi (2010) pointed out that “in recent years excessive credits and financial asset growth went unchecked. Risk, in insurance terms, is the possibility of a loss or other adverse event that has the potential to interfere with an organization’s ability to fulfill its mandate, and for which an insurance claim may be submitted”.
According to Christopher, and Peck (2004) “as risk-bearing institutions can, and do, fail if risks are not managed adequately”. The central function of an insurance company as observed by Merton (1995) is its‟ ability to distribute risk across different participants. Saunders and Cornett (2008), also state that “modern insurance companies are in the administration of hazards‟ business. They discuss that insurance companies undertake risk bearing and management functions on behalf of their customers through the pooling of risks and the sale of their services as risk specialists”. This indicates that management of risks should be focused on in the running of insurance companies. Management of various financial risks is the center stage of the insurance industry. Risk management, can be defined as risk pooling, transfer and indemnification in order to reduce the costly financial loss evolving from probabilistic occurrence and volatility. Skipper (1997) opined that “this fundamental aspect of insurance through the structured administration of hazard process involves identifying the exposures to accidental loss, evaluating alternative techniques for treating each loss exposure, choosing the best alternative and monitoring the results to refine the choices”. According to Curak and Loncar (2008), “in the process of making decision on underwriting risk, insurance companies gather relevant information on risk factors and assess risk which reflects in the price of risk (premium) and the policy conditions”.
According to Levine (2004), “few studies have shown that insurance activities, as a means of risk transfer and indemnification, contribute to economic growth by promoting financial stability, allowing different risks to be managed more efficiently, encouraging the accumulation of new capital and helping to mitigate losses as well as the negative consequences that random shocks may have on capital investment in the economy”.Rejda (2003) stated that “risk management means to a process of identifying loss exposures faced by an organization and selecting the most appropriate techniques for treating these particular exposures effectively. There are many techniques available for insurance companies to manage risks including; loss financing, risk avoidance and loss prevention and control”. Ingram (2006) observed that „insurance refers to a form of risk transfer where one party (the insurer) undertakes to indemnify the other (insured) in the event of an insured risk taking place in consideration of a premium. Further, general insurance or simply non-life Insurance is the underwriting of a number of classes of insurance that is not long term in nature (usually one year) including automobile and homeowners policies. Payment or reimbursement is provided to the insured should an insured loss occur”. Managing risk is germane to insurance companies. Gollier (2003) described “insurance means that insurance companies take over risks from customers. Insurers consider every available quantifiable factor to develop profiles of high and low insurance risk. Level of risk determines insurance premiums”. As revealed by Dennis (2005), “generally, insurance policies involving factors with greater risk of claims are charged at a higher rate. With much information at hand, insurers can evaluate risk of insurance policies at much higher accuracy. To this end, insurers collect a vast amount of information about policy holders and insured objects”. Barlow (2000) concurred 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 administration of hazard process enables a firm to reduce its risk exposure and prepare for survival after any unexpected crisis”.
1.2 STATEMENT OF THE PROBLEM
There are noticeable changes in insurance market and socio-economic environment recently, which implies that the risks that insurers are encountering have evolved; from volatile investment conditions, increases in longevity and mortality risks through to terrorism threats and climate change. On this account, stakeholders concentrate on these risks and the way in which they are managed. Insurance firms‟ major economic activity is administration of hazard. The companies manage the risks of both their clients and their own risks. This requires an integration of risk management into the companies‟ systems, processes and culture. Various stakeholders pressure their organizations to effectively manage their risks and to transparently report their performance across such hazard administration initiatives. Banks (2004) argued that some risks can and should be retained as part of the core business operations and actively managed to create value for stakeholders, while others should be transferred elsewhere, as long as it is cost effective to do so. According to Stulz (1996), some risks present opportunities through which the firm can acquire comparative advantage, and hence enable it to improve on financial performance.
1.3 OBJECTIVES OF THE STUDY
The study sought to assess adequate risk recognition and management in Nigerian insurance companies. Specifically, the study sought to;
- examine the extent insurance companies adoptedrisk recognition and management practices in Nigeria.
- examine the effect of risk management on the performance and profitability of Nigerian insurance companies.
iii. identify challenges mitigating risk management practices in insurance companies in Nigeria.
1.4 Research Questions
- To what extent do insurance companies adoptrisk recognition and management practices in Nigeria?
- What is the effect of risk management on the performance and profitability of Nigerian insurance companies?
iii. What are the challenges mitigating risk management practices in insurance companies in Nigeria?
1.5 Research Hypotheses
Ho1: Insurance companies do not adopted risk recognition and management practices in Nigeria to a great extent.
Ho2: There is no effect of risk management on the performance and profitability of Nigerian insurance companies.
1.6 Significance of the Study
This study will be significant to insurance companies, general public, students and the insurance regulators as it will offer valuable contributions from both a theoretical and practical perspective. Theoretically, it will contribute to the general understanding of risk management practices and their effect on financial profitability. The study will enable Insurance companies in Nigeria to improve their risk management process and to adopt efficient strategies to improve firm profitability through the risk management processes. This will enable the insurance companies to perform better and to grow their businesses and maintain a competitive advantage. Apart from benefiting the insurance companies, the general public will benefit from the study through improved insurance services and better management of risks. This will result to affordable rates of insurance premiums and reduction in levels of non-payment and fraud.
The study will be helpful to the government in setting regulations on insurance practices in Nigeria and safeguarding the resources of the country. It will also be of immense benefit to other researchers who intend to know more on this study and can also be used by non-researchers to build more on their research work. This study contributes to knowledge and could serve as a guide for other study.
1.7 Scope/Limitations of the Study
This study is on the assessment of adequate risk recognition and management in Nigerian Insurance companies. The study will focus on a case study of Union Assurance Company, Uyo in Nigeria critically discussing the causes of insurance risk and investigating the significance of risk management practices in insurance companies in Nigeria.
Limitations of study
Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.
1.8 Definition of Terms
Risk: Risk is the possibility of losing something of value.
Recognition: Identification of someone or something or person from previous encounters or knowledge.
Risk Management: Risk management is the identification, evaluation, and prioritization of risk followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events or to maximize the realization of opportunities.
Insurance: Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company.
Insurance Companies: a financial institution that provides a range of insurance policies to protect individuals and businesses against the risk of financial losses in return for regular payments of premiums.
Barlow, S. (2000), Case study. prudential: embedding risk management, Internal Auditing and Business Risk, 2(6) .32-3
Christopher, M. & Peck, H. (2004). Building the resilient supply chain’,.The International Journal of Logistics Management, Vol.15(2), 277-287.
Curak, M., Loncar, S. &Poposki, K. (2008).Insurance sector development and economic growth in transition countries. International Research Journal of Finance and Economics, 34(1), 29-41
Dennis, W. (2005), “Risk management and business continuity, overview, and perspective”, Prentice, Hall Ltd.
Gollier, C. (2003), “To insure or not to insure? an insurance puzzle”, The Geneva Papers on Risk and Insurance Theory.36, 414 – 439.
Ingram, D.N. (2006), “Standard and poor’s enterprise risk management evaluation of insurers”, Risk Management: 14–17.
Iqbal Z. &Mirakhor A. (2007). An Introduction to Islamic Finance: Theory and Practice, 2nd Edition
Kadi, A.M. (2003). Basic conditions and procedures in insurance.The Accountant, 13(3), 16-1
Levine, R..(2004). Law, finance, and economic growth. Journal of Financial Intermediation, 8(12): 8-35.
Magezi, J.K. (2003). A new framework for measuring the credit risk of a portfolio. Institute for Monetary and Economic Studies (IMES), 1-45.
Meredith, L. (2004). The ultimate risk manager. Boston: CUSP Communications Group Inc.
Merton, R.C. (1995). A functional perspective of financial intermediation, Financial Management Journal, 24 (2), 23-41.
Mikes A. & R.S Kaplan.(2014).Towards a contingency.Theory of enterprise risk management.Working Paper 13-063.
Okotha, H. (2003). Corporate risk management:costs and benefits. Global Finance Journal, 13 (1), 29-38.
Rejda, E., G. (2003), “Principles of Risk management and Insurances”, New York, Pearson Education Inc.
Sanusi, L.S (2010) “The nigerian banking industry in the aftermath of the recent global financial Crisis”.http://www.cibng.org/admin/publications.
Saunders, A. & Cornett, M.M. (2008). Financial institutions management: A Risk Management Approach, McGraw-Hill, Irwin.
Skipper, H. Jr. (1997). Foreign insurers in emerging markets: issues and concerns. Center for Risk Management and Insurance, Occasional Paper 97-2.The Association of Kenya Insurance. Insurance Industry Annual Report. 2005
Stulz, R.M. (1985). Optimal hedging policies. Journal of Financial and Quantitative Analysis,19, 127-140.
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