THE EFFECT OF RISK MANAGEMENT ON BUSINESS PERFORMANCE

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CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Risk management is a crucial discipline in business, particularly the insurance business (Omasete, 2012). However, it should be noted that risk management goes far back in time even before people could understand that the various practice they were involved in, was apparently the practice of the management of risk. Actually, it was stated in history that some historians believe that the earliest method of managing risk came about because of gambling. It was stated that thousands of years before the internet users could play online poker, people in diverse ancient society played games with dice and bones. In addition, people played games that developed into chess and checkers well over two thousand years ago. Some of the historical evidence that gave rise to probability theory of gaining being the sole originator of risk management was from the writings of various famous authors. It was stated that the famous mathematicians wrote each other about games of chance in the 1600s, a communication that is believed to have given rise to resent probability theory used today (Angus, 2015). On the other hand, it was stated according to Angus (2015) that in the risk management: history, definition and critique that the recent conditions for managing risk came about after world war II, but the discipline mostly began as a study of using insurance to manage risk. Soon after, from 1950s to the 1970s, risk managers began to realize that it was too costly to manage all risk with insurance, so the discipline began to expand to substitutes to insurance. Such examples include training and safety programs as an alternative for insurance.

However, according to the Market Business News (2018) organizational performance which is also known as business performance can be categorized into two which is the “organizational” and the “performance”. Organization is said to be the adjective of organization, is considered an organized group of individuals with a specific purpose, while the performance is regarded the process or action of performing a function or task, and when put together, organizational performance is said to be how successfully an organized group of people with a particular purpose perform a function. It was further stated that performance management process has become renowned or eminent in recent years as way of providing a more incorporated and continuous approach to the management of performance.

Lately, according Omasete (2012) businesses are known to place huge emphasis on risk management as this determines their survival and business performance. Insurance companies are into the risk business and are based in the under write or cover for various types of risks for individuals, businesses and companies. Hence, it is necessary that insurance companies manage and identify their organizations risk exposure and conduct proper analysis to avoid and treat losses due to the compensation claims made by the insured. However, it was stated by Kadi (2014) that majority of insurance companies cover insurable risks without taking note of the proximate cause. That is, most insurance companies underwrite or cover insurable risk without conducting appropriate analysis of the expected claims from clients and without putting in place a mechanism for identifying appropriate risk reduction methods. Nevertheless, it should be taken into consideration that, poor management of risk by insurance companies, leads to accretion of claims from the clients, therefore leading to augmented losses and poor business performance (Magezi, 2014). However, it was further stated that the risk behavior of manager affect risk management activities, that is, a strong risk management framework can help companies to reduce their exposure to risks, and enhance their business performance.