THE EFFECT OF VALUE ADDED TAX ON REVENUE GENERATION IN NIGERIA (2011-2016)

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CHAPTER ONE

INTRODUCTION

1.1  Background to 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. Insurance companies on the other hand are known to have increased their focus on risk management over the recent years. According to Meredith (2014) she suggested that there should be cautious decision, by management of insurance companies, of insurable risks in order to avoid excessive losses in resolving claims. It was stated that if the insurers, who are regarded as risk-bearing institutions can and do fail, if risks are not managed effectively.

In spite of this, it should be taken into consideration that the main function of an insurance company is its capability to share risk across diverse participants (Merton, 2013). This however points out that the management of risk should be the main aspect in the operations of insurance companies, which then leads to the main focus of this study, that is, to understand how this insurance companies manage the various risk that exist for their client, how they manage their own respective risk while protecting clients against such risk and how such risk management affect their business performance.

1.2  Statement of the Problem

Insurance companies are in the main business of managing risk. The companies manage the risks of both their clients and their own risks. This then requires the incorporation of risks management into the companies systems, processes and culture. However, according to Chris (2017) Staco Insurance Plc, like most of the other insurance companies in Nigeria, has continued to struggle, partly as a result to low patronage and the on-going recession. The economic dilemma occasioned by high inflation and the resulting low unusable income in a recession environment impacted negatively on the insurance industry. Hence, there has been a decrease in the revenues of insurance operators as a number of clients continued to place risks on shorter periods of cover, therefore reducing premium payable on their policies.

According to a Nigerian insurance industry report (2017) like most other insurance industries, are all affected by the macroeconomic environment. The downturn in Nigeria’s fortunes which had its basis at declining global crude oil prices since 2014 has triggered changes in the consumption or patronage pattern of insurance product in recent times. It was stated that various non-life business segment have experienced in the life business segment. It was further stated that in 2016 the customer price index (CPI), which is used to measure inflation rose to 18.6%, which was known to be the highest ever in over a decade, was to have impacted the value of long term savings but as a result to the high inflation environment, long term saving as began to lose value over some time (at an average inflation of 18.6%, ₦100 is saved but now at the same range, it worth’s only ₦45 in 5 years and ₦8 in 15 years), and this has discouraged saving and consequently, caused a preference to invest in high yielding securities. However, it was stated that rising inflation also has direct impact on the industry’s operating cost which has reduced in profit. As at 2016, about 28% of the insurance industry’s GPI was paid out as underwriting expenses including acquisition and maintenance cost (Ada, 2017) In spite of this, research in the area of risk management and business performance insurance company is very limited according to Omasete (2012), as such; this research is an organized examination and contribution on the subject matter of risk management and business performance of insurance company in Nigeria.