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1.1              Background to the 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’sinvestments and enhance economic growth, the

sector’s                        response   is   relatively   low;   and   thi

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). Sections 1 not construct or cause to be constructed a commercial building without insuring with a registered

insurer the liability in respect of construction risks caused by negligence or the negligence of servants, agents or consultants which may result in bodily injury or loss of life to or damage to property of any workman on the site or of any member of the public; every commercial building shall be insured with an insurer against the hazards of collapse, fire, earthquake, storm and flood, and an insurance policy issued for it; the insurance policy shall cover the legal liabilities of an


owner or occupier of premises in respect of loss of or damage to property, bodily injury or death suffered by any user of the premises andical thir satisfaction and financial leverages to investors buying insurance to safeguard business interests.

The compliance of the Act (Act 724) is in doubt: as the 2007, ENGAS company filling station gas explosion at Asokwa in Ashanti Region did not fulfil its obligation per the law; the 2011 fire explosions at the Western Steel and Forging Ltd in Tema caused injury, death and damages to people and properties; also, the destruction of properties at Kantamanto Market and the VRA computer room (housing its server) by fire evidence the need for insurance covers to minimize the effects of hazards to SMEs, Government Agencies and Departments; hence, the call on government with other stakeholders to assist victims.

1.2              Problem Statement

Risk is one of the most overlooked areas in SMEs in spite of the fact that it is clear to

most entrepreneurs that, operating any business involves risk such as losses associated with property, income, injury and liability. These risks are inevitable to most entrepreneurs in businesses. Prudent business owners take steps to minimize the risk of their businesses in other to maximize returns on investments. A good risk management system is a continuous process of analysis and communication to select the appropriate tool to manage risk.

SMEs in Nigeria serve as vital indicative sources of growth, technological innovation and flexibility. However, they are saddled with towards growth and development strategies. SMEs are exposed to many risks in their ordinary

course of business, such as interest rate risk, foreign exchange risk, market risk, natural disasters, political risk, and technological risk and so on, that minimize their profit by increasing their


financial losses. However, insurance enshrined in sections 183 and 184 of the Insurance Act, 2006 (Act724) to serve as a buffer in the event of mishaps is not given the attention it deserves regardless of its significance to mitigate the effects of risks resulting from disasters or unexpected events. In Tamale, the level of patronage of insurance by SMEs as a risk transfer mechanism to mitigate risks such as collapse of building, fire outbreaks, accidents, burglary, business interruptions, and dishonesty of personnel tend to be wavy. What were the recovery measures in the wake of the potential losses and financial hardships?

In view of this, the researcher examined the extent to which non-life insurance was used as a risk management tool by SMEs.

1.3              Objectives of the Study

The research broadly sought to assess the extent to which SMEs adopt insurance as a risk management tool and the benefits there in. Specifically, the research intended to achieve the following objectives to:

  1. Identify what business risk(s) SMEs face;

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