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This study is on the role of insurance in minimizing business risk in small and medium scale enterprise, which has been an immense area of research, research questions were defined and sufficient literature was reviewed up to date on the previous research that other scholars have undertaking. We use questionnaire for collection of data. 

In this work we found out that business risk(s) exposures were identified and classified under three main themes; the level of insurance patronage was relatively low; however, insured businesses derived various benefits under the insurance covers.




The substantial growth of small and medium enterprises (SMEs) activity clearly marks SME as one of the most remarkable economic phenomena.  SME is a business that is privately owned and operated with a small number of employees and relatively moderate volume of sales. The definition of SMEs varies from country to country depending on the level of development and the strength of the economy. The lower limit for small scale enterprises is set at between five and ten workers and the upper limit is set at between fifty and one hundred workers. The upper limit for medium scale enterprises is set between one hundred and two hundred and fifty workers (Hallberg, 2000). 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 the 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 the 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 fulfill 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 Uyo, 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 insurance was used as a risk management tool by SMEs a case study of selected SMEs in Uyo State.

1.3      Objectives of the Study

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

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

2.   Examine the response of SMEs towards the use of non-life insurance to mitigate pure risk(s);

3.   Assess the benefits SMEs derive from using insurance as a risk management tool;

4.   Identify any problems SMEs encounter in using insurance; and

5.   Find out solutions to the challenges that SMEs encounter in using insurance.

1.4      Research Questions

The main research question addressed was: do SMEs use insurance to mitigate business risk(s)? The specific related questions to solve the research problem included the following:

1.   What were the risk exposures that an SME was faced with?

2.   How is the management of risk(s) among SMEs in the Metropolis?

3.   What benefits did SMEs derive from using insurance as a risk management tool?

4.   What were the solutions to overcome the challenges that SMEs encountered in using insurance?

1.5      Significance/Justification of the Study

The study would help identify the reasons for the level of patronage of insurance as a risk transfer mechanism and create a changed behaviour of the owners of SMEs. The research would benefit, risk managers, business consultants and business continuity consultants by identifying areas that they might need to consider when preparing disaster recovery plans, particularly for SMEs. Findings that emerged from the study would serve as a spring board to generate interest for further research into the other aspects of insurance challenges. The research work would also be of enormous assistance to various levels of educational institutions in the country, especially the universities as reference material for further studies and research work on insurance as a risk management strategy. The study would further contribute to the existing literature on mitigating and providing confidence to entrepreneurs in their investment decisions. Also, the insurance regulator in the country should find it useful to adopt pragmatic means to enforce the unenforced insurance Acts in the country. Lastly, it might influence the level of premium incomes of non-life insurance companies in the country.

1.6      Scope and Limitation of the Study

The study covered the use of insurance as a risk management tool by SMEs, evidence and prospects in the metropolis. Four categories of insurance protection were classified for any businesses: property, liability, people and income (Dorfman, 2008). These categories remained the focal points of reference in the research. Indemnification and risk pooling of the various categories of insurable risks enhance commercial transactions and the provision of credits by reducing losses. The research took a period of five months.

Uyo Metropolis was one of the 20 administrative districts in the region of the area of study. It is the central business district and the capital of the northern region. The Metropolis shares boundaries with Savelugu-Nantong to the North West, Yendi to the East and Gonja to the South.

The Uyo metropolis is the political, economical and financial capital of the region. The major government departments, NGOs and ministries have Uyo as the operational centre.


CLAIM:This is a demand by the insured for payment under his policy.

INSURED:These are the potential policy-holder of the company.

INSURANCE COMPANY:This is the company that sells the service to the insured.


This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concerned with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study.

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