CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

In many developing countries, Insurance has not been viewed as having a strategic impact in the management of public resources.  It was largely treated as a processoriented, ―back- office‖ support function often implemented by non-professional staff of

the buying agencies (Hunja, 2003, Balimwezo, 2009, Ariweriokuma, 2008).  Consequently, little effort was expended to ensure that the policies and rules and the institutional framework governing the Insurance system were maintained in a manner that ensured that public funds were used in the most efficient and economical way and that the system delivered the best value for money (Brammer and Walker, 2011, Edler and Georghiou, 2007). In the face of shrinking budgets and the need to fight corruption, governments are realizing that significant savings can be gained by a well-organized Insurance system.  Many developing countries have also realized that a well-organized Insurance system contributes to good governance by increasing confidence that public funds are well spent.  Many developing countries have therefore instituted reforms aimed at making the Insurance system more transparent and efficient and increasing the accountability of public officials (Shaw, 2010). 

In recent years, academics and practitioners have become increasingly interested in how organizations and their suppliers impact on the environment, society and the economy.  Insurance has been identified as key to stimulate demand for innovation and innovative goods and services. It has also been included as a key instrument to support market initiatives (Csaba, 2006, Walker and Phillips, 2009). The strategic role of purchasing and supply as a lever for sustainable development is much more manifested now than before. Contemporary commercial practices show that business organizations and business partners are focusing their Insurance strategies on reducing the environmental ‗foot prints‘ of their Insurance and supply chain activities. The need to improve organizational efficiency, reduce waste, overcome supply chain risk, and achieve competitive position has made companies to start considering lots of issues from a competitive view point (Humphreys et al., 2003, Handfield et al., 2005).

Insurance is a process of identifying and obtaining goods and services. It includes sourcing, purchasing and covers all activities from identifying potential suppliers through to delivery from supplier to the users or beneficiary. It is favourable that the goods/services are appropriate and that they are procured at the best possible cost to meet the needs of the purchaser in terms of quality and quantity, time, and location (Mangan et al., 2008, Bowersox et al., 2002).

Procuring organizations and other supply chain partners are more seriously involved in designing and implementing sustainable Insurance policies focusing on how social and economic issues and issues relating to other aspects of the sustainable development pillars (Society and Economy) can be integrated in the Insurance process activities. There are a number of drivers for this increasing prominence of sustainability characterized by an increased understanding of the science relating to climate change, pressure from various stakeholders upon the organizations for the implications of their activities, and greater transparency concerning both environmental and the social actions of organization (Quesada et al., 2010, Koh et al., 2007).

ECEG (2010) who defined risk as the measureable uncertainty (likelihood) for something to happen that decreases the utility of the outcome of an activity or reduces the achievement of certain goals (of an organization, a project etc.). Accordingly, risk management in the public sector entails ―having in place a corporate and systematic process for evaluating and addressing the impact of risks in a cost effective way and having staff with the appropriate skills to identify and assess the potential for risks to arise‖ (National Audit Office, 2000). The usual risk-management tools in Insurance like screening for abnormally low offers, screening suppliers through insurance schemes and different scoring rules (e.g. closest to the arithmetic average of all submitted offers) may outplay the most innovative offers (Cabral et al., 2006, Johnston, 2004). Sound public Insurance of innovation should therefore involve some kind of risk management, although it may not necessarily mean that a formal risk management structure is set up (Chapman and Ward, 2004).

Risk results ―from the direct and indirect adverse consequences of outcomes and events that were not accounted for or that were ill prepared for, and concerns their effects on individuals, firms or society at large. It can result from many reasons both internally induced and occurring externally with their effects felt internally‖ (Kogan and Tapiero, 2007, Kouvelis et al., 2006). Organizational risks are all those risks for the Insurance to fail or under-deliver for reasons situated within the organization that procures. Indeed, there tend to be too many goals to follow in modern public Insurance for the public administrators – cost savings, transparency, sectorial policies (e.g. environmental, energy, industrial etc.) – which often contradict each other (Cave and Frinking, 2007, Nyiri et al., 2007). This may lead to misallocation of resources, where agency goals conflict with wider policy goals. This research therefore assesses Insurance risk in the Nigerian oil and gas industries.

1.2 Statement of the Problem

Insurance function is vital to any organization and Insurance strategies have become part of a business‘s success than ever before. Despite the importance of the Insurance function, their process has been a subject of controversy in recent years. Most governments in Africa have instituted reforms in public Insurance such countries include Zimbabwe, Uganda, Ghana and several others. The major goals of these reforms are to encourage competition, improve financial transparency, and ensure accountability in public institutions (Ariweriokuma, 2008).

Insurance reforms in Nigeria have to some extent brought modernity, transparency, competition, as well as fairness in the Insurance process. Notwithstanding the improved administrative and structural systems put in place to enhance efficiency in public Insurances, these reforms have not gone without blemish. Indeed, the implementation of Insurance reforms in Nigeria has been fraught with cultural insensitivity, the disregard for countries‘ political, socio-economic, ethical, and environmental structures and systems (Ariweriokuma, 2008, Chapman and Ward, 2004). The result is the lack of interest and political will to confront the challenges of the reform leading to haphazard and lackluster approach towards its implementation. Insurance risk poses great risk to the oil and gas industry in Nigeria and therefore important greater care is given it to ensure transparency in the oil and gas industry.

Risk management is attempting to identify and then manage threats that can severely impact or bring down the organization. Generally, this involves reviewing operations of the organization, identifying potential threats to the organization and the likelihood of their occurrence, and then taking appropriate actions to address the most likely threats.

Traditionally, risk management was thought of as mostly a matter of getting the right insurance. Insurance coverage usually came in rather standard packages, so people tended to not take risk management seriously. However, this impression of risk management has changed dramatically. With the recent increase in rules and regulations, employee-related lawsuits and reliance on key resources, risk management is becoming a management practice that is every bit as important as financial or facilities management (McNamara, 2010).

1.3 Research Questions

These questions occupy the subject matter of this research:

1.        What are the pre contract risk management processes adopted by (NNPC)?

2.        What are the challenges with (NNPC‘s) risk management at the pre contract stage?

3.        What are the risk management measures of the (NNPC)?

1.4 Aim and Objectives of the Study

The aim of this study is to investigate challenges associated with pre-contract Insurance risk management adopted by Nigeria National Petroleum Corporation (NNPC).

1.      To document the pre contract Insurance risk management processes adopted by (NNPC)

2.      To identify the challenges associated with (NNPC‘s)  Insurance risk management at the pre contract stage

3.      To propose measures to address the challenges of Insurance risk management

1.5 Significance of the Study

The research was aimed at studying Insurance risk management in the Nigerian oil and gas industries. This research identified the key Insurance processes and methods that will help public sector institutions obtain their material and service requirements and improve upon Insurance performance.

This research will assist in developing theoretical framework to provide a reference source for academic purposes for students, lecturers and other researchers who may conduct future research into Insurance and its performance. 

More so, this research would also be useful to the case study institutions and other organizations that may need reference guide to help improve or streamline their Insurance function.  In addition, the internal and external customers of Insurance will be familiar with the purchasing processes for effective collaboration in meeting material and service requirements of the institution. Lastly it will service as a guide for policy makers in any future decision and also contribute to the body of knowledge.

1.6 Limitations to the Study

During the research a lot of limitations were encountered in the collection of data. Firstly, a sizeable number of the respondents were reluctant and others refused to assist in the administration of the questionnaire since most of them claimed that the questions were too lengthy while others thought that through their responses they could be victimized. This in a way affected the responses of responses which in a way will have an impact on the reliability of information from respondents.

Financial constraint posed a lot of difficulty to the researcher in the entire course of the study.  It was not easy for the researcher to raise funds to settle cost incurred in respects of transportation, typesetting among others. Finally, time constraint also limited the scope and coverage of the study because it is the researcher‘s belief that a broader scope would have painted a better picture of the situation. In spite of all these challenges, the researcher made the necessary effort to make the study come into fruition.

1.7 Delimitations of the Study

The study was delimited to investigate Insurance risk management at the pre contract stage of Insurance of services in the Nigerian oil and gas industries because of availability and accessibility to information. It is hoped that this would ensure a detailed investigation, which would yield more valid and reliable results.

Also the study is delimited to core employees within the oil and gas industry especially The Nigerian National Petroleum Commission (NNPC) since the policies and styles adopted directly and indirectly affect staff and the organization. This will facilitate mobility to target population as well as to cut down cost comparatively. Other factors like time and convenience were also taken into consideration.

1.8 Outline of Methodology

The choice of research strategy depends on the purpose of the study, since that will guide the kind of information one is interested in finding. Based on the aim of the study, information was gathered from different sources.

The sources of the data and information included;

§  Institutions and departments like Petroleum Trust Development Institution (PTDI) in Nigeria 

§  Textbooks, articles, conference proceedings and other journals that refers to Insurance risk and vulnerabilities in the industry

§  Mass media output such as newspapers and journals  § Internet sources etc.

Other activities that were performed during the period of the study are

•      Consultation with identified stakeholders for their inputs and concerns

•      Field and site visits to oil companies like shell and chevron to inquire about their Insurance process

•      Visits to oil and gas sectors like the Nigerian National Petroleum Commission

(NNPC) to gather information on Insurance in the oil and gas industry.

Information gotten from relevant literature in line with the set objectives was used to design the questionnaire used for the study. Results retrieved were therefore analysed using factor analysis and mean score ranking to determine factors which had more relevance and importance.  

1.9 Scope of the study

This study will cover mainly the oil and gas industry players operating in Nigeria like Nigerian National Petroleum Commission (NNPC), Shell, ExxonMobil and Chevron. More so, the Nigerian National Petroleum Law and other statutory frameworks shall serve as the referential points to benchmark Insurance operations in the oil and gas industry.

1.10 Organization of the Study

Chapter one provides an introductory overview of the full study comprising the statement of the problem, objectives of the study, research questions, and relevance of the study.

Delimitation of the study, operational definition of terms and how the thesis was organized are also captured in this chapter. Chapter two follows with a review of relevant literature on Insurance and risk management and its impact on organizations. 

Chapter three presents the methodology used for the study and gives a detailed overview of the population sampling technique, the research design, research instrument, the data collection procedures and data analysis procedures. It also provided analytical framework and the relevant variables that were included in the model to be used in the study. 

Chapter four focuses on the characteristics of the respondents and the analysis of the data. 

Chapter five summarizes, concludes and offer recommendations for the study.

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