CHAPTER TWO
Literature review
2.0 Introduction
This chapter presents a review of relevant literature pertaining to our research questions. The chapter will focus on reviewing related research on SME’s, the risks they are exposed to, the various insurance policies available for such risks, the level of awareness of these policies and also the effectiveness of the policies.
2.1 Small and Medium Scale Enterprises
There is no for the most part adequate meaning of SME (Altman, Sabato, and Wilson, 2008; Henschel, 2009). This is on the grounds that there are no uniform criteria to quantify them regarding capital expense, number of workers, deals turnover, settled capital venture, accessible plant and hardware, piece of the overall industry, level of advancement and even terminology (Ogechukwu, 2011). These distinctions are from nation to nation, industry to industry, school to class and creator to creator (Fatai, 2010).
SMEs seem risky as discovered by researchers as expressed previously. They are in this manner not alluring to financial specialists. The greatest risk confronting SMEs today are financial and strategic risks. For financial risks, cash flow is especially a worry; organizations should consider the wellspring of their cash with a specific end goal to keep the lights on to pay representatives, work and develop. Key hazard then again incorporates rivalry and monetary conditions. No business is free of risk, it positively confronts some level of risk; a portion of the risk are controllable as for the proper move made against it though some are to a great extent flighty and in that capacity wild. Most entrepreneurs know about this and plan precisely before beginning operation however such a business still face conclusion because of a few variables outside its ability to control like quakes, fire flare-up, tidal wave, surge, social agitation, purposefully incurred harms, and so forth. Having said all these, it must be accentuated that the entrepreneur, who deliberately recognizes the danger of its business and make proper move as needs be to relieve the risk, will definitely be effective in that business. Protection gives a cover over that which is safeguarded. Great hazard administration and protection cover can give an affirmation to financial specialists and consequently diminish danger of a business. What in this way remains are whether SMEs do know their dangers and whether they realize that the majority of them are insurable? This is on the grounds that you can’t control what you don’t have the foggiest idea Terungwa (2012).
2.2 Business Risks of SME’s
Risk is a piece of our day to day life. For all businesses, there are many sorts of risks that will be experienced in business. Whilst some are controllable, others are definitely not. Some are predictable while some are unforeseeable. Some have insignificant effect on the business while some debilitate the life span of a business. SMEs are organizations in the private division and they cut over all businesses. Every industry has risks peculiar to it. The onus is along these lines on the proprietor to distinguish the risk common in his business and try endeavors to leave on great management systems. Risk management is a fundamental piece of good business management. It is just shielding the business from conceivable negative events, and in addition recognizing openings and gaining by them when they emerge (Aruwa, 2004b). Risk administration is the path in which antagonistic impacts from hazard are overseen and potential opportunities are acknowledged (Vaughan, 1997).
2.3 Types of Risks confronting SMEs
SMEs and big firms work in a similar business condition, however there are confirmations that they determine distinctive advantages and openings in that. Moreso, they are presented with various classifications of risks Yusuf & Dansu (2013).
2.3.1 Interest rate risk.
SMEs are seen by the present writing as being profoundly subject to outside back, and appropriately, a credit is typically the principle wellspring of financing accessible (Altman et al., 2010; Mutezo, 2013; Gama and Geraldes, 2012). This, notwithstanding, includes the hazard that financing costs on the credits may change (i.e. loan fee hazard). Embracing the point of view of banks, Mutezo (2013) recommended that SMEs may have the capacity to lessen banks’ feelings of trepidation concerning data asymmetries and, subsequently, banks’ impression of SME hazard, which may, thusly, additionally restrain the probability of SME financing costs evolving. Receiving the SMEs’ view, the subjective review by Bruns and Fletcher (2008) demonstrated that for SMEs, whose money related position is powerless however whose proprietors’ hazard hunger stays high, the likelihood of credit being offered diminishes more than for organizations with a solid budgetary position. The two creators proposed that a solid monetary position can, at any rate somewhat, adjust for high hazard resilience. Likewise, Bruns and Fletcher (2008) found that SMEs with restricted guarantee are probably not going to be given an advance, paying little respect to their eagerness to go out on a limb, though for organizations with high security, the probability of being allowed a credit is fundamentally higher when their ability to go out on a limb is low. This finding by Bruns and Fletcher (2008) recommends that solid guarantee can’t make up for the negative parts of high hazard taking
The review by Vickery (2008), which depends on information from 3,248 US firms, found that SMEs are about twice as liable to choose a settled rate (instead of a customizable rate) credit as substantial firms. Vickery (2008) demonstrated that with expanding firm size or age, the likelihood of assuming settled term obligation diminishes consistently. Further, settled term credits are especially mainstream among littler, more youthful organizations with low income or high venture openings (Vickery, 2008). In this manner, Vickery (2008) proposed that, given their inclination for settled rate over flexible rate credits (where the last incorporate financing cost hazard), SMEs are more disinclined to loan fee chance than bigger firms. A potential clarification for this finding was given by Moore et al. (2000): on the grounds that SMEs might be less advanced as far as hazard administration rehearses than bigger elements, it is especially critical for them to know about the way that variable financing costs accompany a noteworthy loan cost chance. This sort of SME conduct may, in any case, fluctuate with SME proprietor training: in view of their overview of more than 4,000 European SMEs, Kim and Vonortas (2014) called attention to that better instructed SME proprietors will probably make vital move to moderate money related dangers, for example, loan fee chance.
2.3.2 Raw material prices risk.
Moore et al. (2000) additionally portrayed crude material hazard in their applied paper. As indicated by them, on account of the deregulation and abrogation of appropriations in certain rural markets, an expanding number of SMEs are searching for approaches to deal with the unpredictability of their crude material expenses. Moore et al. (2000) likewise exhibited confirm that as of late, the unpredictability of crude material costs in agribusiness and on vitality markets has gone up against SMEs with new difficulties. In light of an undeniably aggressive market, rising item costs could never again be passed on routinely to clients. It can’t, be that as it may, be expected that all organizations are presented to a similar issue. Moore et al. (2000) contended that numerous substantial organizations have put resources into innovations, thus for them, it is moderately simple to change to less expensive assets when costs are rising. Be that as it may, in their view, numerous SMEs can’t manage the cost of these speculations and are, in this way, more presented to crude material value dangers. As these discoveries by Moore et al. (2000) are reasonable in nature, they require certification by future observational research.
2.3.3 E-business and technological risks.
The review by Sukumar et al. (2011), which depends on 15 subjective meetings and a quantitative study of 125 SMEs in the UK, recognized online security as the most perilous hazard in e-business. As indicated by them, SMEs are presented to an assortment of online dangers, for example, wholesale fraud, Mastercard extortion, email mishandle and digital assaults. Introducing PC frameworks may likewise include a noteworthy hazard for SMEs. As Poba-Nzaou et al. (2014) displayed, executing mission-basic programming may represent an extensive hazard to SMEs in light of the fact that product usage require higher relative levels of asset responsibility in SMEs than in substantial firms, having the potential effect of usage disappointment generally higher – particularly if SMEs pick open-source programming merchants and not for vast revenue driven programming sellers.
Regarding client related dangers, the SME administrators studied in the review by Sukumar et al. (2011) brought up that shopper certainty is a standout amongst the most vital calculates online business. Be that as it may, Sukumar et al. (2011) contended that it is regularly troublesome for SME directors to manufacture such certainty in view of their constrained organization size and number of exchanges. They proposed that, at last, all holes in online security affect notoriety and client trust. Subsequently, it can be troublesome for a SME to revamp its online notoriety after a security-related episode on account of its restricted assets.
2.3.4 Supply chain risks.
The quantitative review by Thun et al. (2011) of 67 German SMEs demonstrated that SMEs must offer an inexorably extensive variety of items to address their clients’ issues. Be that as it may, this makes higher reliance of the SMEs on their supply chains in view of expanded many-sided quality. What’s more, Thun et al. (2011) called attention to that SMEs are frequently no longer ready to focus just on neighborhood markets, which again prompts to expanded multifaceted nature and more elevated amounts of inventory network dangers. Such expanded multifaceted nature in a SME’s production network may likewise bring about more elevated amounts of exchange obligation, which, thus, may posture significant dangers to SME survival: both Altman et al. (2010) and Wilson and Altanlar (2013) detailed that youthful SMEs with unsecured obligation back payments (for the most part, exchange obligations) are fundamentally more prone to face indebtedness than practically identical firms without such obligations.
SMEs are additionally frequently restricted to one provider in the acquisition of items. Every one of the 11 chiefs overviewed in the subjective field think about by Ellegaard (2008) expressed that they utilize single sourcing as an acquisition system. This finding is supplemented by the outcomes by Thun et al. (2011), who propose that, as the aggregate buy volume is not isolated between a few providers, SMEs plan to pick up a superior dealing position with their providers and, subsequently, a value advantage. In any case, this technique additionally involves a solid reliance on single providers. Any troubles with the provider may prompt to generation intrusions, which shows another noteworthy production network chance for SMEs (Ellegaard, 2008). Be that as it may, as opposed to Ellegaard’s (2008) contentions, Thun et al. (2011) appeared in their review that SMEs are not any more presented to the outcomes of such improvements than huge organizations. Given these contrasts between Ellegaard’s (2008) and Thun et al’s. (2011) discoveries, future research could examine whether SMEs are, actually, more presented to production network dangers than bigger firms and how SMEs can manage them effectively.
2.3.5 Growth risks.
In the 40 interviews with British SME managers directed by Gilmore et al. (2004), just a couple business pioneers communicated a longing for enduring development: The respondents demonstrated that running a bigger organization may include a higher danger of getting to be distinctly not able to take care of developing expenses. Albeit firm development is regularly viewed as a vital objective in numerous vast organizations, the discoveries by Gilmore et al. (2004) recommend that some SME pioneers think diversely and see development as a hazard instead of a vital objective. Besides, Marcelino-Sádaba et al. (2014) proposed that SME development is chiefly expert through tasks, yet that these posture significant dangers in light of the fact that SMEs regularly don’t have the know-how and strategies required to run such development extends successfully.
Gilmore et al. (2004) likewise revealed that their respondents associated the improvement of another market with a huge entrepreneurial hazard. They called attention to that entering new markets comes at the cost of extensive research exertion for SMEs to survey whether the organization can be effective in the new market. In this way, in Gilmore et al’s. (2004) think about, global endeavors are seen as exceedingly theoretical and possibly expensive for SMEs. Interestingly, the quantitative review by Forlani et al. (2008) of 81 little firms in the USA demonstrated that supervisors of little firms see the slightest business chance in fare. Further, in light of a review of 311 Austrian SMEs, Brustbauer (2014) announced that those with a proactive (as opposed to inactive) way to deal with hazard administration indicate higher penchant to grow to new markets and put resources into new creation and process innovations. This recommends proactive hazard administration may moderate SME proprietors’ abhorrence for development dangers.
Given these to some degree conflicting outcomes, there is a requirement for future research in light of bigger specimen sizes and presumably on quantitative strategies to test whether the finding that the dominant part of SME proprietors see development preferably as a hazard than an open door can be summed up to bigger populaces and whether for such bigger populaces, the relieving part of proactive hazard administration holds, as proposed by Brustbauer (2014). Such research could expand on the outcomes by Forlani et al. (2008) and Brustbauer (2014) by including different development systems to figure out if SME proprietors’ view of the dangers related with these procedures vary. In addition, it would likewise be significant as far as anyone is concerned of hazard administration in SMEs whether and how SMEs adapt productively to various sorts of development dangers in various ways (i.e. embracing distinctive hazard administration systems for different development dangers).
2.3.6 Management and employees.
Learning administration may likewise constitute a test for SMEs. In like manner, the 40 British chiefs met by Gilmore et al. (2004) trusted that practically every business is presented to the loss of learning when experienced workers with profitable data and information and additionally contacts leave the association. In this way, Gilmore et al. (2004) reasoned that the loss of long haul workers and chiefs might be particularly unsafe for SMEs on the grounds that regularly no different representatives or directors in the firm have comparable information. In accordance with this idea, contextual investigation discoveries by Gao et al. (2013) demonstrate that information about hazard administration might be for the most part casual in SMEs, which convolutes powerful working of hazard administration limit among SME representatives.
In spite of these discoveries, Sukumar et al. (2011) appeared in their paper that SMEs once in a while offer representative improvement programs and proceeding with training. Sukumar et al. (2011) likewise demonstrated that inadvertent harm or resistance with guidelines can considerably affect the organization and may, therefore, include a noteworthy hazard for SMEs. Besides, the SME chiefs studied showed a familiarity with the danger of licensed innovation rights encroachment (copyright, trademark, connecting, and so forth.), however as indicated by Sukumar et al. (2011), their absence of learning keeps them from legitimately ensuring their licensed innovation.
In outline, the discoveries on administration and worker dangers recommend that SME proprietors are very much aware of the significance of representatives’ (unsaid) learning and the hazard related with losing such information. Nonetheless, in the meantime, SME proprietors appear to be to some degree hesitant to put resources into information building exercises which may moderate such learning dangers. Therefore, we recognize a requirement for future research into how SMEs may effectively deal with the danger of information misfortune (e.g. on hazard administration) because of leaving or disappointed administration work force or representatives.
Source: Yusuf & Dansu (2013)
Yusuf & Dansu (2013) classified the risks into four different types; these were operational, financial, hazard and strategic. Among these also had their own types. For the Strategic risks, the were classified into regulatory trends, technology innovation, social trends, customer wants, competition and reputational damage. Hazards were classified into liability claims, diseases and disability, windstorm and natural perils, business interruption and theft and other crime. Operational risks covered business operations, information technology, human resources, information reporting and product failure. The last faction which was financial encapsulated price, liquidity, credit, hedging.
2.4 Types of Insurance Policies Available for Minimizing SME’s Business Risk
Risk is one of the repetitive issues that makes SMEs unattractive to speculators. Dangers are characterized as the possibility of something event that will affect upon destinations (Aernorld, 1998). Maintaining a business with fundamental protection is an extremely brilliant route in dealing with the distinguished hazard and decreases instability (Douglas, 2009).
Terungwa (2012) conducted a study on ‘Risk management and insurance of small and medium scale enterprises (SMEs) in Nigeria’. In this study, insurance was defined as the exchange of the danger of a misfortune, starting with one entity then onto the next, in return for a periodic payment. It is a risk management system that shields the protected from hazard for a predetermined expense. It is a hazard treatment alternative which includes chance sharing. There are different types of insurance policies just as there are different risk exposures. The research identified the following types of insurance policies for the SMEs. These were liability insurance, employer’s liability insurance, business property insurance, worker’s compensation insurance, health insurance and life insurance. Health Insurance: This policy guards against the unpredictable occurrence of sickness among the employees. This way, there will be readily available funds to take care of the employee in such a situation.
Mäenpää & Voutilainen (2012), in a study on ‘Insurances for human capital risk management in SMEs’ had the aim of analyzing how insurances could be used to manage human capital risks in SME’s. In this study, a qualitative approach was used to analyze empirically on an insurance company. Findings from the study classified human capital risks into insurable and uninsurable risks. Results revealed that, pension, accident, health, life, liability and crime insurances were the most useful types of insurances for the management of human capital risks.
Awareness and Effectiveness of Insurance in Mitigating Business Risks Among SMEs.
The present day insurance policy went further to give an extra take care of under the additional expenses of restoration reminder. This cover shielded strategy holders from extra costs brought about to assemble the premises, and any plant and gear up to the gauges required by the present building, local government, environmental protection agencies, worker cover, fire brigade or state and federal government regulations Jadi et al (2011). The advantage of the present day protection strategy in Australia did not stop at the property misfortune which was alluded to as the material harm cover. It likewise secured the loss of benefit maintained by the business. This is known as Business Interruption, Consequential Loss or misfortune or benefits protection (Manning and Allan, 2004). With this cover providing significant additional benefits, the business assets, although damaged, should be able to be put back with no financial loss to the business owner. Truth be told, on paper, the business ought to be in an ideal situation with structures and hardware moved up to current gear. Actually a few organizations survive the fire or misfortune and a few organizations don’t.
Notwithstanding, a study of SMEs by the Insurance Council (Woolcott, 2008) uncovered the accompanying: the study found that 25.6% of private companies don’t have any type of general protection; Sole brokers have the most elevated rate of non-protection with 40.0% of those tested showing they had no general insurance; Small businesses with 1-4 employees and 5-10 employees both had a rate of non-insurance around 21.0% while small businesses with 11-19 employees had the lowest rate of non-insurance at 16.7%. SMEs organizations in different nations are confronting issues, for example, absence of good hazard administration methodology, deficient protection security, non-protection, resistance and absence of mindfulness on this matter. This paper could be valuable to the SMEs by expanding their mindfulness about the essentialness of protection as a hazard exchange system, sorts of protection plans accessible in the market and the effect of good hazard administration rehearses
The review of the theory undertaken showed that there was little or no research undertaken on insurance companies and SMEs, with past research predominantly concentrating on large organizations. Manning (2004), in his research entitled “Strategic Management of Crises in Small and Medium Businesses” provided a model for the management of crisis particularly for SMEs. The Crisis Management Model for SMEs was aimed at assisting owners or managers of SMEs to minimise the risk associated with losses caused by disasters. This model addressed the need for adequate insurance cover by SMEs and the need for business recovery plans for SMEs. The model aimed at assisting SMEs on how to manage their business in times of crisis. A research conducted into the business protection market aimed at what the level of insurance businesses hold, what types of insurance they believed were important and what insurable risk would have the largest impact on their business, should it occur. The findings from the research highlighted the need for protection in whatever type of business. Business relationships were valuable long-term assets of a company. It was necessary to invest in such relationships and to manage this investment to ensure their repeat businesses. Getting a customer or a supplier to come back over and over again was a challenge for businesses that operated in a competitive environment. Trust, which was an important informal safe-guard, was developed on the basis of personal contacts and confidence in performance. In such a close relationship fluid communications and information flows were essential for implementing long-lasting relationships (Claro, 2004). This substantiated the need for a business relationship between SMEs and insurance companies, as a relationship of that nature could be beneficial for both parties involved. In business-to-business relationships, firms usually customise products and services more than in business to customer relationships. For that reason, prices were seldom standardised, and calculated for each customer individually.
Jadi, D. M., Manab, N. A., & Ahmad (2011), S. INSURANCE AS A RISK TRANSFER MECHANISM IN SMALL AND MEDIUM ENTERPRISES (SMEs).
Aruwa, S.A.S (2005), The Business Entrepreneur: A Guide to Entrepreneurial Development. Kaduna: Scopy Publishing
Vaughan, E. J. (1997) Risk Management, New York: wiley
Terungwa, A. (2012). Risk management and insurance of small and medium scale enterprises (SMEs) in Nigeria. International Journal of Finance and Accounting, 1(1), 8-17.
Yusuf, T. O., & Dansu, F. S. (2013). SMEs, business risks and sustainability in Nigeria. European Journal of Business and Social Sciences, 2(9), 76-94.
Mäenpää, I., & Voutilainen, R. (2012). Insurances for human capital risk management in SMEs. VINE, 42(1), 52-66.
ay in here…