International Journal of Research and Innovation in Social Science (IJRISS) |Volume IV, Issue V, May 2020|ISSN 2454-6186

Risk Management Committee Size, Independence,

Expertise and Financial Performance of Listed
Insurance Firms in Nigeria
Ibrahim Mallam Fali1*, Okika Nkiru Philomena2, Yunusa Ibrahim3 & Janada Amos4
1&4
Department of Accounting, University of Calabar, Nigeria
2
Independent Researcher, Lagos, Nigeria
3
Department of Accountancy, Kaduna Polytechnic, Kaduna, Nigeria
*Corresponding author

Abstract:- Continuous collapse of many organization have Risk Management Committee (RMC) is an
increase the demand to have a committee aside the board whose autonomous board of directors committee which, as its
focus is on setting and implementing firm risk policy, appetite primary and exclusive role, is responsible for the risk
and limit. With firm goal on maximizing profit, this study management policies of the global operations of the company,
evaluates the effect of risk management committee size,
and oversees the implementation of the global risk
independence, expertise on financial performance of listed
insurance companies in Nigeria from 2012 to 2018. The study management system of the organization. The committee will
used a sample size of (24) insurance companies from population help the board of directors in carrying out its regulatory duties
of 27 insurance firms. The study used secondary data obtained regarding the corporation's risk tolerance and the risk control
from annual report of the firms. The dependent variable was and enforcement process and the governance system that
measured by return on asset (ROA) The study employed governs it. Risk tolerance is the amount and type of risk that a
Random Effect regression model and find evidence that risk company is capable of and ready to bear in its risks and
management committee expertise has negative and significant market practices, despite its corporate priorities and
effect on financial performance while risk management stakeholder responsibilities.
committee size and independence does not influence financial
performance. The study concludes that risk management In finance-related discipline, success relates to
committee constrain on management excess risk undertaking will assessments of the strategies, operations, and operating
lead to poor financial performance of insurance firms. The study outcomes of the business in financial terms. It is used to test
recommends that the risk management committee should be the performance, enforcement and financial status of an
made effective by inclusion of more members with back ground
on finance and actuarial sciences into risk management
organization. Such outcomes are expressed in the return on
committee structures. investment, cash, equity, employees’ capital, and
competitiveness of the company (Naz, Ijaz & Naqvi, 2016).
Keywords: Financial Performance, Risk management size, Risk The performance is divided into two viz-a-viz: financial and
management Independence, Risk management Expertise non-financial performance. For the purpose of this research
I. INTRODUCTION we used financial performance because of its advantages over
the non- financial performance measures. The financial

I n developed and developing countries corporate governance

has become a common subject for discussion. The widely
held view of corporate governance as determining firm
performance measures are return on assets, return on equity,
return on capital employed, return on investment and so on
while non – financial performance measures such as growth,
performance and protecting shareholders ' interests has led to market share etc. One of the advantages of financial
increased global attention (Heenetigala & Armstrong, performance is agreeable definition and can easily be found
2011).The corporate governance system specifies the on financial statements.
allocation of rights and duties to different organizational
members, such as the board, executives, shareholders and According to Naz, Ijaz & Naqvi (2016), financial
other stakeholders, and describes the rules and procedures for performance (FP) is a degree to which an organization’s
making corporate relations decisions. By doing so, it also financial stability is measured over a period of time. In other
establishes the mechanism by which the company's targets are words, it is a financial activity used to produce the enhanced
set and the means to meet those targets and track the results profits, productivity and interest of a corporate entity for its
(Akinsulire, 2006). Corporate governance sub divided into owners by controlling its existing and non-current cash,
several committee amongst are risk management, audit, board, borrowing, equity, revenues and expenditure. Its key aim is to
remuneration etc. For the purpose of these studies we are provide the owners and stakeholders with full knowledge up
looking at the aspect of risk management committee. to the stage in order to enable them to take decisions. This

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International Journal of Research and Innovation in Social Science (IJRISS) |Volume IV, Issue V, May 2020|ISSN 2454-6186

may be used to measure related firms from the same sector or Ho2 Risk management committee independence has no
to compare the aggregated sectors. significant effect on financial performance of listed
insurance firms in Nigeria.
RMC is a firm's asset allowing it to meet its
corporate goals and increase the standard of financial Ho3 Risk management committee expertise has no significant
statements as a shield for the integrity of the company, and effect on financial performance of listed insurance firms
eventually to enhance the efficiency of the company. As the in Nigeria.
RMC is responsible for reviewing, tracking, and assessing the
The study would be significant in providing information
principles, practices, procedures, systems, and regulation of
to investors, government agencies, business professionals,
risk management, that should create a stronger risk
accounting practitioners, regulators and the literature on RMC
management framework, so that the risks posed by the
characteristics and FP. The study is about the effect of risk
organization will be reduced and even dodged and eventually
management committee attributes on the financial results of
affect firm performance improvements.
the insurance companies listed in Nigeria. The research spans
Continuous collapse of many organization have a seven (7) year time span (2012 – 2018). The article is
increase the demand to have a committee aside the board divided into five parts to achieve this analysis, namely:
whose focus is on setting and implementing firm risk policy, section one is the introduction, section two takes up the
appetite and limit. Business failures is also as a result of risk examination of the literature, section three introduces the
management mechanism (Davies, 2013; McShane, Nair, & approach, section four deals with the findings and comments
Rustambekov, 2011). With firm goal on maximizing profit, in and section five ends the research.
view of the above, it is clear that lack of adequate risk
II. LITERATURE REVIEW
management framework was among the key causes of
insurance failure in Nigeria and also it is due to the failures of In this section, a review of extant literature on the subject
risk management committee to discharge their duty and matter is carried out covering conceptual issues, theoretical
functions accordingly that lead to the collapsed of some review and review of empirical studies.
notable insurance companies in Nigeria. For instance, in the
Risk Management Committee
year 2008, the following insurance companies collapsed Acen
Insurance Plc, Amicable Insurance Plc, Baico Insurance Plc RMC is described as the board of commissioners who assist in
and Security Assurance Plc and Sun Insurance Plc. In 2013 the execution of supervisory duties on corporate risk control
Crusader Insurance Nigeria Plc merged with custodian and (Halim, Mustika, Sari, Anugerah & Mohd-Sanusi 2017). In
Allied Insurance Plc. In 2014 FBN life Insurance acquired Nigerian Corporate Governance Code NCGC (2011) any
Oasis Insurance Plc. In another vein, Investment and Allied company's board may create a Risk Management Committee
Insurance Plc collapsed due to being unable to meet up with to assist the board of directors (BOD) in its oversight
regulatory guidelines and in 2019 Great Nigeria Insurance Plc responsibility for the risk function or profile, the risk
voluntarily withdrew from the business due to their failure to management system and the risk scheme to be set up.As
manage the risk properly. required by the Corporate Governance Code, this is one of the
Also, the extensive body of related previous BOD Committee. Getting one is necessary but not mandatory
empirical studies on risk management committee attributes for company. Scholars postulate that corporate efficiency may
be increased if there is a strong committee of management in
and financial performance have presented somewhat
place. Business success is largely based upon the process of
conflicting results, others agreeing some disagreeing with
risk control (Akindele, 2012; Edogbanya & Kamardin, 2015).
important theories of risk management committee globally
(Elamer & Benyazid, 2018: Malik, 2017). The contrasting Risk Management Committee Size
results warrant further research. Most of the studies done in
Nigeria have focused on risk management committee in The presence of a risk management committee may be tied to
banking and financial sector (Kakanda, Salim & Chandren, a board’s size. The presence of board size provides more
2017 & Jimoh & Attah, 2017) Making it difficult to produce a opportunities for managers with the necessary skills to
convincing result, and henceforth, the need to do this study in coordinate and be in charge of a sub-committee on risk
insurance sector in Nigeria. Therefore, this study examine the management (Abubakar, Ado, Mohamed, & Mustapha, 2018).
effect of risk management committee attributes on financial In another loss, the size of the Risk Committee is used as a
performance of listed insurance firms in Nigeria. measure of the willingness of a corporation to expend board
money to improve the prestige of clients and the strength of
In view of the above, therefore, the following committee. Bédard, Chtourou and Courteau (2004) note that
research hypothesis was developed and stated in null form. not only does a broad committee have power but the resulting
plurality of opinions within a committee makes it more
Ho1 Risk management committee size has no significant
effect on financial performance of listed insurance firms successful in solving possible problems (Ng, Chong & Ismail,
in Nigeria. 2013).This is also proposed as an improvement of ERM roles
by a growing number of members within a risk committee.

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International Journal of Research and Innovation in Social Science (IJRISS) |Volume IV, Issue V, May 2020|ISSN 2454-6186

However, the literature is also discussing certain adverse 2014) but for a risk committee there is (until now) no legal or
consequences of large commissions. For this article the regulatory control. The Walker research, however,
makeup of the risk committee as the total number of risk recommends that a risk committee would have at least one
committee members is estimated for absolute terms. The data financial specialist with ample appropriate expertise to
for this feature was gathered by hand from the Corporate communicate with the executive team and respond to the key
Governance portion of financial accounts. risk concerns within the ERM limits (Walker, 2009).
Risk Management Committee Independence The indicator of the competence of the risk
committee is measured as the proportion of members of
For the monitoring capacity of a board, board independence
finance or actuarial experience to the total RMC number. The
from management is important. The involvement of a
data is obtained from the financial accounts section of
significant number of non-executive board members is
corporate governance, as this section also includes
regarded as a strong measure of the board's freedom from
biographical information for each board member.
management (Abubakar et al. 2018). According to Abubakar
et al. (2018), RMC independence includes the number of Financial Performance
leaders sitting on the RMC who are independent non-
Financial performance is a subjective measure of how well a
executive directors. Subramaniam, Mcmanus, & Zhang (2009
company can harness assets from its primary business mode
) indicated that boards with a larger number of non-executive
and generate revenue. Often, the term is used as a general
directors are able to better analyze risks and consider setting
indicator of the overall financial performance of a company
up a risk management committee as a vital tool to assist them
over a given timeframe. Analysts and investors use financial
in fulfilling their risk management oversight function as
performance to compare similar companies across the same
opposed to those with a small number of non-executive
industry, or to aggregate industries or sectors. Financial
directors.
achievement calls for concrete consequences in the strategies
In the risk committee, Protiviti (2011) stresses that and practices of a company. Those results are reflected in the
having independent / non-executive directors is a prerequisite company's return on investment, asset benefit, value added,
for establishing constructive coordination with the etc. A comparative measure of how easily a company can
administrators and officers in charge of ERM operations of an maximize and deliver revenue from its primary business type
organization. Ng et al. (2013) also believes that a timely inventory. This term is also used as a general measure of a
objective evaluation of main risk areas could mitigate the company's average financial output over a given period of
vulnerability to major risks. In addition, the Walker study ( time, and can be used to align similar firms within the same
2009) stresses the flexibility of the ERM function by making industry or to compare aggregated industries or sectors.
an independent CRO working under the oversight of the risk Examination of the financial statements is undertaken
exposure and risk appetite control committee (Walker, 2009). primarily for decision-making purposes. The specifics found
This analysis recognizes the flexibility of the risk committee in the financial report are of great value when analyzing and
and the non-executive directors independently, as indicated by assessing the financial statements before making decisions.
Nicholson and Kiel (2007) in that the two concepts should not Financial analysis is the process of assessing the financial
be deemed equivalent. The independent risk management performance and failure of a company by accurately creating a
committee was calculated as the number of independent / non- relationship between the balance sheet goods and the benefit-
executive directors of the risk committee to the overall and-loss account (Ravichandran & Subramanian, 2016).
number of the risk management committee, and the details is
Review of Empirical Studies
gathered from the financial reports portion of corporate
governance. Elamer and Benyazid (2018) looked at the risk committee's
impact on the financial performance of UK financial
Risk Management Committee Expertise
institutions. The research sample consists of 23 listed FTSE-
Accounting or financial skills are attributes / qualifications or 100 benchmark financial institutions for the period 2010 to
knowledge that an individual has gained before becoming a 2014.For the data analysis, ordinary lease square (OLS)
member of a firm's board. In comparison, financial expertise regression model was employed; the explanatory variables
and Board members' experience has gained considerable comprised of risk committee (existence, size, meetings &
coverage in the literature on corporate governance. This work independence), firm size, liquidity, gearing, audit quality and
adopts the idea of a financial expert to determine the financial year dummies whereas the explained variable was the return
competency of the risk committee, as established by the FRC on assets (ROA) and return on equity (ROE). The study
for audit committees. The advice from the FRC (2012) notes findings showed a negative association between the
that financial consultants should have formal credentials (in characteristics of the risk committee (i.e. presence, scale,
accounting or finance or actuarial) and usually need to have flexibility, and meetings) and the financial efficiency. The
ample expertise in corporate financial matters. In the UK, results also indicate that companies with no risk committee
according to Elamer and Benyazid (2018) adding a financial (RC) performed considerably well in comparison to
expert to the audit committee is a requirement (FRC, 2012; companies with RC.

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Zraig and Fadzil (2018) had investigated the impact financial knowledge exhibit a significant negative effect with
of audit committee characteristics on firm performance: ROA while risk management committee size has a positive
Evidence from Jordan. The population of the study consisted insignificant effect on ROA. The study recommends that the
of 228 listed industrial and services firms in Jordon for the board should include more independence directors and more
period of two years, 2015 to 2016. The study tested the link of board financial knowledge as these lead to banks
between independent (AC size and meetings) and dependent performance.
variables (ROA and EPS) using OLS regression. The study
Jimoh and Attah (2017) studied on risk management
results showed a good path but negligible relationship
committee attributes and bank performance in Nigeria. For the
between the size of the audit committee and ROA while the
purpose of this study, the sample of the study consist of 15
size of the audit committee with EPS is good and important.
listed banks on the floor of the Nigeria Stock Exchange. The
Malik (2017) studied Enterprise Risk Management evidence was primarily secondary with implementation of
and Company Performance: Role of the Four Year Risk multiple regression techniques. The study found that all
Committee, 2012 to 2015 in the UK. The test study consists of variable risk governance except the size of a risk committee is
260 business- year evaluation and the application of positively related to returning on assets as indicators of bank
regression used to analyze the relationship. The study findings performance. Accordingly, the study advises that risk
revealed that ERM significantly and positively affects the firm committee leaders be adequately encouraged, meet more
performance measured by Tobin’s Q. In addition, the presence regularly, have more independent directors and more financial
of size in the risk committee has a positive but weak influence and risk experts as all of these contribute to improved bank
on the performance relationship with ERM. results.
In addition, Battaglia and Gallo (2015) used data Kakanda, Salim and Chandren (2017) had
from the Asian financial sector that focused on Indian and investigated the risk committee characteristics and market
Chinese banks to establish the relationship between boards of performance: Empirical Evidence from listed financial service
directors with risk management mechanisms related to CFP firms in Nigeria. The research statistical population was
during the financial collapse of 2007–08. No substantial link consisted of those Nigeria stock exchange 45 listed financials
between productivity and RC size was disclosed in the tests. service firms analyzed from 2012 to 2016. By taking RMC
characteristics and market performance as variables and to
However, study by Kallamu and Saat (2013), who
analyze data and test hypotheses of the present research,
investigated the effect on financial efficiency of the corporate
descriptive statistics method and panel corrected standard
governance system by collecting data from 37 FIs listed in the
errors (PCSEs) regression model was used. They concluded
financial sector in Malaysia, using ROA and Tobin's Q as a
that risk management size has a significant but negative
performance metric for the period 2007 to 2011, shows that
impact on firms’ performance while RMC composition and
there is a positive relationship between the RC size and CFP.
RMC meeting have a significant positive effect on FP as
Hoque, Islam & Azam (2013) published another analysis in
expected by their hypothesis.
this respect, and found a strong negative correlation between
the scale of RC and FP. Agency Theory Review
Akpey and Azembila (2016) have researched the The roots of the agency hypothesis can be traced back to
impact of an audit committee on the results of Ghana Stock Jensen and Meckling (1976) and the exploration of the
Exchange listed companies. The sample size of the report problem of ownership-control separation. Jensen and
consisted for the 2015 financial year of 36 traded stocks on Meckling (1976) suggested that managers of other people's
the Ghana Stock Exchange. Cross sectional regression model money cannot be expected to watch over it with the same
was used, and the version SPSS 17.0 was used. The study anxious vigilance that one would expect from the owners and
showed that the number of independent audit committee therefore that negligence and profusion must always prevail,
members had little impact on the company’s results. However, more or less, in the management of such a company's affairs.
the number of independent audit committee members with They established the relationship between the stakeholders,
degrees in finance or accounting adversely affected the such as shareholders and agents such as managers, and held
performance of the firm. that managers cannot, on their own, optimize shareholders'
returns unless proper governance mechanisms are placed in
Abubakar, Ado, Mohammed & Mustapha (2018)
place to protect shareholders' interests (Jensen & Meckling,
work on the impact of skills of risk management committee
1976).
and financial board information on the financial performance
of listed banks in Nigeria; The study's population and sample Agency theory proponents argue that division of
size is comprised of fourteen (14) banks listed on the Nigerian ownership and power leads to moral hazard issues, where
Stock Exchange floor for a period of three years (2014- agents behave to gain personal advantages at shareholders'
2016).The study used secondary data and random effect was expense. Efficient board monitoring can be a great benefit to
adopted in analyzing the data. The results of the study reveals curb these behavior. The Board monitoring’s success relies,
that risk management committee independence and board among others, on the Board's sub-committees (Kibiya, Che-

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International Journal of Research and Innovation in Social Science (IJRISS) |Volume IV, Issue V, May 2020|ISSN 2454-6186

Ahmad & Amran 2016). Dinu and Nedelcu (2015) employed Where:
agency theory in explaining transparency and quality of
FP = measured by Return on Assets (ROA).
financial disclosures in the case of Romanian listed
companies. Koładkiewicz (2014) also analyzed the main RMCSZ = Risk Management Committee Size
agency problems and their consequences. Similarly, Nayeri
and Salehi (2013) analyses the role of the agency theory in RMCINDP = Risk Management Committee Independence
implementing management's control. This study will add to RMCEXP = Risk Management Committee Expertise
the existing literature by adopting the agency theory in
explaining the relationship between RMC attributes and FSIZE = Firm Size
financial performance of listed insurance firms in Nigeria. LEV= Leverage
III. METHODOLOGY ε = Error term
Data for this analysis were collected for the seven (7) year i = Firm Script (i=24)
duration (2012-2018) from the audited financial statements of
the sampled listed insurance firms in Nigeria. The test adopts t = Firm Script (t=7)
Ex-Post Facto Research Design and uses already collected β0 = is the intercept
data for study purposes. This sample population is composed
of twenty-seven (27) listed insurance firms. This was obtained β1 – β7 = are the parameters to be estimated in the equation
from Fact Book of Nigerian Stock Exchange as at December Return on Assets, measured as Net income to Total
2018. Purposive sampling techniques was adapted to filter assets (Elamer & Benyazid, 2018), Risk management
out some of the Insurance firms in the following manner; all committee Size, measured as total number of risk committee
Insurance firms listed after 2012 were excluded and the members (Malik, 2017 & Kakande et al., 2017),Risk
insurance firms that the researcher was not be able to gather Management Committee Independence, measured as
all necessary information for the period of study (2012 to Proportion of independent and non- executive directors to the
2018). In line with the foregoing, twenty four (24) insurance total number of risk (Elamer & Benyazid, 2018, Malik, 2017
firms were selected as sample for the study. and Kakande et al., 2017),Risk Management Committee
Panel data approach was followed because it Expertise , measured as Proportion of members with finance
represented the chosen companies' mixture of time series and or actuarial knowledge to the total number of risk committee
cross-sectional data. The empirical approach was multiple (Malik, 2017), firm size measured as firm total assets(Elamer
regression, and the Ordinary Least Square (OLS) as an & Benyazid, 2018) and Leverage, measured as ratio of total
inference method. The model used in this study is Kakanda, liabilities to total assets (Kazeem, 2015 and Sumaira &
Salim and Chandren (2017) in modified form. The model Amjad, 2013).
compares success of total companies to characteristics of the IV. RESULT AND DISCUSSION
risk management team, while accounting for certain company-
specific variables. The modified version is given as: This section presents the descriptive statistics and the
summary of the regression results; followed by analysis and
ROAit = β0 + β1RMCSZit+ β3RMCINDPit+ β4RMCEXPit+ discussions of what the figures portray.
β5FSIZEit+ β6LEVit+eit

Table 4.1 Descriptive Statistics

Variables No of Observations Mean Standard Deviation Minimum Maximum

ROA 168 .02 .12 -.69 .46
RMCSZ 168 5.02 1.20 3 10
RMCINDP 168 .60 .12 .2 .83
RMCEXP 168 .34 .10 .17 .5
FSIZE 168 7.20 .38 6.25 8.35
LEV 168 .62 .63 045 4.44

Source: Results from STATA Output

The table reveals the description of the variables under study. value of 5 members. The table shows that the sizes are
The table shows that return on assets has an average value of common among the insurance firms during the period under
2% with a standard deviation value revealing a wide variation. study. Table 1 further show that the risk committee members
The average size of the risk committee is revealed with a on average have 60% of the board who are non-executive

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International Journal of Research and Innovation in Social Science (IJRISS) |Volume IV, Issue V, May 2020|ISSN 2454-6186

directors. Further the paper also shows that 34% of the Firm size measured by log of total assets reveals a mean value
members are accounting and finance expertise with standard of 7.20 with leverage showing that the insurance sectors is
deviation showing a low dispersion of the individual variables characterize by high debt evidence by the average value of
from the mean value. 62%.
Table 4.3 Summary of Regression Result – OLS Model
Variance Inflation
Variables Coefficients. Z-Value P-Value
Factor (VIF)
Constant -.439 -1.89 0.058 .
RMCSZ -.001 -0.12 0.906 1.58
RMCINDP .033 0.44 0.661 1.28
RMCEXP -.16 -2.10 0.036* 1.10
FSIZE .075 2.35 0.019* 1.55
LEV -.001 -3.67 0.000* 1.21
2
R 0.094
Wald chi 34.02 0.000*
Hausan test 1.27 0.934
Lagrangian Multiplier Test 42.67 0.000*
Auto correlation 1.86 0.185
Heteroskedacity 32.65 0.000*
Crosssectional independence .778 0.436

*at 5% level of significance

Interpretation Risk Management Committee Independence and Financial

Performance
The table 2 above presents the result of Random effect
model selected for the study based on the Hausman The results in table 2 shows that risk management committee
specification test and Lagrangian Multiplier test. The independence does not have effect on financial performance
regression result discloses that risk management committee of listed insurance firms. The table reveals that risk
size, independence, expertise and the control variables are management committee independence has a coefficient of
able to give account of 9.4% changes in the financial 0.003 and a p-value of 0.661 which is not statistically
performance of the listed Insurance firms in Nigeria. The F- significant. The result is contrary to prior studies by Abubukar
statistics chi square reveals a value of 34.02 and a p-value of et al. (2018), Kakanda et al. (2017) and others. The study
0.000 which is significant at less than 5% level significance. therefore fails to rejects the hypothesis that risk management
This reveals that the model is fit and adequate. It also shows committee independence has no significance effect on
that the variables jointly have significant effect on financial financial performance of listed insurance firms in Nigeria.
performance of listed Insurance firms in Nigeria.
Risk Management Committee Expertise and Financial
Risk Management Committee Size and Financial Performance Performance
Table 2 reveals that risk management committee size has a The study also found that risk management committee
negative and insignificant effect on financial performance of expertise has a negative and significant impact on ROA of
listed insurance firms in Nigeria during the period under DMB’s in Nigeria. The result output shows that RMCEXP
review. This is indicated by the sign of the coefficient which has a coefficient of -0.16 and p-value of 0.036 significant at
is -.004 and a p-value of 0.906. This further shows that the 5% level. This implies that risk management member
size of the risk committee does not influence financial expertise in accounting finance will affect the financial
performance. The result is in conformity with previous works performance of listed insurance firms in Nigeria negatively.
by Battaglia and Gallo (2015), Abubukar et al. (2018) and Hence the study reject the null hypothesis three that risk
contrary to the work of Jimoh and Attah (2017), Kakanda et management committee expertise has no significant effect on
al.(2017), Elamer and Benyazid (2018) and others. On the financial performance of listed insurance firms in Nigeria.
strength of this result, the study fails to reject the hypothesis This is line with prior studies by Abubakar et al.(2018) who
thatrisk management committee size has no significance effect discovered that expertise of the members of risk management
on financial performance of listed insurance firms in Nigeria. may reduce the performance the firms as result of knowledge
on risk. This is contrary to the work of Jimoh and Attah
(2017) who discover that risk management committee
expertise positively impact financial performance.

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