Browsing by Author "Tibebu, Girma"

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    Applicability of Business Failure Prediction Models to the Insurance Sector of Ethiopia
    (2018-02) Tibebu, Girma; Degefe, Duressa (PhD)
    The bankruptcy of insurance companies recorded in different parts of the world sends messages to interested stakeholders of insurance companies operating in Ethiopia to utilize the existing verified models or to develop new models of business failure prediction so as to identify and manage potential business failure risk in the insurance sector. Two global and two local accounting-based statistical models developed with MDA (Multiple Discriminant Analysis) are examined in this study to determine their applicability to the insurance sector of Ethiopia. The selected models are: Altman’s Z’’-score model developed in USA, Springate’s model developed in Canada, Wondim’s Model developed in Ethiopia on Public Enterprises, and Fufa’s Model developed in Ethiopia on Private Enterprises. Fourteen out of 16 insurance companies operating in Ethiopia for the recent five years of 2012 to 2016 are sampled for the study. The prediction accuracy in correctly identifying non-bankrupt insurance companies of the country for year 2017 is calculated for each of the four models. The research found out that, from the four models studied, only the adjusted Altman’s Z’’- score model has satisfactorily predicted non-bankrupt insurance companies of the country, with accuracy rates of 85.71% for prediction made two-years prior to the year prediction is made for (2017). The applicability of the remaining three models to the Ethiopian insurance sector is not supported by the study as the maximum prediction accuracy achieved by the models is 28.57%. It is suggested that Altman’s Z’’ score model be considered as an instrument in prediction of business failure risks in the Ethiopian insurance sector, and recommendations are provided on further studies that need to be made to identify bankruptcy prediction models specifically appropriate to the insurance sector of the Ethiopia.