Determinants of Insurance Companies Profitability: The Case of Ethiopian Insurance Industry
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Date
2024-03-09
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AAU
Abstract
The development of social and financial stability, the growth of commerce and industry,
and economic progress all depend critically on the presence and survival of powerful
insurance companies. For several years, academics connected to the finance literature
have been interested in profitability. But in the context of Ethiopia, the insurance industry
received little attention. In order to determine the factors that affects the insurance
businesses' profitability in Ethiopia, this study looks into the industry-specific,
macroeconomic, and company-specific factors that were taken into account in the
regression model. The study used secondary panel data covering the period 2018-2022 and
out of the 18 insurance companies operating in the country, a sample of 17 insurers were
selected by non-probability purposive sampling technique. To identify the relationship
between the ROA and independent factors, a quantitative research technique and an
explanatory way of research design were employed. Descriptive statistics, correlation
analysis and fixed effect regression analysis were performed using the statistical software
"Stata 14.2." to analyze profitability of the insurance companies in Ethiopia. Fixed Effect
model regression results, suggest that industry-specific variables like market share and
firm-specific variables like loss ratio, investment income ratio, and business age are
significantly affects the profitability. The results also showed a positive correlation
between market share, inflation, premium growth, reinsurance dependency, GDP growth,
and investment income and profitability. The loss ratio, leverage, and age of the company
were found to be negatively correlated with ROE. Ultimately, in order to keep their business
profitable, managers should place a greater focus on investment opportunities, potential
client, customer happiness, and pre-risk evaluation and selection, and claim handling.