The Determinants of Profitability on Insurance Sector: Evidence from Insurance Companies in Ethiopia
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Date
2015-05
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Addis Ababa University
Abstract
Organizational performance has attracted scholarly attention in corporate finance literature
over several decades. However, in the context of insurance sector, it has received a little
attention in developing economies. The objective of this study is to determine the relationship
between factors affecting insurance profitability (Age of companies, Size of companies,
Leverage, Tangibility of assets, Liquidity, Premium Growth, Loss ratio, Reinsurance
dependence, Solvency margin and GDP growth rate and financial performance of insurance
companies in Ethiopia. In order to carry out the study, secondary data of 9 insurance companies
over the period of 2003-2014 was obtained on the financial performance from the annual reports
and audited financial statements and secondary data supported by primary data obtained
through open-ended questionnaires held with insurance companies chief finance officers .Data
collected was analyzed using Eviews 7 econometrics software . Regression analysis was used to
analyze the data from secondary source and data from primary source were streamlined
presented to support regression result. The study findings indicate that the variables are
statistically significance to influencing financial performance of insurance companies in
Ethiopia. This implies that loss ratio, size of insurance companies, leverage ratio, and solvency
margin has significant impact at one percent significance level on profitability of insurance
companies operating in Ethiopia and the primary source data also supports that the above
variable has an impact on profitability of insurance companies. Based on the findings, the study
recommends that insurers must work towards improving their solvency margin, underwriting
risk, and increase their size of asset, financing decision and improving management and
employee’s competency. Further studies should be undertaken to analyze the different sectors in
the economy to determine any significant differences in the relationship between firm
characteristics and financial performance in the insurance sectors by incorporating other
independent variable.
Key Terms: Financial Performance, Profitability, Insurance Companies in Ethiopia, Return On
Asset (ROA)
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Keywords
Financial Performance, Profitability, Insurance companies in ethiopia, Return on asset (ROA)