Determinants of Profitability of Insurance Companies in Ethiopia: An Empirical Study

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Addis Ababa University


A company’s profitability has always attracted the attention of academics, policy makers and practitioners, and researchers interested in revealing the main factors that determine business success or profitability. Although profitability has been widely investigated in industries like manufacturing industries far less attention has been paid to financial sector especially to insurance sector. This study examined the determinants of profitability (liquidity, tangibility, volume of capital, premium growth, claim ratio, real GDP and inflation) on general insurance companies of Ethiopia proxied by ROA. Profitability is dependent variable while liquidity, tangibility, volume of capital, premium growth, claim ratio, real GDP and inflation) are independent variables. In this paper, econometric analyses have performed for a panel of nine Ethiopian general insurance companies for the study period of 2005-2014. The study has used secondary data or quantitative nature of data obtained from the annual audited financial statements (balance sheet and profit/loss account, and revenue account) of insurance companies, financial publications of NBE by applying a statistical package data called EVies 7 only. Since, the study data was panel data or the combination of cross-sectional and time-series data and concurrently random-effect panel data regression was applied to study the effect of those selected independent variables on profitability (ROA). The random effect regression result shows that tangibility, volume of capital, premium growth, claim ratio, and real GDP are identified as most important determinants of profitability hence tangibility, volume of capital, premium growth are significant and positively related. In contrast, claim ratio and real GDP are negatively but significantly related with profitability. However, liquidity and inflation are not significantly related with profitability. The result implies that, company with high asset, capital, volume of premium, and with low claim incurred has more profit than the company with low asset (fixed asset), capital, premium growth, and high claim incurred. Hence, insurers should have to raise their asset (fixed asset), capital, and volume of gross premium; while, insurers must decrease their claim incurred in line with the rules and limits of the National Bank of Ethiopia in order to earn more profit. Key Words: Insurance Companies, Determinants, Profitability



Insurance Companies, Determinants, Profitability