Factors Influencing Profitability in the Ethiopian Private Insurance companies
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Date
2017-06
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Addis Ababa University
Abstract
Profitability is one of the most important determinants of insurers’ performance and healthiness.
This paper empirically investigates the link between the micro and macroeconomic environment
determinants of profitability of private insurance companies for the period 2005-2015. In
light of prior literature, key explanatory variables were identified to disclose their
relationship and influence on profitability. These variables are liquidity, leverage, firm’s
size, firm growth, risk, tangibility of asset, economic growth, inflation, trade openness and
urbanization. The assumptions needed to be fulfilled for OLS were tested; the data was found
homoscedastic, free of multicollinearity, free of autocorrelation and normally distributed.
Results using panel least square regression exhibited that leverage, firm growth, inflation
growth, risk and urbanization has a significant relationship with profitability. Also, the study
found that liquidity, firm size, tangibility of asset and trade openness were found to be
insignificant in profitability of Ethiopian insurance companies. Board of directors and
managers of insurance companies need to consider these variables while designing their
strategic plan. The conducted empirical analysis allows regulators to better understand and
roughly quantify those effects which might support discussion with insurers resulting in some
mitigating actions. Further research needs to be done to develop top-down stress test
methodologies to fully assess the impact of the low yield environment in combination with a sharp
increase of other macro-economic factors, on insurers’ profitability as well as solvency
positions
Key Words: Return on Asset, profitability; insurance companies
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Keywords
Return on asset; profitability; insurance companies