The Determinants of Financial Performance of Insurance Companies in Ethiopia
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Date
2024-05-05
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A.A.U
Abstract
In today's economic world, insurance is a key risk-mitigation mechanism. Financial
soundness, social stability, and economic development depend on the presence and longevity
of financially stable insurance companies. To assure insurers' reliability and financial
soundness, it is critical to understand the elements that influence their financial performance.
This study aimed to look into the factors that influence the financial performance of Ethiopian
insurance businesses, using ROA as a metrical. The study used a correlation explanatory
research design and a quantitative research approach to investigate the link between ROA and
independent factors such as leverage, liquidity, the management competency index, firm size,
inflation, and GDP growth. The analysis examined secondary panel data from 2014 to 2020,
covering all Ethiopian insurance providers. The study used descriptive statistics, correlation
analysis, and multiple regression analysis to examine insurance firms' financial performance.
The regression results showed that ROA was positively and significantly influenced by the
management competency index and business size and positively and insignificantly by GDP.
Inflation had a negative and minor impact on ROA. The liquidity and leverage ratios were
both negative and significant. The study recommended that insurance companies maintain an
acceptable degree of leverage and effectively manage their capital, as well as maintain an
adequate level of liquidity and effectively manage their cash flow. Additionally, the study
suggests that insurance companies adjust their prices, costs, and interest rates to account for
inflation expectations, which helps maintain profit margins.