Factors that Affect Profitability of Ethiopian Insurance Companies
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Date
2021-03
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A.A.U
Abstract
Profitability has drawn the attentions ofscholarsassociated with finance literatureover several periods. However, the private insurance sector has received small amount ofattention in the context of Ethiopia. The objective of this study was to find and examine determinants of profitability of the private insurance companies in Ethiopia. The target population was defined as all private insurance companies. Hence, the research design was a sample survey of private insurance companies in Ethiopia which operated in the insurance industry from 2009/10 to 2018/19. Secondary data were collected from the financial statements of insurance companies and NBE. The data collected were analyzed using standard deviation, mean, correlation and multiple linear regression statistical analysis tools. Regression test was performed to know the effect of explanatory variables on profitability of insurance companies in Ethiopia. This study examined the effects of firm specific factors (firm size, leverage of a company, investment ratio, commission ratio, underwriting risk, reinsurance dependence), industry specific factors (market share and diversification) and macro-economic factors (real GDP and inflation) onprofitability of private insurance companies. Profitability is dependent variable while firm size, leverage of a company, investment ratio, commission ratio, underwriting risk, reinsurance dependence,market share, diversification, real GDP and inflationare independent variables. The outcome of the finding showedthat explanatory variables have of the expected sign excluding size of the company and inflation. That means investment ratio, commission ratio,marketshare, real GDP and inflation positively related to profitability whereas firm size, leverage of a company, diversification,underwriting risk, and reinsurance dependence affected profitability negatively. Company size, leverage of a company,investmentratio,underwritingrisk,market share andinflation affect profitability significantly whereas commission ratio, reinsurance dependence, diversification, and real GDP affect profitability insignificantly. The insurers should give attention to the level of leverage in the company; it would be crucial setting minimum level of debt financing. The level of investment and market share should be seen as a crucial factor for the profitability of the insurers. Finally, the insurers should charge risk commensurate premium for the risk they bear to decrease the level of underwriting risk.
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Affect Profitability, Insurance Companies