FACTORS AFFECTING PROFITABILITY OF INSURANCE COMPANIES IN ETHIOPIA

Abstract

The study examines the effects of internal factors, made up of firm specific variables, industry and the external factors or macroeconomic variables, on the profitability performance of insurance companies in Ethiopia. In particular, the study investigates the impact of liquidity, expense ratio, growth rate, market share, inflation and exchange rates on the profitability of insurers in nonlife markets. Profitability was proxied by Return on Assets (ROA). The study employs an unbalanced panel data sample of eleven non-life insurance companies from 2010 to 2021, with one hundred and thirty-two (132) non-life firm-year panel observations, obtained from the National Bank of Ethiopia. The models were estimated using the Ordinary Least Square (OLS) with fixed and random effects panel estimation techniques. The findings show that, Liquidity (LQ) Expense Ratio (ER) Market Share (MS) and Exchange Rate (EXR) have a positive and significant effect on ROA. The findings have implications that for economic regulators such as the National Bank of Ethiopia (NBE), it is recommended that sound monetary policies that strengthen foreign exchange be initiated, and Insurers should stay liquid based on our finding. Regulators should pay more attention to illiquid companies. Regulators could also limit share of illiquid assets in insurer’s investment portfolio. In addition, it is suggested that insurers seek more efficient ways to manage their expenses and transfer risks to third parties in cases where insurers underwrite high risk policies or underwrite less risky policies.