Determinants of the Profitability of Insurance Companies in Ethiopia

Abstract

The objective of the study is to investigate the factors that determine the profitability of insurance companies in Ethiopia. The performance of any firm is not only plays the role to increase the market value of that specific firm but also leads towards the growth of the whole industry which ultimately leads towards the overall prosperity of the economy. To maximize the insurance companies’ profitablity, it is necessary to identfy the major factors affecting their profitablity. In ethiopian insurance industry context, there are few studies conducted which incorporated only the internal factors. To achieve the research objective explanatory type of research design was employed. This study the explanatory research design was employed to examine the relationship of the stated variables. A panel data study design which combines the attributes of cross sectional (inter-firm) and time series data (inter-period) was used. To comply with the research objectives, the researcher was focused on secondary data, which are obtained from financial statement of selected individual insurance companies, National bank of Ethiopia (NBE) and financial publication of Ministry of Finance and Economic Development of Ethiopia (MOFED). Purposive sampling was used so as to include all insurance companies established and serving with in the specified period of time from 2010 – 2019. To analyze the collected data the researcher was used descriptive statistics, regression analysis and diagnostic tests. The collected data would be analyzed by using E-views 10. The researcher used the multiple regression econometrics models through which the financial performance of the insurance companies in the Ethiopian market is analyzed. The study shows that; profitability was usually expressed as a function of internal and external determinants. By using internal factors such as size of company, leverage, tangibility of asset, liquidity, loss ratio, growth of firm and premium growth with the external variable inflation and economic growth, this study examined the determinants of profitability of insurance companies over the period of 2010 – 2019, using regression model for profitability measures; (ROA) and (ROE). Based on the study findings, the profitability of insurance companies measured by ROA and ROE, since the company’s management has control over the insurance company’s specific factors, it was possible to improve the financial performance of insurance companies by giving more attention on the identified company’s specific factors particularly; size of company and firm growth. Since, they were found to be positive and statistically significant variables that affect profitability of insurance companies measured by both ROA and ROE.