The effects of financial factors on financial performance of selected insurance companies in Ethiopia

Abstract

The purpose of this study was to empirically examine the effects of financial factors on financial performance of 11 purposively selected insurance companies in Ethiopia. Specifically, the study empirically examined the impact of leverage ratio, liquidity ratio, underwriting risk, Premium growth, and size of company, inflation rate, and gross domestic product on financial performance (return on asset) of insurance companies in Ethiopia. Under this study, the researcher used explanatory research design with quantitative approach and panel type of data. The data used in this study were secondary, collected from national bank of Ethiopia. Regarding to the sampling technique the researcher used purposive sampling technique based on the availability of data, year of establishment and operation life of the insurances. Finally, the data were analyzed through the use of descriptive statistics, correlation matrix and multiple linear Regressions model using EView10 software package. Accordingly, random effect regression model was chosen to run the regression. Then the results of random effect regression analysis revealed that liquidity ratio, Premium growth, and gross domestic product have positive and statistically significant effect on the financial performance of Ethiopian insurance companies whereas, company size also has positive effect but statistically insignificant. While other variables like: leverage, underwriting risk, and inflation rate have negative and significant effect on financial performance of Ethiopian insurance companies. Based on the above findings, the researcher recommended the insurance industry in Ethiopia, to give more focus on factors that could increase premium and liquidity ratio and also on factors that decreases leverage and underwriting risk in order to improve their operational and financial performance. Finally the researcher also recommended the mangers of Ethiopian insurance companies to prepare themselves for macroeconomic changes by preparing financial plans, provide new product lines and making extensive advertisement that maximizes their market share.