The Effect of Risk Management on Financial Performance of Insurance Companies in Ethiopia

Abstract

Risk management is the most important factor which insurance companies must attend to achieve their financial performance. Therefore, this study examined the effect of risk management on financial performance of insurance companies in Ethiopia. This study was conducted using secondary data for 16 insurance companies during the period of 2014-2019. This data have been collected from national bank of Ethiopia. Study used two step system GMM estimation techniques which more powerful for studies which there might be a potential endogeneity, heteroskedasticity, autocorrelation and omitted variable biases have been employed. The results of a two-step System GMM revealed that liquidity risk and solvency risk have negative and significant effect both in the short run and long run financial performance of the insurance companies, whereas technical reserve risk and underwriting risk have negative effect in the short run and positive effect in the long run financial performance of insurance companies. The study also shown reinsurance risk has positive and significant effect in both short run and long run financial performance of insurers. This study finally recommends that insurance companies in Ethiopia should pay greater attention to liquidity risk, solvency risk, technical reserve risk, underwriting risk and reinsurance risk