Factors Determining Profitability of Insurance Companies In Ethiopia

Abstract

The main objective of this study is to examine the internal and external factors that determine profitability of Insurance Companies in Ethiopia. Profitability in terms of Return on Asset (ROA) is taken as a dependent variable while age of company, volume of capital, leverage ratio, tangibility of assets, liquidity ratio, loss ratio inflation and economic growth are taken as independent variables. From the total seventeen insurance companies, nine insurance companies which have ten years data were selected based on purposive sampling method. Ten years (2007-2016) Secondary data obtained from National Bank of Ethiopia (NBE) and financial statements of sampled nine insurance companies are analyzed. By conducting Random effect regression model, liquidity, loss ratio and GDP growth Rate are identified as the most important factors that determine the of profitability of insurance companies in Ethiopia. Liquidity has a positive while loss ratio and GDP growth rate have a negative and statically significance impact on profitability. In contrast, Age, leverage, tangibility of Asset, volume of capital and inflation has insignificant relation with profitability of insurance companies in Ethiopia. Based on the findings of the study, insurance companies need to give prime emphasis on liquidity, loss ratio and GDP growth that have significant influence on their performance. The Ethiopian Insurance Association has to be strong to coordinate all insurance companies to work together on their common interests and in creating public awareness about insurance by preparing workshops and different researches regarding insurance sector. The supervisory body (NBE) is recommended to focus on ensuring the healthy competition of insurance companies by setting regulation that control unfair competition and price cutting.