THE EFFECT OF REINSURANCE MECHANISM FOR THE PROFITABILITY PERFROMANCE OF PRIVATE INSURANCE COMPANY IN ETHIOPIA

Abstract

Reinsurance is mainly the concept of transferring underwriting risks and creating capacity to make available for insurance companies to assume risks where there are beyond their capability to shoulder within the given available capital. The objective of this study was to find and examine the relationships and the effect of reinsurance arrangements or techniques on the insurance companies’ performance taking a proxy variable return on investement (ROI) assuming as dependent variable. The study used panel data that were drawn from five years quantitative secondary data from ten insurance companies’ audited annual financial statement. The study used random effect regression analysis model after taking the necessary testes to choose the best model from Random effect, fixed effect and ordinarily list square model by applying lagragian Multiplier test and Hausman test method. The study examined the effect of specific reinsurance variables (retention ratio and the ratio of ceding claim to ceding premium) and other specific control variables (company size, investement ratio, underwriting risk/loss ratio/, expense ratio and commission ratio) on the private insurance companies’ profitability performance by assuming as independent variables. The outcome of the findings showed that the reinsurance techniques explanatory variables; retention ratio has positive sign but insignificantly affect profitability performance while the ratio of ceding claim to ceding premium has negative sign but significantly affect the insurance profitability performance. Other explanatory variables: loss ratio has negative sign with high significance, company size has negative sing with moderate significance, expense ratio and commission ratio have negative sign and insignificantly affect while investement ratio has positive sign with moderate significance affects the insurance companies profitability. The result gave us some understanding that there are interdependency between reinsurance and insurance profitability performance. But it is unclear that how the effect of the ratio of ceding claim to ceding premium on profitability performance showed negatively because the ratio represent to denote the relative reinsurance benefit (ceded claim) per reinsurance cost (ceding premium).