EFFECTS OF FIRM CHARACTERISTICS ON THE performance OF listed INSURANCE companies IN NIGERIA
EFFECTS OF FIRM CHARACTERISTICS ON THE PERFORMANCE OF LISTED INSURANCE COMPANIES IN NIGERIA
However, the literature that is currently accessible in this field is contradictory and inconclusive. Firm specific factors have been identified to have an immeasurable influence in increasing the financial success of organisations.
The study consequently examines the effect of firm specific variables on the financial performance of listed insurance firms in Nigeria in light of these conflicting and ambiguous findings.
The dependent variable is financial performance, whereas the independent variables are age of the insurance company, firm size, premium growth, loss ratio, liquidity, and leverage. Thirty (30) listed insurance companies were the study's population as of December 31, 2013.
For the eight-year study period (2006–2013), a sample of 12 of the listed insurance companies was chosen. Multiple regression analysis was used in the study. Analysis was done using secondary data taken from the companies' financial statements.
The impact of firm-specific features on financial performance was investigated using panel data approaches (fixed and random effects models), and Hausman specification indicated that the random effect model is more suited.
The outcome demonstrates that the most crucial factors of financial performance are business size, loss ratio, liquidity, and leverage. So, there is a negative correlation between business size, loss ratio, and leverage. In contrast, there is a positive and strong correlation between the liquidity ratio and financial performance.
Finally, neither the age of the insurance company nor the rise in premiums much affect the financial performance of Nigeria's listed insurance firms.
Before making significant business decisions, insurance companies are advised to conduct careful analysis and take into account firm specific characteristics (firm size, loss ratio, liquidity, and leverage) that influence their financial performance in order to increase their profit and competitiveness in the market. This will help them significantly improve their financial performance.
1.1 BACKGROUND OF THE STUDY
Due to its positive effects on the overall economy, the insurance sector contributes significantly to society. This is so because the industry contributes to the economy's defence and recovery mechanisms, and its successful operation can inspire the growth of other industries and the overall economy (Abate, 2012).
In fact, having a strong and established insurance industry is essential for creating the right conditions for economic growth since it increases the country's capacity to take risks while also providing long-term funding for long-term investments.
As insurance companies compensate corporate losses and prevent the collapse of societal economic activity, their significance for enterprises and individuals becomes increasingly clear. Insurance companies serve society economically and socially by preventing losses,
as well as by lowering tension and fear, increasing employment, and generating accumulated premiums for long-term investments. As a result, insurance companies must continue to perform better than their competitors in order to maintain their position in society.
Any company firm's performance not only contributes to its own market value growth but also to the sector's growth as a whole and the economy's overall success (Ahmed, Naveed, & Usman).
In order to achieve the objectives of individual business owners, solid financial management should be compatible with efforts to enhance and increase profitability.
Any business's main goal is to increase its profits and the wealth of its stakeholders (Gitman, 2007). However, most businesses are unable to achieve their objectives due to difficulties in the internal and external environments.
In other words, an organization's effectiveness depends on its capacity to acquire resources and manage them in a variety of ways in order to create competitive advantages (Iswatia & Anshoria, 2007).
Both internal and external factors may have an impact on how insurance firms succeed. The management-controllable internal elements are what account for the variations in profitability between different firms.
External variables, on the other hand, are uncontrollable circumstances that influence a firm's choice and over which management has no control.
However, macroeconomic or market-specific factors, such as the expansion of the money supply, interest rates, inflation rates, and gross domestic product, are outside of management's control.
As one of the primary determinants of insurance profitability, firm attributes may typically be used to estimate a company's performance.
These characteristics, together with firm-specific determinants of organisational behaviour, include firm size, underwriting risk, leverage, age, growth rate of written insurance premiums, as well as institution and political climate.
In accordance with the aforementioned description, the internal variables that concentrate on the unique characteristics of insurers are divided into financial and non-financial variables. The financial characteristics are factors that can be gleaned from an insurance company's financial statement and profit and loss.
They consist of things like business size, premium growth, loss ratio or risk underwriting, liquidity, tangibility, leverage, and so on. The variables that cannot be determined from an insurance company's financial statement or profit and loss are known as non-financial features.
They include the firm's age, management skills, and operational range. The assumption that management talents will be reflected in the operational success of insurance firms makes it difficult, if not impossible, to analyse management competencies directly, despite the fact that they are a key factor in strong financial performance.
Therefore, in order to represent firm-specific characteristics against the financial performance of listed insurance firms in Nigeria, this study combined five financial variables (firm size, premium growth, loss ratio, liquidity, and leverage) along with one non-financial variable, namely the age of the firm.
In order to determine the firm-specific characteristics that have an impact on the financial performance of listed insurance firms in Nigeria, this paper conducts an empirical analysis.
1.2 STATEMENT OF THE PROBLEM
The insurance sector is essential to the growth of commercial and infrastructure firms. According to the latter viewpoint, it fosters economic and social stability, mobilises and directs savings, encourages trade, commerce, and entrepreneurial activity,
and raises the standard of living for people and a nation as a whole (Malik, 2011). Insurance firms must be financially stable and powerful enough to fulfil this duty in order to
their ability to operate profitably.
Agabi (2009) stated that the reason for the underwhelming performance of Nigerian insurance companies was a number of years' worth of underwriting companies' failure to pay claims.
This practise of Nigerian insurance companies not paying out claims led to a decline in their goodwill, which translated into a negative perception of the industry. As a result, confidence in the industry appears to have declined dramatically.
Nigerians no longer think about insuring their assets as a result of the industry's credibility crisis. There is proof of the performance of many businesses in Nigeria today, including banking and other financial institutions, but the insurance sector is not responding to economic growth in a way that is suitable due to confidence difficulties in the sector.
This suggests that, with the exception of those that have a variety of funding sources, the overall financial performance of insurance corporations in Nigeria is poor.
As a result, measuring the financial performance of insurance businesses has drawn a lot of interest in business and corporate finance literature from both industrialised and some developing nations.
As underwriters, these businesses not only offer effective risk-transfer mechanisms but also contribute to appropriately boosting entrepreneurial confidence to encourage investment growth and overall economic activity.
All organisations with a direct or indirect interest in the company prioritise profitability. Despite these crucial roles that profit plays in the ongoing operations of insurance firms, researchers in the field of finance have not paid much attention to the profitability status of the majority of insurance companies operating in Nigeria in relation to firm age, firm size, premium growth, loss ratio, liquidity, and leverage of the firm.
This may be related to the incomplete assessment of aspects that are crucial to the realisation of profits by Nigerian insurance corporations.
The degree to which firm-specific variables (firm age, firm size, premium growth, loss ratio, liquidity, and leverage) have an impact on the financial performance of listed insurance firms in Nigeria is therefore interesting to learn.
It is important to evaluate the insurance firm-specific characteristics in order to gather useful data about how they affect performance.
Studies have been done to isolate the relationship between the performance of insurance businesses in industrialised nations and certain firm characteristics (Greene & Segal, 2004, Deshng,
Al-Shami, 2008, Dieter, 2011, Sandra & Lianga, 2007, Adams, Hardwick & Zou, 2008,
2011 and Charumathi, 2012),
while others (Adams & Buckle, 2012) concentrated on developing nations
2003, Malik, Ahmed, Naveed, and Usman (2011); Abate, Daniel, and Tilahun (2012); Akotoye, Osei, and Gemegah (2011); Almajali, Sameer, and Yahya (2012)).
To our knowledge, no research has been done on this industry in Nigeria. In contrast to insurance businesses, banks are typically the subject of literature rather than insurance firms themselves (Aburime 2008, Buba 2009, Ani et al. 2012, and Akano 2014).
In a similar vein, the findings of research carried out in developed and some emerging nations might not apply to insurance firms in Nigeria for no other reason than that the environments in which the insurance firms operate differ in terms of supervision, regulation, and operational procedures.
Additionally, factors from other studies, particularly those from mature markets, might not be compatible with the nascent Nigerian insurance system. In order to do this, an empirical examination into the association between firm characteristics and financial performance of insurance firms in Nigeria is required.
Therefore, it is impossible to simply extrapolate the results of studies conducted in other nations with different conditions to Nigeria.
1.3 RESEARCH QUESTIONS
Therefore, the study responds to the following inquiries:
How does an insurance company's age effect its financial performance when it is listed in Nigeria?
How much does firm size affect the financial performance of Nigeria's listed insurance firms?
What effect does the premium growth rate have on the monetary results of Nigerian listed insurance companies?
What percentage of listed insurance firms' financial performance the loss ratio contributes to
How does liquidity affect listed insurance corporations' financial performance?
How much of an impact does leverage have on the monetary results of Nigerian listed insurance firms?
1.4 OBJECTIVES OF THE STUDY
This study's primary goal is to investigate the effects of firm-specific variables on the financial performance of Nigeria's listed insurance firms from 2006 to 2013.
The precise goals are to:
I. investigate how the firm's age affects the performance of listed insurance firms in Nigeria.
II. Examine the impact of firm size on the performance of listed insurance firms in Nigeria.
III. Determine the effect of premium growth rate on Nigeria's listed insurance firms' performance.
IV. Examine the effect of loss ratio on the operation of Nigeria's listed insurance companies.
V. Analyse how liquidity affects listed insurance corporations' performance.
VI. Analyse how leverage affects the performance of Nigeria's listed insurance companies.
1.5 RESEARCH HYPOTHESES
Following the aforementioned goals, the following hypotheses are presented in null form:
Ho1: The financial performance of Nigeria's listed insurance firms is not significantly impacted by the age of the company.
Ho2: The financial performance of Nigeria's listed insurance firms is not significantly impacted by the firm's size.
Ho3: Premium growth rate has no appreciable effect on listed companies' financial performance.
Nigerian insurance firms.
Ho4: The financial performance of Nigeria's listed insurance firms is unaffected by loss ratio in a substantial way.
The financial performance of Nigeria's listed insurance corporations is unaffected by Ho5 Liquidity.
Ho6: The financial performance of Nigerian listed insurance corporations is unaffected by leverage.
1.6 SCOPE OF THE STUDY
The study looks into how firm-specific variables affect the financial performance of Nigeria's listed insurance firms. The study was done from 2006 to 2013 during an eight-year period in order to assess this influence. The reforms that were implemented to improve the industry's performance, productivity, and efficiency give rise to the study era.
The time frame is deemed appropriate because it heralds the start of financial reforms that mandated higher capital requirements for Nigerian insurance companies.
The study concentrated on internal factors because they can be easily measured using data from financial statements of insurance firms in Nigeria and because they are elements that management of listed insurance firms in Nigeria can alter, making them controllable.
1.7SIGNIFICANCE OF THE RESEARCH
This analysis is based on the observation that the banking industry dominates the majority of empirical literatures on firm-specific features. Inferentially, this section of the Nigerian insurance industry has not received adequate research attention.
In other words, the majority of empirical literatures focus on the banking industry rather than the insurance industry. To the best of our knowledge, there is little to no information available about the insurance sector in relation to the research at hand, particularly when seen from the perspective of a developing country like Nigeria.
Therefore, it is anticipated that this study would present empirical data on the firm-specific factors influencing the financial performance of Nigeria's listed insurance firms.
In order to preserve their investment and lead it to the best and most viable investment that will return benefits in the future, the research will give investors on the Nigeria Stock Exchange with information on the firm features and financial performance.
The study would also be useful to management in identifying the signs of good performance so that they could take the required steps to enhance the performance of insurance firms and make wise decisions that will advance the organisation.
The government is curious about which businesses run well or failed to take the required precautions to prevent financial catastrophes in these businesses. Customers are more curious to discover whether insurance businesses can fulfil their duties based on their success indicators than anything else.
Business professionals are interested in the study's findings because they can give their clients expert advise. The purpose of this study is to help policymakers develop policies to enhance the industry.
The results of this study add to the body of finance literature by demonstrating the beneficial influence of business characteristics on the financial performance of listed insurance firms in Nigeria.
The findings may also give regulators and accounting professionals crucial information about the intricate relationships between the features of various sorts of enterprises and the financial performance of insurance companies.