Impact of underwriting risk on performance of listed insurance companies in Nigeria: The moderating Role of Company Size and Leverage
DOI:
https://doi.org/10.37134/firdaus.vol5.1.6.2025Keywords:
Underwriting Risk, Risk-Adjusted Return on Capital (RAROC), Nigerian Insurance Sector, Profitability, LeverageAbstract
The insurance sector plays a vital role in ensuring economic stability by offering protection against financial losses, facilitating risk-sharing, and fostering confidence among individuals and businesses. In Nigeria, while the industry contributes to economic resilience, it faces challenges such as economic volatility and regulatory shifts that exacerbate underwriting risk. Underwriting risk arises when premiums collected are insufficient to cover claims and associated costs, threatening an insurer’s solvency and profitability. This study examines the impact of underwriting risk on the adjusted Risk-Adjusted Return on Capital (RAROC) of listed Nigerian insurance companies. Adjusted RAROC provides a comprehensive assessment of risk-adjusted returns by incorporating both risk costs and capital, offering a clearer picture of financial resilience. The study employs descriptive analysis, revealing an average Total Premiums Earned (TPE) of ₦8.09 billion, with a median of ₦5.05 billion, indicating a skewed market dominated by a few large firms. Leverage shows considerable variability (Mean = 272.92, Std. Dev. = 1058.06), while the Claims Benefit Ratio (CBR) averages 59.65, suggesting operational efficiency. The average Adjusted RAROC of 42.14 shows profitability variations across companies. Using techniques such as the Generalized Method of Moments (GMM), Fixed Effects, and Random Effects, the study identifies dynamic, firm-specific factors influencing profitability. The findings highlight the crucial role of underwriting risk, company size, and leverage in shaping financial performance, suggesting policy recommendations aimed at enhancing stability and profitability in Nigeria's insurance sector.
Jel Classification Code - G22, G32, C33, G11, G21
Downloads
References
Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29–51.https://doi.org/10.1016/0304-4076(94)01642-D
Beattie, V., Goodacre, A., & Thomson, J. (2006). The impact of leverage on the risk profile of UK insurance companies. The British Accounting Review, 38(4), 481-502. https://doi.org/10.1016/j.bar.2006.04.001
Berger, A. N., & Humphrey, D. B. (1991). The dominance of inefficiencies over scale and product mix economies in banking. Journal of Monetary Economics, 28(1), 117-148. https://doi.org/10.1016/0304-3932(91)90036-K
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115-143. https://doi.org/10.1016/S0304-4076(98)00009-8
Cagle, J. G., & Harrington, S. E. (1995). Underwriting cycles in property-liability insurance: A re-examination of the evidence. Journal of Risk and Insurance, 62(1), 66-82. https://doi.org/10.2307/253708
Clarke, M., & Jennings, A. (2024). Financial leverage and profitability in emerging markets: Evidence from the insurance sector. Journal of Financial Economics, 72(1), 45–60. https://doi.org/10.1016/j.jfineco.2023.12.004
Cummins, J. D., & Nini, G. (2002). Optimal capital utilization in the insurance industry: A dynamic programming approach. Journal of Risk and Insurance, 69(4), 423-441. https://doi.org/10.1111/1539-6975.00029
Cummins, J. D., & Weiss, M. A. (2009). Analysing the performance of the insurance industry: A risk-adjusted return on capital approach. Journal of Insurance Regulation, 28(2), 1-29.
Dong, Y., Monaghan, J., & Wang, K. (2019). Risk-adjusted return on capital (RAROC): A review and empirical evidence from the insurance industry. Insurance: Mathematics and Economics, 84, 185-200. https://doi.org/10.1016/j.insmatheco.2018.09.005
Eze, E. E., & Okoye, L. U. (2013). The challenges of underwriting risk management in the Nigerian insurance industry. International Journal of Economics and Business Research, 6(2), 135-145. https://doi.org/10.1504/IJEBR.2013.052968
Iqbal, Z., & Rehman, M. U. (2014). Firm size and performance: Evidence from insurance companies in Pakistan. International Journal of Academic Research in Accounting, Finance and Management Sciences, 4(2), 1-9. https://doi.org/10.6007/IJARAFMS/v4-i2/908
Kaitibi, D. M., Ganawah, K., Yokie, T., Jalloh, M., & Koroma, F. (2018). The impact of capital structure on profitability in West African insurance companies. Journal of African Business, 19(4), 453–475. https://doi.org/10.1080/15228916.2018.1518184
NAICOM. (2022). National Insurance Commission annual report. Retrieved from [website link]
Patel, M. H., & Singh, R. (2022). Analysing the determinants of profitability in the Indian insurance sector: A dynamic panel approach. International Journal of Financial Studies, 10(2), 112–128. https://doi.org/10.3390/ijfs10020012
Pottier, S. W., & Sommer, D. W. (2002). The effectiveness of state insurance regulation: An empirical analysis. The Journal of Risk and Insurance, 69(1), 59-81. https://doi.org/10.1111/1539-6975.00003
Salako, S. B., & Adekunle, A. A. (2020). Risk management practices and performance of insurance companies in Nigeria: An empirical study. Journal of Financial Risk Management, 9(3), 314-327. https://doi.org/10.4236/jfrm.2020.93019
Schroeck, G. (2002). Risk management and value: A quantitative analysis. Journal of Risk Management in Financial Institutions, 5(4), 433-440. https://doi.org/10.1057/palgrave.jrm.8230055
Shimpi, P. (2001). Financial leverage and performance in property-casualty insurance. The Journal f Risk and Insurance, 68(2), 225-243. https://doi.org/10.1111/1539-6975.00008
Smith, J. P., Johnson, D., & Brown, H. T. (2023). Underwriting efficiency and profitability in insurance companies: A cross-country analysis. Journal of Insurance Regulation, 42(1), 87–102. https://doi.org/10.5555/jinsreg.2023.0012
Downloads
Published
Issue
Section
License
Copyright (c) 2025 Emmanuel Oluwafemi Adebayo, James Ayanwale Obadeyi, Taofeek Osindero Agbatogun, Oluwasegun Temitayo Odunsi
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
