The Impact of Insurance-Specific Risk on Firm Performance of Listed Insurance Companies in Sri Lanka

Abstract

Insurance-specific risk includes challenges and uncertainties specific to the operations and functioning of insurance companies. The study therefore investigates the effect of these insurance-specific risks on the profitability of listed insurance companies in Sri Lanka over 11 years (2012-2022) with a sample size of 27 firms. Three variables, such as reinsurance, technical provisions, and underwriting risks, have been used to measure insurance-specific risk as independent variables. The Return on Equity (ROE) and Re turn on Assets (ROA) were used to measure firm performance as the dependent variable. The study is based on the Ex-Post Facto Research Design, which uses data already col lected. The study used secondary data from their annual reports. The results of the fixed effect regression model showed that the technical provision risk and reinsurance risks had a negative and significant impact on ROE, while the underwriting risk had a nega tive and insignificant impact on ROE. The study concludes that the best model for the evaluation of Insurance firm performance is ROE rather than ROA. Due to the argu ments, ROE and ROA are both considered performance indicators where ROA is not significant with variables. The study recommends that insurance companies in Sri Lanka should make sufficient provision for outstanding claims by conducting an adequate as sessment of their liabilities and also taking into account experience to develop a com prehensive procedure for effectively monitoring and controlling their outstanding claims. Further, listed insurance companies in Sri Lanka will consider their reinsurance policies and risk retention ratios and listed insurance companies need to enhance their ability to cover most incurred claims by themselves.