Determinants of Insurance Companies Profitability in Ethiopia

Suheyli Reshid

A Thesis Submitted to

The Department of Accounting and Finance

Presented in Partial Fulfillment of the Requirements for the Degree of

Master of Science (Accounting and Finance)

Addis Ababa University

Addis Ababa, Ethiopia

June, 2015
 Addis Ababa University

School of Graduate Studies

This is to certify that the thesis prepared by Suheyli Reshid, entitled: Determinants of

Insurance Companies Profitability in Ethiopia and submitted in partial fulfillment of

the requirements for the Degree of Master of Science (Accounting and Finance)

compiles with the regulations of the University and meets the accepted standards with

respect to originality and quality.

Signed by the Examining Committee:

Advisor Dr. Abebaw Kassie Signature_______________ Date______________

Examiner Dr. Abebe Yitayew Signature________________ Date_____________

Examiner Dr. Arega Seyoum Signature________________ Date_____________

_________________________________________________________

Chair of Department of Graduate Program Coordinator

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 Abstract
Determinants of Insurance Companies profitability in Ethiopia
Active financial analysis has become one of the important tools that actuaries use to

model the underwriting and investment operations of insurance companies. The first

step in carrying out the analysis is to investigate the most important factors affecting

company profitability. This study seeks to find the determinants of insurance

companies’ profitability in Ethiopia. In order to achieve this objective, the study used

mixed research approach. Panel data covering eleven-year period from 2004 – 2014

are analyzed for nine insurance companies. Also in-depth interview is conducted with

company managers. The findings of the study showed that underwriting risk,

technical provision and solvency ratio have statistically significant and negative

relationship with insurers’ profitability. However, reinsurance dependence has

negative but insignificant relationship with profitability. On the other hand, variables

like liquidity, company size and premium growth have a positive and statistically

significant relationship with insurers’ profitability. In addition, economic growth rate

has significant influence on profitability whereas inflation has insignificant influence

on insurers’ profitability. The study provides evidence that underwriting risk,

technical provision and liquidity are the most important factors that affect

profitability of insurance companies in Ethiopia. So, the study recommends that

Ethiopian insurance companies’ managers should give consideration to underwriting

risk, technical provision and liquidity to increases their profitability significantly.

Keywords: profitability, determinants, insurance

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 Acknowledgements
First of all, I am heartily thankful to my advisor, Dr. Abebaw Kassie, whose

encouragement, guidance, and support from the initial to the final level enabled me

to develop an understanding of the subject and complete the thesis. Secondly, I would

like to extend grateful acknowledgement to the National Bank of Ethiopia and

insurance companies for their understanding and for providing me with all the

necessary information and documents required to carry out this study. Thirdly,

financial support for my studies by the NBE and Addis Ababa University is gratefully

acknowledged. Lastly I am also indebted for my family, friends and to all those who

helped me for the accomplishment of my study.

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 Table of Contents

Abstract…………………………………………………………………………….ii

Acknowledgements……………………………………………………………...iii

List of figures……………………………………………………………………...vi

List of tables ……………………………………………………………………...vii

List of Acronyms………………………………………………………………...viii

Chapter one: Introduction………………………………………………………..1

1.1. Overview of the Ethiopian Insurance Industry………………………...3

1.2. Statement of the problem…………………………………………………4

1.3. Objective of the study………………………………………………………..6

1.4 Scope and limitation of the study……………………………………………..7

1.5. Significance of the study………………………………………………..........8

1.6. Organization of the paper ……………………………………………………9

Chapter two: Literature review…………………………………………………..10

2.1. Theoretical review…………………………………………………………..10

2.1.1. Definition and Role of Insurance……………………………………...10

2.1.2. The Concept of Insurance Profitability………………………………..12

2.1.3. Theories of insurer’s profitability……………………………………..13

2.2. Review of empirical studies………………………………………………...17

2.3. Research Hypotheses……………………………………………………….23

2.3.1. Specific determinants (internal factors)……………………………….23

2.3.2. Macroeconomics variables (External Factor)…………………………30

2.4. Summary of the literature review & Conceptual Framework………………31

2.4.1. Summary of the literature review……………………………………...31

2.4.2. Conceptual Framework………………………………………………..32

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Chapter three: Research Design & Methodology ………………………………34

3.1. Research approaches………………………………………………………..34

3.2. Research methods adopted …………………………………………………35

3.2.1: Quantitative aspect of research methods ……………………………...35

3.2.2. Qualitative aspect of research methods ……………………………….38

3.2.3 Data analysis techniques and model specification……………………..38

3.3. Variable definition………………………………………………………….43

3.3.1. Dependent variable……………………………………………………43

3.3.2. Independent variables…………………………………………………44

3.4. Conclusions & relationships between hypotheses & data source…………..47

Chapter four: Results and Discussions…………………………………………..55

4.1 Model Specification Test…………………………………………….......49

4.1.1 Tests for the Classical Linear Regression Model………………………50

4.2 Descriptive statistics……………………………………………………...55

4.2.1 Correlation Analysis…………………………………………………...58

4.3 Regression results………………………………………………………..60

4.4 Summary of main findings……………………………………………….71

Chapter five: Conclusions and Recommendations……………………………...72

5.1. Conclusions…………………………………………………………………72

5.2 Recommendations…………………………………………………………...74

References

Appendices

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 List of figures
Figure 2.1: Conceptual framework of the study…………………………………………33

Figure 3.1: Rejection and Non-Rejection Regions for DW Test.......................................42

Figure 4.1: Normality Test Result.....................................................................................53

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 List of tables
Table 3.1 Description of the variables …………………………………………………..46

Table 3.2 Link between research hypotheses, variables and the data sources…………..47
Table 4.1 Heteroscedasticity Test White………………………………………………...50

Table 4.2 Breusch-Godfrey Serial Correlation LM Test………………………………...52

Table 4.3 Correlation Matrix between independent variables…………………………...54

Table 4.4 Descriptive Statistics of the Variables………………………………………...55

Table 4.5 Correlation matrix……………………………………………………………..59

Table 4.6 Regression Results-FEM ……………………………………………………..61

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List of Acronyms/ Abbreviations
CIEP Claims Incurred To Earned Premiums

CLRM Classical Linear Regression Model

CACL Current Asset to Current Liability

COE Claims Outstanding To Equity

CS Company Size

DW Dublin Watson

EIC Ethiopian Insurance Corporation

FEM Fixed Effect Model

GDP Gross Domestic Product

HO Null Hypothesis

INF Inflation

LIQ Liquidity

MOFED Ministry of Finance and Economic Development

NANPW Net Asset to Net Written Premium

NBE National Bank of Ethiopia

OLS Ordinary List Square

PCTA Premium Ceded To Total Asset

PG Premium Growth

REM Random Effect Model

ROA Return on Asset

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 CHAPTER ONE
1. Introduction
In modern society, financial industry is growing rapidly and gaining importance in the

global financial development. The financial system comprises of financial institutions,

financial instruments and financial markets that provide an effective payment, credit

system and risk transfer and thereby facilitate channelizing of funds from savers to the

investors of the economy. According to Frederic & Eakins (2009), financial institutions

not only affect our everyday life but also involve huge flows of funds, which in turn

affect business profits, the production of goods and services, and even the economic well-

being of countries. The financial institutions enable an economy to be more productive as

it allows investors with few resources to use savings from those with few prospects of

investing. Research surveyed by Naved (2011), reveals that the efficiency of financial

intermediation and transfer of risk can affect economic growth while at the same time

institutional insolvencies can result in systemic crises which have unfavorable

consequences for the economy as a whole. Hence, the important role that financial

institutions such as insurance companies remain in financing and insuring economic

activity and contribute to the stability of the financial system in particular and the

stability of the economy of concerned country in general is part of immune and repair

system of the economy. The insurance sector plays important role in the financial

services industry in almost developed and developing countries, contributing to economic

growth, efficient resource allocation, reduction of transaction costs, creation of liquidity,

facilitation of economics of scale in investment, and spread of financial losses (Haiss and

Sumegi, 2008).

Every firm is most concerned with its profitability. Profitability indicates how well

management of an enterprise generates earnings by using the resources at its disposal. In

the other words the ability to earn profit e.i. profitability, it is composed of two words

profit and ability. The word profit represents the absolute figure of profit but an absolute
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figure alone does not give an exact ideas of the adequacy or otherwise of increase or

change in performance as shown in the financial statement of the enterprise. The word

‘ability’ reflects the power of an enterprise to earn profits, it is called earning

performance.

According to Hifza Malik, (2011), profitability is one of the most important objectives of

financial management since one goal of financial management is to maximize the

owners’ wealth, and profitability is very important determinant of performance. A

business that is not profitable cannot survive. Conversely, a business that is highly

profitable has the ability to reward its owners with a large return on their investment.

Hence, the ultimate goal of a business entity is to earn profit in order to make sure the

sustainability of the business in prevailing market conditions. Pandey (1980) defined the

profitability as the ability of a business, whereas it interprets the term profit in relation to

other elements. A financial benefit is realized when the amount of revenue gained from a

business activity exceeds the expenses, costs and taxes needed to sustain the activity.

Although there are numerous approaches, generally, insurers’ profitability is estimated

through the examination of premium and investment income and of the underwriting

results or of the overall operating performance.

There has been a growing number of studies recently that test for measures and

determinants of firm profitability. Financial industry’s profitability has attracted scholarly

attention in recent studies due to its importance in performance measurement. However,

in the context of the insurance sector particularly in developing countries or emerging

markets like Ethiopia it has received little attention.

To this end, this study is examined the determinants of insurance companies’ profitability

in Ethiopia. This will not only add to existing literature but also it will serve as

identifying the determinants insurance companies’ profitability is useful for investors,

researchers, financial analysts and supervisory authorities.

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1.1. Overview of the Ethiopian Insurance Industry

The Ethiopian insurance industry does not have a long history of development despite the

country’s long history of civilization. Modern forms of insurance service which were

introduced in Ethiopia by Europeans, trace their origin as far back as 1905 when the bank

of Abyssinia began to transact fire and marine insurance as an agent of a foreign

insurance company. The number of insurance companies increased significantly and

reached 33 in 1960. At that time insurance business like any business undertaking was

classified as trade and was administered by the provisions of the commercial code. This

was the only legislation in force in respect of insurance except the maritime code of

Ethiopia that was issued to govern the operations of maritime business and the related

marine insurance. The law required an insurer to be a domestic company whose share

capital (fully subscribed) to be not less than Birr 400,000 for a general insurance business

and Birr 600,000 in the case of long-term insurance business and Birr one million to do

both long-term & general insurance business. Non-Ethiopian nationals were not barred

from participating in insurance business. However, the proclamation defined domestic

company as a share company having its head office in Ethiopia and in the case of a

company transacting a general insurance business at least 51% and in the case of a

company transacting life insurance business, at least 30% of the paid-up capital must be

held by Ethiopian national companies.

Four years after the enactment of the proclamation, the military government that came to

power in 1974 put an end to all private entrepreneurship. Then all insurance companies

operating were nationalized and from January 1, 1975 onwards the government took over

the ownership and control of these companies & merged them into a single unit called

Ethiopian Insurance Corporation. The insurance sector during the command economic

system was characterized by monopoly of the sector by the government, lack of

dynamism and innovation, volatile premium growth rates and reliance on a couple of

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classes of insurance business (motor and marine) for much of gross premium income.

The nationalization of private insurance companies, the restrictions imposed on private

business ventures, and management of the insurance sector had significant adverse

impact on the development and growth of Ethiopian insurance industry (Hailu, 2007).

However, following the change in the political environment in 1991, the proclamation for

the licensing and supervision of insurance business No. 86/1994 heralded the beginning

of a new era. Immediately after the enactment of the proclamation private insurance

companies began to flourish. According to the directive of ISB/34/2014, any insurance

company required to be a domestic company whose share capital (fully subscribed) to be

not less than Ethiopian Birr 60m for a general insurance business and Ethiopian Birr 15m

in the case of long term (life) insurance business and Ethiopian Birr 75m to do both long-

term & general insurance business.

Today the total number of insurance companies, branches and their capital increased

significantly. At 2014, there are seventeen insurance companies in operation. Ethiopian

Insurance Corporation (EIC) is state owned while the rest are private. Number of branch

reached 332 in 2014.The gross premium of sector is 5 billion in 2014, which is increasing

8% from previous year total premium of the sector i.e. 4.6billion (NBE, annual report

2014).

1.2. Statement of the problem

Insurance plays a significant role in a country's economic growth and offers financial

protection to an individual or firm against monetary losses suffered from unforeseen

circumstances (Kihara, 2012).This is because the world is characterized by risks and

uncertainties and insurance has evolved as a way of providing security against the risks

and uncertainties. In this context, it is crucial to know what drives insurers’ profitability.

Profitability is propulsive element of any investments in different projects and relative

measure of success for a business; it is the efficiency of a company or industry to

generate earnings.

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Due to the unique accounting system used by insurance companies, profitability of the

industry has always been difficult to measure as compared with other financial

institutions or corporations. Different scholars using empirical investigation on the

determinants of insurers’ profitability are resulted in different conclusions. For insurers’,

profitability is affected by a host of factors including actual mortality experience,

investment earning, capital gains or losses, the scale of policyholder dividends, and

federal and state taxes (Wright 1992). According to Swiss (2008), insurers’ profitability is

determined first by underwriting performance (losses and expenses, which are affected by

product pricing, risk selection, claims management, and marketing and administrative

expenses); and second, by investment performance, which is a function of asset allocation

and asset management as well as asset leverage. Khan (2013) revealed that leverage, size,

earnings volatility and age of the firm are significant determinants of profitability while

growth opportunities and liquidity are not significant determinants of profitability. A

study of Ahmed (2008) examined the determinants of insurers’ profitability indicated that

size, volume of capital, leverage & loss ratio are significant determinants of profitability.

Other studies conducted in the area of insurers’ profitability (Curak, 2012; Shiu, 2014;

Maria and Ghiorghe, 2014) verified that there is a direct association between profitability

of insurance companies and it’s both internal and external determinants. Even though, all

these and other researchers conducted study on this area, the determinants of profitability

have been debated for many years and still unsolved issues in the corporate finance

literature.

Coming back to the case of the Ethiopian insurance sector, while a large body of research

on financial institutions profitability has been undertaken in the banking industry in

Ethiopia, to the researcher's best knowledge, the studies conducted in the areas of

insurance are few in number and did not give such an emphasis on the factors considered

to be determinants of profitability of insurance industry in Ethiopia. For instance, (Abate,

2012) studied factors affecting insurance companies’ profitability in Ethiopia. He focused

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only on internal factors and have not considered external factors like macroeconomic

(gross domestic products, Inflation) and basic internal factors like underwriting risk,

operational, technical reserve, reinsurance risks and solvency ratio that are potentially

accountable for determinant of insurers’ profitability (Lee 2014) & (Shiu 2014).

Therefore, the factors which affect the profitability of insurance companies have not been

adequately investigated. Thus, current paper extended prior research and contributes to

the literature on the determinants of profitability in a number of ways. First, a

comprehensive research on profitability determinants using both company specific

factors and macroeconomic variables was not conducted in the Ethiopian insurance

industry. Second, insurance is a risky business and basic risk factors for insurance such as

underwriting risk, operational, technical reserve, reinsurance risks and solvency ratio

have not used in previous studies but, these variables are the most important factors to

determaine the profitability of the insurers. Third, prior studies mostly adopted a

quantitative approach only without considering a lot of limitations of it which resulted

fail to perform their conclusions.

Therefore, this study seeks to fill the above explained gap by providing information about

the internal and external factors that affects profitability by examining the untouched one,

and replicating the existing in the Ethiopia by using all insurance company operating in

the country that have 11 years data. To this end, the study provided insights into the

profitability determinants of insurance companies in Ethiopian.

1.3. Objective of the study

The core objective to conduct this study is to investigate the most important determinants

of profitability in the insurance sector of Ethiopia.

Based on the above general objective, the study has the following specific objectives:

1) To identify the internal factors that determine the insurance companies

profitability in Ethiopia.

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 2) To identify the macroeconomic factors on insurance companies profitability in

Ethiopia.

3) To rank the determinants according to their degree of influence on insurance

companies’ profitability.

1.4 Scope and limitation of the study

The study was limited to examination of the internal and external factors affecting

insurers’ profitability of all insurance companies registered by the NBE and that have at

least eleven years data i.e., 2004-2014. The period of 2004 –2014 was selected because,

in Ethiopia, large numbers of private insurance established following 1994 financial

liberalization and the period has significant structural change in profitability in Ethiopian

insurance industry.In addition, eleven years is assumed to be relevant because five years

and above is the recommended length of data to use in most finance literatures. This is

the reason to start the investigation of this research from 2004 until 2014 year. Further, in

order to get an accurate picture of insurers’ profitability determinants, researcher believed

that it is important to consider eleven years, as any insurance company can have one

unprofitable year, which is compensated by a certain form of profitability achieved over

several years. However, insurance companies operating for less than eleven years

excluded in this study because they do not have full data for the study period. Even if the

profitability is influenced by variables such as industry dynamics and competitive market

position, the perspective of the study confined merely on company specific factors like

underwriting risk, reinsurance dependence, solvency ratio or capital adequacy, technical

provision risk, liquidity, company size and premium growth and macroeconomic

variables such as growth of gross domestic product and inflation that are potentially

liable for determinant of insurers profitability based on the selected previous empirical

works. Due to the unique accounting system used by life assurance business, the

secondary data collection from income statement, balance sheet and revenue account was

limited to only general insurance business, because income statement of life assurance

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business is not prepared at the end of each year. It may be prepared one time in three

years or five years due to difficulty to prepare income statement of life assurance

business and it needs an actuary which is high cost and also not all insurance company in

Ethiopia gives life assurance services.

1.5. The significance of the study

The study importance emerges from the fact that insurance sector plays a significant role

in enhancing the country economy, and providing critical services for people in Ethiopia,

the current study was empirically implemented a comprehensive analytical framework of

profitability in the case of Ethiopian insurance sector.

This study, attempted to assess the determinants of insurance profitability in Ethiopia,

provides evidence on what effect the firm-specific factors and the macroeconomic factors

have on the insurance company’s profitability in Ethiopia. Analyzing and understanding

the impact of different factors on the insurance profitability in Ethiopia is a major

stepping result to enlighten what should be done if profitability is to be achieved.

In Ethiopia, no more researches have been investigated on determinants of Ethiopian

insurance companies' profitability, so the current study is a base for other studies in the

same field, and it will help in adding value to this subject. The current study was also

provided a comprehensive framework and literature about firms’ profitability, and the

factors influencing it in the case of Ethiopian insurance companies.

The findings of the study also benefits to insurance companies, regulatory authorities,

managers and others interested in the area the opportunity to gain deep knowledge about

the relationship of internal and external factors and profitability. This in turn helps them

knowing factors affecting profitability and thereby takes appropriate actions to increase

profitability of insurance industry. It is hoped that the outcome of this study also provide

an insight of the insurance industry to other researchers.

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1.6. Organization of the paper
The research paper was organized in to five chapters. Chapter one is introduction where

overview of the insurance industry in Ethiopia, statement of the problem, objectives of

the study, scope and limitation, and significance of the study presented. Chapter two is

review of literature in which theories, empirical evidence and conceptual frame work are

identified. Chapter three is research methodology. Chapter four is results and discussion

in which the finding results are interpreted. Finally, Chapter five brings to an end the

research with conclusion and possible recommendation.

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 CHAPTER TWO
2. Review of literature
Several factors influence insurance profitability, recognizing and understanding the

underlying concepts and definitions of the insurance sector is essential in order to vouch

results and analyses. Hence, chapter two serves as background for this study by

describing concepts of financial intermediation and factors that could influence insurance

profitability. Subsequent chapters will build on concepts and definitions described here.

In light of the above, the purpose of this chapter is to review the literature in the area of

determinants of insurance profitability. This chapter therefore covers four broad topics

that are related to determinants of insurance profitability. Section 2.1 about definition &

role of insurance, concept of its profitability and theory about insurance profitability. This

is followed by a review of relevant empirical studies on determinants of insurance

profitability in section 2.2. Section 2.3 is about research hypothesis. Finally,summary and

conceptual frame work on the literature review presented in section 2.4.

2.1. Theoretical review

This section reviews the basic theoretical issues related to insurance and insurer’s

profitability and its determinants. Hence, section 2.1.1 presents the role of insurance in

the economy. Then, section 2.1.2 presents concepts of insurers’ profitability. Finally,

section 2.1.3 presents the theories related to insurer’s profitability.

2.1.1. Definition and Role of Insurance

Insurance is a contract in which the insured transfers risk of potential loss to the insurer

who promises to compensate the former upon suffering loss. The insured then pays an

agreed fee called a premium in consideration for this promise. The promisor is called the

insurer and the promisee is called the insured (Lowe, 1999). Insurance premium is the

monetary consideration paid by the insured to the insurer for the cover granted by the

insurance policy. The Insurer takes on a number of clients (Insured) who pay small

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premiums that form an aggregate fund called the premium fund (Norman, 2000). The

likelihood of an event or loss may be mathematically calculated or it may be based on the

statistical results of past experience in order to determine the amount of premiums that

would be required to accumulate a common fund or pool, to meet the losses upon their

arising (Grose, 1992).

The term insurance defined by referring two important schools of thoughts: i) transfer

school and ii) pooling school. According to transfer school, “insurance is a device for the

reduction of uncertainty of one party, called the insured, through the transfer of particular

risks to another party ; called the insured, who offers a restoration, at least in part of

economic losses suffered by the insured” (Irving, 1956). On the other hand, according to

pooling school “the essence of insurance lies in the elimination of uncertainty or risk of

loss for the individual through the combination of large number of similarly exposed

individuals” (Alfred, 1935), cited in (Tanveer 2010). Insurance operates on the principle

of pooling risks where the people contribute to a common fund in form of premiums and

where the lucky ones who do not suffer loss help the unlucky ones who suffer loss during

a defined insurance period ( Irukwu 1994).

It seems Insurance not only facilitates economic transactions through risk transfer and

indemnification but it also promotes financial intermediation (Ward and Zurbruegg,

2000). More specifically, insurance can have effects such as promote financial stability,

mobilize savings, facilitate trade and commerce, enable risk to be managed more

efficiently, encourage loss mitigation, foster efficient capital allocation and also can be a

substitute for and complement government security programs (Skipper, 2001).

Insurance provides economic protection from identified risks occurring or discovered

within a specified period. Insurance is a unique product in that the ultimate cost is often

unknown until long after the coverage period, while the revenue premium payments by

policyholders are received before or during the coverage period.

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Insurance is an important growing part of the financial sector in virtually all the

developed and developing countries (Das et al., 2003). A resilient and well regulated

insurance industry can significantly contribute to economic growth and efficient resource

allocation through transfer of risk and mobilization of savings. In addition, it can enhance

financial system efficiency by reducing transaction costs, creating liquidity and

facilitating economies of scale in investment (Bodla et al., 2003).

Insurance business is usually divided into two main classes namely: a) General insurance

business - This is a contract between an insurer and the insured where by the insurer

undertakes to indemnify the assured against losses, which may result from the occurrence

of specified events within specified periods. General insurance business can be sub-

divided into: motor, fire, accident, oil and gas, contractors’ all risks and engineering

risks; marine and credit insurance, bond and surety ship etc. This is a contract between

the assurer and the assured whereby the assurer undertakes to pay benefits to the policy

holder on the attainment of a specified event. b) Life assurance business: comprises

individual life business, group life insurance and pension business, health insurance

business and annuities.

2.1.2. The Concept of Insurance Profitability

Profitability consists of two words profit and ability. It is necessary to differentiate

between the term Profit and Profitability at this point. The term Profit, from accounting

point of view, is arrived at by deducting from total revenue of an enterprise all amount

expended in earning that income while the term Profitability is defined as the ability of a

given investment to earn a return from its use.

Profitability is one of the most important objectives of financial management because one

goal of financial management is to maximize the owner`s wealth and profitability which

in turn indicates better financial performance. According to Hifza Malik (2011) insurance

plays a crucial role in fostering commercial and infrastructural businesses. From the latter

perspective, it promotes financial and social stability, mobilizes and channels savings,

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supports trade, commerce and entrepreneurial activity and improves the quality of the

lives of individuals and the overall wellbeing in a country.

Renbao Chen et.al (2004) stated in his investigation that “higher profits provide both the

means (greater availability of finance from retained profits or from the capital market)

and the incentive (a high rate of return) for new investment”. Therefore, we can

understand from the above explanation that insurance companies have double

responsibility: in one way they are required to be profitable so as to have high rate of

return for new investment. On the other hand, insurance companies need to be profitable

in order to be solvent enough so as to make other industries in the economy as they were

before even after risk occurred.

Profitability is a measure of evaluating the overall efficiency of the business. The best

possible course for evaluation of business efficiency may be input-output analysis.

Profitability can be measured by relating output as a proportion of input or matching it

with the results of other firms of the same industry or results attained in the different

periods of operations. Profitability of a firm can be evaluated by comparing the amount

of capital employed i.e. the input with income earned i.e. the output. This is popularly

known as return on investment or return on capital employed.Profitable means that

insurance companies are earning more revenues than being disbursed as expenses.

2.1.3. Theories of insurer’s profitability

There is no general theory that provides a unifying framework for the study determinant

of the insurer’s profitability. Because of this, this study tries to view some theories which

are nearer to the concept of insurance profitability and its determinants.

Modern Portfolio Theory

Modern portfolio theory was developed by Harry Markowitz in 1952. The theory

suggests that investors can improve the performance of their portfolios by allocating their

investments into different classes of financial securities and industrial sectors that are not

expected to react similarly if new information emerges. It assists in selecting the most

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efficient investments by analyzing various possible portfolios of the given securities. By

choosing securities that do not move exactly together, MPT model shows investors how

to reduce their risk. It is based on expected returns (mean) and the standard deviation

(variance) of the various portfolios. MPT attempts to maximize expected portfolio returns

for a given amount of portfolio risk, or equivalently minimize risk for a given level of

return by carefully choosing the proportions of various assets. It models a portfolio as a

weighted combination of assets, so that the return of a portfolio is the weighted

combination of the assets return.

Since insurance firms are investments by themselves its standard practice for them to

invest in a diversified portfolio to minimize risk and harness the returns of the various

investment options on offer. When choosing a portfolio investors should maximize the

discounted (or capitalized) value of future returns. Since the future is not known with

certainty, it must be expected or anticipated returns which are discounted. Through

combining different assets whose returns are not perfectly positively correlated, MPT

seeks to reduce the total variance of the portfolio return. MPT also assumes that investors

are rational and the markets are efficient.

MPT emphasizes maximizing returns while minimizing risks, while giving recognition to

the existence of systematic and non-systematic risks. These concepts are usually referred

to when discussing financial investments. Insurance being influenced by risks and returns

as well, also finds meaning through MPT. Diversification is the solution against being a

victim of concentration risk. Over-reliance on similar assets’ profitability and hopes that

contingent liabilities do not become actual obligations are risks that can wipe-out risk-

portfolios in an instant. Non-systematic risks and alphas are the main items that give

underwriting skills meaning. Non-systematic risks can be eliminated by widening the

coverage of insurance over more assureds. In doing so, diversification is achieved.

Alphas, on the other hand, represent the surprise return or inherent profitability of an

asset and in converting this concept onto the insurance industry, this is perhaps the

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inherent characteristics of an insured property and how the hazards and other

circumstances are minimized, wherein it is more probable that the premiums paid by the

assured will eventually be kept at the end of the insurance policy coverage period. While

financial assets are capable of delivering abnormal returns, insurable risks are also able to

remain abnormally intact and avoid transforming into real obligations for the insurance

company. The fewer obligations an insurance company has, the more the profit they

have.

Arbitrage Pricing Theory

Arbitrage Pricing Theory (APT) was proposed by Stephen Ross in 1976. APT agrees that

though many different specific forces can influence the return of any individual firm,

these particular effects tend to cancel out in large and well diversified portfolio. This is

the principle of diversification and it has an influence in the field of insurance. An

insurance company has no way of knowing whether any particular individual will

become sick or will be involved in an accident, but the company is able to accurately

predict its losses on a large pool of such risk. However, an insurance company is not

entirely free of risk simply because it insures a large number of individuals. Natural

disaster or changes in health care can have major influences on insurance losses by

simultaneously affecting many claimants.

Cummins (1994) states that insurance companies are corporations and insurance policies

can be interpreted as specific types of financial instrument or contingent claim thus it is

natural to apply financial models to insurance pricing. The models are designed to

estimate the insurance prices that would pertain in a competitive market. Charging a price

at least as high as the competitive price (reservation price) increases the market value of

the company. Charging a lower price would reduce the company’s market value. Thus,

financial models and financial prices are among the key items of information that insurers

should have at their disposal when making financial decisions about tariff schedules,

reinsurance contract terms, etc.

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Black Swan Theory
The concept of black swan events was popularized by Nassim Nicholas Taleb in 2008. It

states that the world is severely affected by events that are rare and difficult to predict,

events of low probability but high impact. Silberzath (2013), states that a black swan does

not create a new category of events, but is simply the occurrence of a known category,

the probability of which was under estimated. They occur not because their probability is

inherently incalculable, but because the model used to calculate them is wrong, or

because though the model was correct, the possibility of occurrence was dismissed in

practice. Their implications for markets and investment are compelling and need to be

taken seriously. The Black Swan is an essential concept for understanding how we make

mistakes in estimating the probabilities of different events belonging to a known

universe.

Davidson (2010) states that since probabilistic risks can be quantified by human

computing power, the future is insurable against risky probabilistic occurrences. The cost

of such insurance, or self-insurance, will take into account all entrepreneurial marginal

cost calculations (or by contingency contracts in a complete general equilibrium system).

This insurance process permits entrepreneurs to make profit maximizing rational

production and investment choices even in the short run when dealing with risky known

processes. It is just that the short run does not provide a sufficiently large sample, for

enough black swans to appear to calculate the probabilistic risk of encountering a black

swan. In the long run, those entrepreneurs who in their price marginal cost calculations

include these insurance costs as if they knew the objective probabilities implicit in

Knight's unchanging reality will make the efficient decision and will, in Knight's system,

earn profit. The greatest risks are never the ones you can see and measure, but the ones

you can’t see and therefore can never measure. The ones that seem so far outside the

boundary of normal probability that you can’t imagine they could happen in your lifetime

even though, of course, they do happen, more often than you care to realize. What may be

16 | P a g e
a black swan to society at large may have limited insurance impact; likewise, some

events that cause catastrophic losses may not seem extreme from other perspectives.

Nobody wants to de-risk, in the sense that they want to actually take some money off the

table. It’s all about pricing and quantifying risk, and of course hedging against it.

Demand for protection against so-called tail risks is increasing as investors react to black

swan events. An investor or a firm does not have to try to be too smart in trying to

forecast what is going to happen and which hedge is going to perform better what they

need to do is accumulate cheap protection. Insurance firms offer this cheap protection

where by large losses can be hedged against by paying small amounts known as

premiums. By having such products, insurance firms accumulate premiums in a pool,

since the occurrence of these events is minimal, they may end up paying none thus better

financial performance.

2.2. Determinants of insurance profitability: An empirical Review

The disparity of profit among insurance companies over the years in a given country

would result to suggest that internal factors or firm specific factors and macroeconomic

factors play a crucial role in influencing their profitability. It is therefore imperative to

identify what are these factors as it can help insurance companies to take action on what

will increase their profitability and investors to forecast the profitability of insurance

companies in Ethiopia. To do so, it is better to see what factors were considered in

previous times by different individuals in different countries.

Rudolf (2001), in his paper, examined the key factors and latest trends determining

profitability in the major non-life insurance markets. The study focused on the non-life

insurance markets of the group of seven countries (G7) mainly for the period 1996 to

2000. To analyse the profitability, investment results and underwriting results were

compared between countries and across lines of business and to analyse the drivers of

profitability, return on equity was decomposed into its main components namely

underwriting results and investment income. The results indicated that only Germany and

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Japan did not have negative underwriting results and return on equity was high in UK,

moderate in Canada and US, and low in France and Germany. The study found that

underwriting result and investment yield are negatively correlated. The research

suggested that due to uncertain prospects for investment results, the insurers must focus

on underwriting results to achieve greater profitability.

Shiu (2004) analyzed the determinants of the performance of the UK general insurance

companies, over the period 1986–1999, by using three key indicators: investment yield,

percentage change in shareholders funds and return on shareholders funds. Based on a

panel data set, the author empirically tested 12 explanatory variables and showed that the

performance of insurers have a positive correlation with the interest rate, return on equity,

solvency margin and liquidity, and a negative correlation with inflation and reinsurance

dependence.

Greene (2004) argued that the profitability of insurance is normally expressed in net

premium earned, profitability from underwriting activities, annual turnover, return on

investment, return on equity. These measures could be classified as profit performance

measures and investment performance measures.

Hoyt and Powell (2006), in their research paper, analysed the financial performance of

medical liability insurer by using two appropriate measures, namely, the economic

combined ratio and the return on equity. The period for the study was from 1996 to 2004.

Based on ECR, medical liability insurers, as a group reported modest profitability in only

three years (1996, 1997 and 2004). In contrast, these insurers sustained losses in six

consecutive years from 1998 to 2003. The average profit ratio (return on net premiums

earned) during the period 1996 to 2004 was negative thirteen per cent. The study found

that there was no evidence that medical liability insurers had been earning excessive

returns or that they were over-capitalized. The research concluded that there was no

evidence that medical malpractice insurance was overpriced.

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Holzheu (2006), in his research paper, measured the underwriting profitability of

insurance markets. The study used economic combined ratio as alternative key

performance indicator instead of conventionally published combined ratio. It reflects

underwriting profitability more accurately. The study focused on the underwriting

profitability of six major non-life markets, the US, the UK, Germany, Japan, France and

Canada from 1994 to 2004. The results indicated the picture for the business year results

for Japan, Canada, France, Germany and the UK were broadly consistent with the US

results. The results for the years 1994 to 1997 and 2002 to 2004 were profitable, though

often only moderately. The period from 1998 to 2001 exhibited dismal underwriting

results. Substantial improvements in underwriting results from 2001 to 2003 restored

profitability to the level of the 1994 to 1997 period. The study further pointed out that the

ten year average underwriting margins before taxes were positive in all countries

implying a positive contribution to profits from the insurance activities. However, the

contribution was only about one- two per cent in the US and Japan, two-three per cent in

France, five per cent in Canada and the UK, and six per cent in Germany. The study

found that these positive results were necessary but not a sufficient condition for creating

shareholder value. Profits must also cover tax and the insurers' capital cost. During the

period 1994 to 2004, it was difficult for the industry to earn its underwriting cost of

capital.

Hamdan (2008) examined determinants of insurance company’s profitability in UAE.

The study used secondary data for the period of 2004-2007. The study revealed that there

is no relationship between profitability and age of the company and there is significantly

positive relationship between profitability and size & volume of capital.Result also shows

that Leverage ratio & loss ratio significantly and opposite related to profitability.

According to Swiss (2008) profits are determined first by underwriting performance

(losses and expenses, which are affected by product pricing, risk selection, claims

19 | P a g e
management, and marketing and administrative expenses); and second, by investment

performance, which is a function of asset allocation and asset management as well as

asset leverage. The first division of the decomposition shows that an insurer’s ROE is

determined by earnings after taxes realized for each unit of net premiums (or profit

margin) and by the amount of capital funds used to finance and secure the risk exposure

of each premium unit (solvency).

Malik (2011) examined in his paper, the determinants of Pakistan’s insurance companies

profitability proxied by ROA. The study used secondary data for the period of 2005-2009

and the sample was 34 insurance companies of Pakistan. The variables tested in the study

are age, size, voc, leverage and loss ratio. Descriptive statistics and multiple regression

analysis were performed to describe the profitability among Pakistani insurance

companies. Result showed that there is no relationship between profitability and age of

the company and there is significantly positive relationship between profitability and size.

Result also shows that volume of capital was significantly and positively related to

profitability. On the other hand the analysis suggests that a reverse and significant

relationship between leverage ratio and loss ratio as independent variables and

profitability.

Kozak (2011) examined determinants of profitability of non-life insurance companies in

Poland during integration with the European financial system for the period of 2002–

2009. The results indicated that the reduction in the share of motor insurance in the

portfolio, with simultaneous increase of other types of insurance has a positive impact on

profitability and cost-efficiency of insurance companies. However, offering too broad

spectrum of classes of insurance negatively impacts its profitability and cost efficiency.

Companies improve profitability and cost efficiency with an increase of their gross

premiums and decrease of total operating expenses. Additionally increases of the GDP

growth and the market share of foreign owned companies positively impact profitability

of non-life insurance companies during the integration period.

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Ikonic et al. (2011) analyzed the profitability of the Serbian insurance companies by

applying the IMF CARMEL methodology. Thus, by determining four indicators related

to the capital adequacy of insurers, the authors highlight that capital adequacy is vital for

a company, as it may generate a good level of profitability. The analysis indicated that

the Serbian insurance market falls into the category of developed markets and that there

are good perspectives of evolution.

Curak et al. (2012) examined the determinants of the profitability of the Croatian

composite insurers’ between 2004 and 2009. The determinants of profitability, selected

as explanatory variables include both internal factors specific to insurance companies and

external factors specific to the economic environment. By applying panel data technique,

the authors show that company size, underwriting risk, inflation and return on equity

have a significant influence on insurers’ profitability. The final results indicate that the

Croatian insurance market has a low level of development, but it is very dynamic.

Yuvaraj and Abate (2013) examined the internal factors affecting profitability of

insurance companies as measured by ROA. The sample in the study included nine of the

listed insurance companies for years (2003- 2011). The results of regression analysis

reveals that leverage, size, volume of capital, growth and liquidity are most important

determinant of performance of life insurance sector whereas ROA has statistically

insignificant relationship with, age and tangibility. As the findings show that liquidity do

have negative impact on profitability and it provides further implication on the effective

risk management practices in the companies.

Daniel and Tilahun (2013) in their paper evaluated determinants of insurance companies’

performance in Ethiopia over the period of 2005 to 2010. The results revealed that firm

size, leverage, loss ratio and tangibility of assets were statistically significant to explain

performance of insurance companies in Ethiopia. The result of the study also showed that

insurers’ size, leverage and tangibility of assets were positively related to insurance

performance, while loss ratio was negatively related to performance (ROA). Firm age,

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liquidity and growth in written premium have no a statistical significant relationship with

performance of insurers.

Anna-Maria and Ghiorghe (2014) in their paper evaluated the determinants of financial

performance in the Romanian insurance market, between 2008 and 2012. The authors

analyzed the financial performance of insurance companies at micro and macroeconomic

level, being determined both by internal factors represented by specific characteristics of

the company, and external factors regarding connected institutions and macroeconomic

environment by applying specific panel data techniques. The results achieved the

determinants of the financial performance in the Romanian insurance market are the

financial leverage, company size, growth of gross written premiums, underwriting risk,

risk retention ratio and solvency margin.

Pervan (2014) investigated how insurance companies in Macedonia performed and

according to the findings of panel analysis regarding the determinants of profitability, it

was revealed that expense ratio, claim ratio, Size of the insurer, economic growth (GDP),

and inflation have statistically significant influence on insurers' performance. Expense as

well as Claims ratios (CR) have negative and statistically significant influence on

insurers’ profitability while size has a positive influence on the insurers’ profitability.

GDP growth positively affects insurers profitability i.e. growth of overall economic

activity encourage demand for insurers services and indirectly result in higher insurers

income while Inflation on profitability is statistically significant and negative, suggesting

that higher levels of inflation cause higher interest rates and lower bond prices which in

turn reduce portfolio returns.

Lee (2014) investigated in his study the relationship between firm specific factors and

macroeconomics on profitability in Taiwanese property-liability insurance industry using

the panel data over the1999 through 2009 time period. Using operating ratio and return

on assets (ROA) for the two kinds of profitability indicators to measure insurers’

profitability. The results show that underwriting risk, reinsurance usage, input cost, return

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on investment and financial holding group have significant influence on profitability in

both operating ratio and ROA models. The insurance subsidiaries of financial holding

group compared with other insurance companies, showing lower profitability. In

addition, economic growth rate has significant influence on profitability in operating ratio

model but insignificant influence on profitability in ROA.

2.3. Research hypothesis and determinants selection

Based on the previous empirical studies, insurers’ profitability is influenced by both

internal and external factors. Whereas internal factors focused on an insurer’s specific

characteristic, the external factors concerned macroeconomic variables.

2.3.1. Specific determinants (internal factors)

The internal determinants of insurance company’s profitability are those management

controllable factors which account for the inter-firm differences in profitability, given the

external environment.

A. Underwriting risk
Underwriting risk is the risk that the premiums collected will not be sufficient to cover

the cost of coverage. Insurance prices are established based on estimates of expected

claim costs and the costs to issue and administer the policy. The estimates and

assumptions used to develop policy pricing may prove to ultimately be inaccurate. This

may be due to poor assumptions, changing legal environments, increased longevity,

higher than expected weather catastrophes (Ernst & Young, 2010). Huge fluctuations in

net premiums written indicate a lack of stability in underwriting operation of an insurance

company. An unusual increase in net premiums written might indicate that the company

is engaging in the so-called “cash-flow underwriting” to attempt to survive its financial

difficulty. However, this is not necessarily the case. An unusual increase in net premiums

written could indicate favourable business expansion if it is accompanied by adequate

reserving, profitable operations, and stable products mix (National Association of

Insurance Commissioner, 2001). Barth and Eckles (2009) find a negative relationship

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between premium growth and changes in loss ratios, suggesting that premium growth

alone does not necessarily result in higher underwriting risk. Further, there is a positive

relationship between claim count growth and changes in loss ratios, suggesting that claim

count growth may be a preferred measure of underwriting risk.

Organizations that engage in risky activities are likely to have more volatile cash flows

than entities whose management is more averse to risk-taking (Fama and Jensen, 1983).

As a consequence, insurers that underwrite risky business (e.g., catastrophe coverage)

will need to ensure that good standards of management are applied to mitigate their

exposure to underwriting losses ex-ante and maximize returns on invested assets ex-post.

This could improve annual operational performance by encouraging managers to increase

cash flows through risk taking. On the other hand, excessive risk-taking could adversely

affect the profitability of insurers and reinsurance companies. Furthermore, higher annual

insurance losses will tend to increase the level of corporate management expenses ex-post

(e.g., claims investigation and loss adjustment costs) that could further exacerbate a

decline in reported operational performance. In contrast, insurers companies with lower

than expected annual losses are likely to have better operational performance because, for

example, they do not incur such high monitoring and claims handling costs. Thus a

negative connection between the underwriting risk and the insurer's profitability is

expected, since taking an excessive underwriting risk can affect the company’s stability

through higher expenses. Consequently, the researcher formulates the following null

hypothesis:

Ho1: Underwriting risk has no significant impact on profitability of insurance

companies’ in Ethiopia.

B. Reinsurance Dependence
Insurance companies usually take out reinsurance cover to stabilise earnings, increase

underwriting capacity and provide protection against catastrophic losses. Nevertheless,

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there is a cost for reinsurance. As a result, determining an appropriate ceding level is

important for insurance companies, and they have to try to strike a balance between

decreasing insolvency risk and reducing potential profitability. Although it increases

operational stability, increasing reinsurance dependence, i.e. lowering the retention level,

reduces the potential profitability. Purchasing reinsurance reduces insurers’ insolvency

risk by stabilizing loss experience, increasing capacity, limiting liability on specific risks,

and/or protecting against catastrophes. However, transferring risk to reinsurers is

expensive. The cost of reinsurance for an insurer can be much larger than the actuarial

price of the risk transferred. Cummins, Dionne, Gagne, and Nouira (2008), they analyzed

empirically the costs and the benefits of reinsurance for a sample of US property-liability

insurers. The results show that reinsurance purchase increases significantly the insurer’s

costs but reduces significantly the volatility of the loss ratio. With purchasing

reinsurance, insurers accept to pay higher costs of insurance production to reduce their

underwriting risk. Insurers with higher reinsurance dependence tend to have a lower level

of firm profitability. It is possible that an insurer that cedes more business to reinsurer

and keeps lower retention more or less operates like a reinsurance broker who only

transfers risk without underwriting risk and is likely to report less profit for a relatively

high percentage of the premium received is ceded to reinsurers (Lee, 2012). Therefore,

based on the above analysis, the following null hypothesis formulate:

Ho2: Reinsurance dependence has no significant impact on profitability of insurance

companies’ in Ethiopia.

C. Solvency Ratio (Capital adequacy)

Available solvency ratio means the excess value of assets over the value of insurance

liabilities and other liabilities of policyholders’ and shareholders’ funds (Charumathi

2013). The result in his study indicated that there is a significant positive relationship

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between profitability and solvency ratio. Solvency ratio is an important indicator of the

financial health of an insurance firm and denotes its ability to survive in the long run.

Insurance companies with higher solvency margin are considered to be more sound

financially. Financially sound insurance companies are better able to attract prospective

policyholders and are better able to adhere to the specified underwriting guidelines.

Insurance companies with higher solvency margin outperform those with lower solvency

margin (Shiu, 20114).

On the other hand, assuming that the company is in its first stage, the manager will

choose to invest using the retained earnings in order to increase profitability. This means

that the internal financing will continue until the retained earnings reach the amount of

zero. Furthermore, Durinck et al. (1997) found that the faster the growth, the more

external financing firms will use. However, this increase in external financing is mainly

through an increase in the liabilities, as the increase in external equity financing was not

found significant. As a company grows, the solvency ratio will thus become smaller.

Therefore, based on the above analysis, the following null hypothesis formulate:

Ho3: Solvency ratio has no significant impact on profitability of insurance companies’

in Ethiopia.

D. Liquidity
Liquidity refers to the degree to which debt obligations coming due in the next 12 months

can be paid from cash or assets that will be turned into cash. It is usually measured by the

current assets to current liabilities (current ratio). It shows the ability to convert an asset

to cash quickly and reflects the ability of the firm to manage working capital when kept at

normal levels. A firm can use liquid assets to finance its activities and investments when

external finance is not available or it is too costly. On the other hand, higher liquidity

26 | P a g e
would allow a firm to deal with unexpected contingencies and to cope with its obligations

during periods of low earnings (Liargovas, and Skandalis, 2008)

Maintaining high liquidity can reduce management’s discipline as regards both

underwriting and investment operations. Moreover, according to the theory of agency

costs, high liquidity of assets could increase agency costs for owners because managers

might take advantage of the benefits of liquid assets (Adams and Buckle, 2000). In

addition, liquid assets imply high reinvestment risk since the proceeds from liquid assets

would have to be reinvested after a relatively short period of time. Undoubtedly,

reinvestment risk would put a strain on the performance of a company. In this case, it is,

therefore, likely that insurance companies with less liquid assets outperform those with

more liquid assets. Nevertheless, agency costs and reinvestment risk can be effectively

minimised if proper actions are taken. Thus, the expected sign of the profitability and

asset liquidity ratio is unpredictable based on prior research. Consequently, the researcher

formulates the following hypothesis:

Ho4: Liquidity has no significant impact on profitability of insurance companies’ in

Ethiopia.

E. Premium growth
Premium revenue is the primary source of revenue for most insurers, and it is generally

more persistent than other revenue sources. Therefore, premium growth should help

predict future revenue and earnings growth. For insurance company, especially those

writing long-tail policies, income in periods of premium growth is understated due to the

overstatement of losses and loss expenses, which are measured undiscounted. If premium

revenue is relatively stable over time, this bias is offset by the omission of interest

expense on the loss reserve. However, when premium revenue increases (declines) over

time, the omitted interest expense is smaller (larger) than the overstatement of the losses

and loss expenses, and so income is understated (overstated) Charumathi (2013).

27 | P a g e
Premium growth measures the rate of market penetration. Empirical results showed that

the rapid growth of premium volume is one of the causal factors of insurers’ insolvency

(Kim et al. 1995).

Premium growth is driven by exposure growth (an increase in the number of

policyholders) and rate-level growth (an increase in the average price per exposure).

These two sources of growth have different persistence and risk implications. Exposure

growth is valuable if the products are properly priced, but in a competitive market,

significant exposure growth may be an indication of underpricing. This is the primary

motivation for using premium growth as a potential early warning signal of financial

impairment. In contrast, premium growth attributable to rate increases may reduce risk if

the same customers are paying more for the same risk exposure. However, if the rate

increases alter or reflect a change in the mix of customers, the new book of business can

generate unexpected losses if it is mispriced. Maria (2014) argue that an excessive growth

of underwritings generates a higher underwriting risk and the necessity to increase the

volume of technical reserves and excessively increase the volume of the gross written

premiums may lead to self-destruction, as other important objectives, such as selecting

profitable investment portfolios could be neglected. Thus, the expected sign of the

premium growth is unpredictable based on prior research.

Ho5: There is no significant effect between growth of gross written premium and
insurance companies’ profitability in Ethiopia.

F. Company Size
It has been suggested that company size is positively related to profitability. The main

reasons behind this can be summarized as follows. First, large insurance companies

normally have greater capacity for dealing with adverse market fluctuations than small

insurance companies. Second, large insurance companies usually can relatively easily

28 | P a g e
recruit able employees with professional knowledge compared with small insurance

companies. Third, large insurance companies have economies of scale in terms of the

labor cost, which is the most significant production factor for delivering insurance

services (Shiu, 2014). Company size is computed as decimal logarithm of total assets of

the insurance company. A positive linkage between company size and its profitability is

expected, since larger firms have more resources, a better risk diversification, complex

information systems and a better expenses management. Thus, the researcher formulates

the following null hypothesis:

Ho6: Company size has no significant impact on profitability of insurance companies’

in Ethiopia.

G.Technical Provisions risk

Risk of holding insufficient technical provisions or of holding unjustifiably excessive

provisions. Where provisions are set at a lower level than actually required then this

could present the company’s financial position in a better light than it actually is. This

could result in inappropriate underwriting decisions being made. For example, more risky

policies may be underwritten on the basis that more capital is available to support this

than is actually the case, or higher levels of business may be written (Lawrie S. ).

Insurance companies collect premiums in advance and keep them in reserve accounts for

future claim settlements. For instance, most premiums collected by insurance companies

are kept in outstanding claims and unearned premiums reserves which are two main

accounts in the liability side of the balance sheet. Outstanding claims reserve is

considered riskier than ordinary long-term corporate debt since neither the magnitude nor

the timing of the cash flows is known (Shiu,2014). Consequently, the researcher

formulates the following null hypothesis:

Ho7: Technical provision has no significant impact on profitability of insurance

companies’ in Ethiopia.

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2.3.2. Macroeconomics variables (External Factor)
H. Growth rate of GDP
Growth rate of GDP reflects economic activity as well as level of economic development

and as such affect the various factors related to the supply and demand for insurance

products and services. GDP is the most informative single indicator of progress in

economic development. Poor economic conditions can worsen the quality of the finance

portfolio, thereby reducing profitability. If GDP grows, the likelihood of selling

insurance policies also grows and insurers are likely to benefit from that in form of higher

profits. Outreville (1990) investigated the economic significance of insurance in

developing countries. He compares 45 developed and developing countries and concludes

that there is a positive but non-linear relationship between general insurance premiums

and GDP per capita. Maja (2012) also examined that GDP growth positively affects

insurers profitability i.e. growth of overall economic activity encourage demand for

insurers services and indirectly result in higher. Thus, the researcher formulates the

following null hypothesis:

Ho8: Gross domestic product has no significant impact on profitability of insurance

companies’ in Ethiopia.

I. Inflation
Inflation certainly plays a role in insurance and has adverse impact on many aspects of

insurance operations, such as claims, expenses and technical provisions (Daykin,

Pentikäinen & Pesonen, 1994). Expected inflation is taken into account when actuaries

set actuarially fair premiums, inflation itself is unlikely to seriously impact on the

performance of insurance companies. Nevertheless, if inflation is significantly greater

than expected, it could cause insurance companies financial difficulty. For instance,

unexpected inflation makes real returns on fixed-rate bonds lower than expected. As a

consequence, profit margins of insurance companies are compressed and financial

30 | P a g e
performance is accordingly impaired (Browne, Carson & Hoyt, 1999). The inflation

could affect insurance companies’ profitability influencing both their liabilities and

assets. In expectation of inflation claim payments increases as well as reserves that are

required in anticipation of the higher claims, consequently reducing technical result and

profitability. Taking into consideration that inflation affects assets side of the balance

sheet, as the bond markets adjust to the higher level of inflation, interest rates begin to

rise. This result in bond prices fall, negatively affecting value of investment portfolio.

Given the negative relationship between inflation and returns on both fixed-income

securities and equities, it is expected that the relationship between profitability and

inflation will be negative. Thus, the researcher formulates the following null hypothesis:

Ho9: Inflation has no significant impact on profitability of insurance companies’ in

Ethiopia.

2.4. Summary of the literature review & Conceptual Framework

2.4.1. Summary of the literature review
A lot of empirical works has been done regarding determinants of profitability. Review

of the literature showed that the researches on the determinants of profitability had been

comprehensively studied in developed countries around the world and in some emerging

countries like Pakistan, India and Taiwan. Besides, in Ethiopia most of the researches

focused on banks and other non-financial sectors rather than insurance companies.

Different scholars using empirical investigation on the determinants of profitability are

resulting in dissimilar conclusions. For instance, an empirical study by Daniel &Tilahun

(2013) indicated that positive and significant relationship between size, tangibility and

leverage with profitability; however, loss ratio is statistically significant and negatively

related with ROA. The result also revealed that there is negative relationship between age

and profitability but statistically insignificant. On the other hand, a study of Ahmed

(2008) examined the determinants of insurance companies profitability in UAE indicated

31 | P a g e
that that there is no relationship between profitability and age of the company and there is

significantly positive relationship between profitability and size & volume of capital.

Result also shows that Leverage ratio & loss ratio significantly and opposite related to

profitability. Khan and Amjad (2013) revealed that leverage, size, earnings volatility and

age of the firm are significant determinants of profitability while growth opportunities

and liquidity are not significant determinants of profitability. This initiate that

determinants of profitability are issue that requires further investigation.

Empirical evidences regarding determinants of insurance companies’ profitability

(Yuvaraj and Abate 2013) focused only on internal factors such as age, size, leverage,

growth, volume of capital, tangibility of assets and liquidity. However this study was

focused on other factors like underwriting risk, reinsurance dependence, solvency

margin, liquidity risk, premium growth, technical provisions, company size, inflation and

growth rate of GDP because these variables exert strong impact on insurance companies’

profitability based on the selected previous empirical works.

2.4.2. Conceptual Framework

Different empirical evidences suggested that profitability of financial institutions affected

by internal and external factors. This study used both internal and external determinants

of insurance’s profitability includes underwriting risk, reinsurance dependence, solvency

ratio, liquidity, premium growth, technical provisions, company size, growth rate of GDP

and inflation. The study was identified how these variables determine the profitability of

insurance company in Ethiopia.

32 | P a g e
Figure 2.1. Conceptual framework: Relation between insurance companys’

profitability and its determinants

Company-specific (internal) External (macroeconomic)

Underwriting risk Growth rate of GDP

Reinsurance dependence Inflation

Solvency ratio
ROA
Liquidity

Premium growth

Company size

Technical provisions

Source: Researcher-design

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 CHAPTER THREE
3. Research methodology
The purpose of this chapter is to present the research methodology which is adopted in

the study. The chapter arranged as follows. Section 3.1 presents research approaches.

This is followed by research method adopted in section 3.2. Section 3.3 presents variable

definition.Finally a conclusion is presented in section 3.4.

3.1. Research approaches

When conducting a research, there are different ways of approaching the problem.

According to Creswell (2009), there are three approaches of research; quantitative,

qualitative and mixed. The following discussions briefly presents the basic features of

these research approaches.

Quantitative research is a means for testing objective theories by examining the

relationship among variables (Creswell, 2009). On the other hand, qualitative research

approach is a means for exploring and understanding the meaning individuals or groups

ascribe to a social or human problem with intent of developing a theory or pattern

inductively (Creswell, 2009). Finally, mixed methods approach is an approach in which

the researchers emphasize the research problem and use all approaches available to

understand the problem (Creswell, 2003).

Hence, based on the above discussions of the three research approaches and by

considering the research problem and objective, in this study, the quantitative method is

primarily used. However, to have a better insight and gain a richer understanding about

the research problem, the quantitative method is supplemented by the qualitative method

of inquiry. That is, to get the benefits of a mixed methods approach and to mitigate the

bias in adopting only either quantitative or qualitative approach. Therefore, employing

mixed approach is used to counterbalance the biases (limitations) of applying any of a

single approach and a means to offset the weaknesses inherent within method with the

34 | P a g e
strengths of the other method (Creswell, 2003). In addition, adopting mixed approach in

this study is justified as it provides the best understanding of a research problem because

it opens the door to multiple methods of data collection and to both generalize the

findings to a population and develop a detailed view of the meaning of a phenomenon or

concept for individuals (Creswell, 2003).

The current study is used explanatory research design started with a quantitative survey

study and identified results and then followed up these results with an in-depth interview

qualitative study to best understand the research problem. If the objective is to determine

which variable might be causing a certain behavior, i.e. whether there is a cause and

effect relationship between variables, explanatory research must be undertaken (Shields

2013).

3.2. Research methods adopted

Decision regarding the selection of research instrument, the nature of data collection and

analysis are based on the research method used in a study. Selection of appropriate

research methods is very important because it decides the quality of study findings. The

following sections discuss consecutively the quantitative and qualitative aspects of the

research method.

3.2.1: Quantitative aspect of research method

The use of survey design provides a quantitative or numeric description of trends,

attitudes, or opinions of a population by studying a sample of that population in order to

generalize from the sample to the population (Creswell, 2009). As a result, in order to

generalize the findings to the whole insurance operated in the country, in the current

study the researcher adopted survey research method.

Survey can be useful when a researcher wants to collect data on phenomena that cannot

be directly observed. Creswell (2003) stated that the purpose of survey is to generalize

description of trends, attitudes, or opinions from a sample to a population so that

inferences can be made about some characteristic, attitude, or behavior of this population.

35 | P a g e
Moreover, as noted in Fowler (1986) it is also reasonable to use survey designs because

of its benefits such as the economy of the design and the rapid turnaround in data

collection and identifying attributes of a large population from a small group of

individuals. Therefore, it is logical to apply survey method for this study. The survey is

carried out by means of structured document review.

Sample design
The target populations of the study are all insurance companies registered by NBE and

under operation in Ethiopia. Currently, seventeen insurance companies are working in

Ethiopia (as presented in appendix 1). In order to reach meaningful conclusion, there is

no need to sample from the seventeen insurance companies, as they are already few in

numbers to collect information over the period of 2004-2014. But, because of lack of 11

years data in most of the newly established insurance companies, the number of sample is

reduced to nine. The researcher believes that the sample size is sufficient to make sound

conclusion about the population as far as it covers more than 50% of the total population.

Moreover, the inclusion of Ethiopian insurance Corporation (EIC) in the sample which

takes the lions share in the country’s insurance activity makes the sample more

representative and reasonable. Hence samples are chosen to represent the relevant

attributes of the whole population. Accordingly, available audited financial statements of

eleven consecutive years from 2004-2014 of each insurance companies include in the

sample frame is consider (99 yearly observation). Thus, to make the panel data

structured, i.e. every cross-section follows the same regular frequency with the same start

and end dates. Besides, eleven years is assumed to be relevant because five years and

above is the recommended length of data to use in most finance literatures.

The procedure used for drawing the sample from the available lists is the insurance

service year profile, for the reason that the study intend to use document sources.

Therefore, sample size is decided based on the availability of operating data in the

insurance operating in Ethiopia. According to Singh, (2006) when the subjects used in the

36 | P a g e
sample is homogeneous, using purposive sampling technique is appropriate. Therefore,

the researcher used purposive sampling method to draw the sample from the population.

Data sources and collection instruments

The necessary data that used in the study is obtained through both primary and secondary

sources. The sources of data for this research are mainly from secondary sources, but for

the purpose of supporting the finding of the research, primary data were used to some

extent. While books, journal articles, and internet were explored to gather published data

on the issues under investigation, primary data on determinant of profitability are

collected from the manager of insurance companies through unstructured questionnaire.

Secondary data on insurance companies are obtained from insurance company’s audited

financial statements and their annual reports filed with NBE. Moreover, in order to

analyze the relationship that exists between profitability and macro-economic variables,

macroeconomic data are collected for the same years. Those macroeconomic data are

gathered from the records held by NBE and MoFED through structured document

review.

According to Koul (2006) using appropriate data gathering instruments help researchers

to combine the strengths and amend some of the inadequacies of any source of data to

minimize risk of irrelevant conclusion. He further argues that consistent and reliable

research indicates that research conducted by using appropriate data collection

instruments increase the credibility and value of the research findings. In view of this

concept, questionnaire surveys for manager of insurance companies and supervisory

officers, and secondary data (audited financial statements; balance sheet, income

statement and revenue account) are used for this study to collect required data by using

purposive sampling.

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3.2.2. Qualitative aspect of research method

In the current study, qualitative data is gathered as a supplementary of the quantitative

one. Since the nature of this research requires in-depth understanding of the factors

determine insurance company’s profitability in Ethiopia, an interview is suitable to

uncover such information. Smith et al. (1991) commented that the interview method is

the most fundamental of all qualitative methods and is claimed to be the best method for

gathering information.

The researcher has conducted an in-depth interview in unstructured face to face interview

form. In respect of instrument, unstructured face to face interview has been used because

of its flexibility and also allowing new questions to be bring up during the interview. As a

result, the response of the interviewees’ for the interview questions is used for supporting

the result obtained from analysis of structure record reviews or as arguments. Regarding

the sample design, non-probability purposive sampling method was adopted. So, to

explore the view of company officials about the determinants of insurance profitability,

nine managers (three managers from Ethiopian insurance corporation and six from two

private insurance companies are interviewed by using unstructured face to-face

interviews.

3.2.3 Data analysis techniques and model specification

According to William (2010), model building involves specifying relationships between

two or more variables; perhaps extending to the development of descriptive or predictive

equations. In order to achieve the objectives of this research study, the panel data

regression model is used to identify the relationship between the profitability of insurance

companies and explanatory variables like underwriting risk, reinsurance dependence,

solvency ratio, liquidity, premium growth, company size, technical provisions, inflation

and growth rate of GDP. This is because prior studies; Malik (2011), Shiu (2004),

38 | P a g e
Charumathi (2012) mostly developed this model to identify the determinant of insurance

companies profitability. Thus, the collected panel data is analyzed using descriptive

statistics, correlations, multiple linear regression analysis and inferential statistics. Mean

values and standard deviations are used to analyze the general trends of the data from

2004 to 2014 based on the sector sample of 9 insurance companies and a correlation

matrix is also used to examine the relationship between the dependent variable and

explanatory variables. In addition, ordinary least square (OLS) is conducted using

statistical package “EVIEWS” to determine the most significant and influential

explanatory variables affecting the profitability of the insurance industry in Ethiopia.

Modeling is based on panel data techniques. Panel data or longitudinal data, comprises of

both cross-sectional elements and time-series elements; the cross-sectional element is

reflected by the different Ethiopian insurance company and the time-series element is

reflected the period of study (2004-2014). Panel data is favored over pure time-series or

cross-sectional data because it can control for individual heterogeneity and there is a less

degree of multi-linearity between variables (Altai, 2005).

In light of the above, to investigate the effect of insurance-specific and macroeconomic

determinants of insurers profitability, the following general multiple regression model is

adopted from different studies conducted on the same area.

ROAit = β0 + β1 (ISD)xt + β2 (MED)yt + eit

Where;

ROAit is a dependent variable for insurance i at time t; Β0, β1 and, β2 represent estimated

coefficients including the intercept; (ISD)xt represent the x-th insurance specific

determinants at time t; (MED)yt represent the y-th macroeconomic determinants at time t

; eit is the error term.

The equation that account for individual explanatory variables which are specified for

this particular study is given as follows.

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ROAit = β0 + β1URi, t+ β2 RD i, t + β3 SR i, t + β4TPi, t + β5LQi, t + β6 CS i, t + β7 PG i, t +

β8 I i, t+ β9 GDPi,t + ε
Source: developed by researcher by reviewing previous research works.

Where:

ROAit = dependent variable return on asset; PG = premium growth;

UR = underwriting risk; TP = technical provision;

RD = reinsurance dependence; GDP = growth rate of GDP;

LQ = Liquidity; I = inflation;

CS= company size

SR = solvency ratio;

Є =is the error component for company i at time t assumed to have mean zero E [Є it] = 0

β0= Constant
β= 1, 2, 3…9 are parameters to be estimate;
i = Insurance company i = 1. . . 9; and t = the index of time periods and t = 1. . . 11

The issue that may arise from the use of panel data is whether the individual effect is

considered to be fixed or random. While random effects estimation addresses the

endogeneity issue by instrumenting potentially endogenous variables, it also assumes that

the individual firm effects are uncorrelated with the exogenous variables. On the other

hand, the fixed effect estimation deals successfully with the correlated effects problem.

The choice between both approaches is done by running a Hausman test. To conduct a

Hausman test the number of cross section should be greater than the number of

coefficients to be estimated. But, in this study the numbers of coefficients are equal with

the number of cross sections so it is not possible to conduct a Hausman test.

Therefore a fixed cross-sectional effect is specified in the estimation so as to capture

unobserved idiosyncratic effects of different insurance companies. In addition, as noted

in Gujarati (2004) if T (the number of time series data) is large and N (the number of

40 | P a g e
cross-sectional units) is small, there is likely to be little difference in the values of the

parameters estimated by fixed effect model and random effect model. Hence, the choice

here is based on computational convenience. On this score, fixed effect model may be

preferable than random effect model (Gujarati 2003). Since the number of time series (i.e.

11 year) is greater than the number of cross-sectional units (i.e. 9 insurance companies)

and adjusted R2 value and Durbin-Watson stat value increases with the use of cross-

sectional fixed effect model, fixed effect model is preferable than random effect model in

this case.

As mentioned in Brooks (2008), there are basic assumptions required to show that the

estimation technique, OLS had a number of desirable properties, and also so that

hypothesis tests regarding the coefficient estimates could validly be conducted. If these

Classical Linear Regression Model (CLRM) assumptions hold, then the estimators

determined by OLS will have a number of desirable properties, and are known as Best

Linear Unbiased Estimators. Therefore, for the purpose of this study, diagnostic tests are

performed to ensure whether the assumptions of the CLRM are blue or not in the model.

Consequently, the basic CLRM assumptions test in this study are errors have zero mean,

homoscedasticity, autocorrelation, normality and multicollinearity. According to Brooks

(2008) when the assumptions are satisfied, it means that all the information available

from the patterns was used. But, if there is assumption violation of that data usually

means that there is a pattern of data that have not included in the model, and could

actually find a model that fits the data better.

The first assumption is errors have zero mean. According to Brooks (2008), if a constant

term is included in the regression equation, this assumption will never be violated. The

second assumption is hetroskedasity. The assumption of homoscedasticity is that the

variance of the errors is constant or equal. If the variance of the errors is not constant, this

41 | P a g e
would be known as hetroskedasity (Guajarati, 2004). In order to test homoscedasticity the

white test will be used.

The third assumption is the autocorrelation assumption that the covariance between the

error terms over time is zero; it assumed that the errors are uncorrelated with one another.

If the errors are not uncorrelated with one another, it would be stated that they are serially

correlated. Usually, Durbin-Watson (DW) value in the main regression table is

considered and used to test the presence of autocorrelation. According to Brooks (2008),

DW has 2 critical values: an upper critical value (dU) and a lower critical value (dL), and

there is also an intermediate region where the null hypothesis of no autocorrelation can

neither be rejected nor not rejected.

Figure 3.1: Rejection and Non-Rejection Regions for DW Test

The rejection, non-rejection, and inconclusive regions are shown on the number line in

figure 3.1. So, the null hypothesis is rejected and the existence of positive autocorrelation

presumed if DW is less than the lower critical value; the null hypothesis is rejected and

the existence of negative autocorrelation presumed if DW is greater than 4 minus the

lower critical value; the null hypothesis is not rejected and no significant residual

autocorrelation is presumed if DW is between the upper and 4 minus the upper limits; the

null hypothesis is neither rejected nor not rejected if DW is between the lower and the

upper limits, and between 4 minus the upper and 4 minus the lower limits.

42 | P a g e
The fourth assumption is Normality of the error distribution that assumed the errors of

prediction (differences between the obtained and predicted dependent variable scores) are

normally distributed. Violation of this assumption can be detected by constructing a

histogram of residuals (Brooks, 2008).

Finally the fifth assumption is multicollinearity assumption which refers to the situation

in which the independent variables are highly correlated. When independent variables are

multicollinear, there is overlap or sharing of predictive power. This may lead to the

paradoxical effect, whereby the regression model fit the data well, but none of the

explanatory variables (individually) has a significant impact in predicting the dependent

variable (Gujarati, 2004). A Pearson correlation was used for the purpose of testing

multicollinearity in this study. The Pearson correlation matrix is a technique of testing

multicollinearity of explanatory variables by investigating the relationship of biviariate

variables (Wooldridge, 2006).

3.3. Variable definition/ measurement

This section explains the variables used as dependent and independent (explanatory)

variables in this study. The definitions/measurements used for these variables are

described as follow:

3.3.1. Dependent variable

The most commonly used profitability ratios are net profit margin, return on assest

(ROA) and return on equity. The return on total assets ratio represents one of the most

used methods of quantifying financial performance. It was developed in 1919 by Dupont

and it emphasizes the company’s ability to efficiently use its assets (Maria,2014). ROA

reflects the ability of insurance’s management to generate profits from the insurances’

assets, although it may be biased due to off-balance-sheet activities. In most of the

previous studies on insurance sector, return on assest (ROA) is being used as a proxy of

profitability (Ahmed, 2011); (Al-Shami, 2008); (Malik, 2011); (Lee, 2014). Therefore,

43 | P a g e
this study has attempted to measure profitability by using ROA similar to most of the

aforementioned researchers. ROA= Net profit before tax / Total Assets

3.3.2. Independent variables

This subsection describes the independent variables that is used in the ecoometric model

to estimate the dependent variable. To measure the predictor variables of insurance

companies’ profitability in Ethiopia, nine measures are used as independent variables

which are extracted from different studies. The variables namely; underwriting risk,

reinsurance dependence, solvency margin, liquidity, company size, premium growth,

technical provisions, inflation and growth rate of GDP.

Underwriting risk- The underwriting risk emphasizes the efficiency of the insurers’

underwriting activity and it is measured through the losses incurred divided by annual

premium earned.

Reinsurance dependence- The reinsurance dependence is calculated as ratio of gross

written premiums ceded in reinsurance to total assets. Insurance companies reinsure a

certain amount of the risk underwritten in order to reduce bankruptcy risk in the case of

high losses. Although reinsurance improves the stability of the insurance company

through risk dispersion, achievement of solvency requirements, risk profile equilibration

and growth of the underwriting capacity, it involves a certain cost.

Solvency ratio: The solvency ratio is calculated as ratio of net assets to net written

premiums, and represents a key indicator of the insurer’s financial stability.

Technical provision risk: Risk of holding insufficient technical provisions or of holding

unjustifiably excessive provisions. Where provisions are set at a lower level than actually

required then this could present the company’s financial position in a better light than it

44 | P a g e
actually is. This could result in inappropriate underwriting decisions being made. A

technical provision is measured by Safety Ratio (claims outstanding to equity ratio).

Liquidity: the liquidity ratio measures the firm's ability to use its near cash or quick assets

to retire its liabilities. Liquidity Ratio = Current Assets / Current Liabilities.

Company size: is computed as logarithm of total assets of the insurance company.

Premium growth: Proxy for premium growth is the percentage increase in gross written

premiums (GWP). The equation is expressed as: PG = (GWP (t) – GWP (t-1)) / GWP (t-1).

Growth of real GDP: it is a macroeconomic variable, and it is expected to have a positive

influence on the insurers’ financial performance, since economic growth improves the

living standards and the levels of income, increasing the purchasing power of population.

Economic Growth Rates (EGR) = (GDP t−GDP t − 1)/GDP t − 1, where GDP respects

real gross domestic product.

Inflation- occurs when the prices of goods and services increase over time. Inflation

cannot be measured by an increase in the cost of one product or service, or even several

products or services. Rather, inflation is a general increase in the overall price level of the

goods and services in the economy. Inflation rates (IR) = (I t−I t− 1)/I t − 1,

The following table 3.1 presents the summary of hypothesized expected sign for the

relationship between the explanatory variables (independent variables) and insurance

profitability (dependent variable).

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Table 3.1 Descripton of the variables and their expected relationship

Variables Definition/Measure Expected sign

Dependent Profitability(ROA) Net profit before tax/total assets NA

Independent Underwriting risk claim incurred / premium earned -

Reinsurance dependence premium ceded/total asset -

Solvency margin(SM) net assets to net written premiums +/-

Company size Natural logarithm of total assets +

Liquidity(LQ) Current Assets / Current Liabilities +/-

Premium growth(PG) PG = (GWP (t) – GWP (t-1)) / GWP (t-1) +/-

Technical provisions claims outstanding to equity ratio -

Inflation(I) I = (Inft−Inft− 1)/Inft − 1, -

Growth rate of GDP (GDPt−GDPt − 1)/GDPt − 1 +

Source: Compiled by the researcher based on earlier studies

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 3.4. Conclusions and the relationships between research hypotheses and the

data source

This chapter discussed the research approach, design, research methods and different data

sources which are used to address the study problem. Based on the underlying principles

of research methods and research problem, a mixed method is chosen as appropriate to

this research. Finally, summary of hypotheses, variables and data sources are presented in

table 3.2 below.

Table 3.2 Link between research hypotheses, variables and the different data sources

Research hypotheses Variables Data sources

Ho1: Underwriting risk has no significant Dependent variable:

impact on profitability of insurance Profitability(ROA) Insurance specific

company’s in Ethiopia. data from revenue

Ho2: Reinsurance dependence has no statement and

significant impact on profitability of Independent variables: balance sheet held by

insurance company’s in Ethiopia. NBE and the and

Ho3: Solvency ratio has no significant Underwriting risk, macroeconomic data

impact on profitability of insurance Reinsurance from the records held

company’s in Ethiopia. dependence, by NBE and MOFED

Ho4: Liquidity has no significant impact on solvency margin,

profitability of insurance company’s in liquidity,

Ethiopia. company size

Ho5: There is no significant effect between premium growth,

growth of gross written premium and technical provisions,

insurance company’s profitability in growth rate of GDP

Ethiopia. inflation

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Ho6: Company size has no significant impact

on profitability of insurance company’s in

Ethiopia.

Ho7: Technical provision has no significant

impact on profitability of insurance

company’s in Ethiopia.

Ho8: Gross domestic product has no

significant impact on profitability of

insurance company’s in Ethiopia.

Ho9: Inflation has no significant impact on

profitability of insurance company’s in

Ethiopia.

Source: Compiled by the researcher based on earlier studies

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 CHAPTER FOUR
4. Results and Discussions
The preceding chapter presented the research methods adopted in the study. This chapter

analysis the determinants of insurance company’s profitability, using the annual balanced

panel data, where all the variables are observed for each cross-section and each time

period. The study has a time series segment covering from the period 2004 up to 2014

and a cross section segment which considered nine Ethiopian insurance companies. This

chapter is organized into four sections. Section one presents model specification & tests

for the classical linear regression model assumptions. Section two discusses descriptive

statistics and correlation analysis. Section three presents discussion of results and finally,

section four is about summary of the main findings.

4.1. Model Specification Test (Fixed effect Versus Random effect)

There are broadly two classes of panel estimator approaches that can be employed in

financial research: fixed effects models (FEM) and random effects models (REM)

(Brooks, 2008). The choice between both approaches is done by running a Hausman test.

To conduct a Hausman test the number of cross section should be greater than the

number of coefficients to be estimated. But, in this study the numbers of cross section are

nor greater than the number of coefficients to be estimated so it is not possible to conduct

a Hausman test. Therefore a fixed cross-sectional effect is specified in the estimation so

as to capture unobserved idiosyncratic effects of different insurance companies. In

addition, as noted in Gujarati (2003) if T (the number of time series data) is large and N

(the number of cross-sectional units) is small, there is likely to be little difference in the

values of the parameters estimated by fixed effect model and random effect model.

Hence, the choice here is based on computational convenience. On this score, fixed effect

model may be preferable than random effect model (Gujarati, 2003). Since the number of

49 | P a g e
time series (i.e. 11 year) is greater than the number of cross-sectional units (i.e.9

insurance companies).

According to Brooks (2008) and Wooldridge (2006), it is often said that the REM is more

appropriate when the entities in the sample can be thought of as having been randomly

selected from the population, but a FEM is more plausible when the entities in the sample

effectively constitute the entire population/sample frame. Hence, the sample for this

study was not selected randomly and equals to the sample frame FEM is appropriate.

4.1.1 Tests for the Classical Linear Regression Model (CLRM) assumptions
This section presents the test for the assumptions of classical linear regression model

(CLRM) namely the error have zero mean, hetroskedasity, autocorrelation, normality and

multicollinearity.

The errors have zero mean (E(ut ) = 0). According to Brooks (2008), if a constant
term is included in the regression equation, this assumption will never be violated. Thus,

since the regression model used in this study included a constant term, this assumption

was not violated.

Homoscedasticity (variance of the errors is constant (Var (ut) = σ2<∞). This

assumption requires that the variance of the errors to be constant. If the errors do not

have a constant variance, it is said that the assumption of homoscedasticity has been

violated. This violation is termed as heteroscedasticity. In this study white test was used

to test for existence of heteroscedasticity across the range of explanatory variables.

Table 4.1 Heteroskedasticity Test: White

F-statistic 0.812644 Prob. F(9,89) 0.6058

Obs*R-squared 7.517776 Prob. Chi-Square(9) 0.5834
Scaled explained SS 11.77801 Prob. Chi-Square(9) 0.2261

Source: Eview output from data of sample insurance com, 2004 – 2014

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In this study as shown in table 4.1, both the F-statistic and Chi-Square versions of the test

statistic gave the same conclusion that there is no evidence for the presence of

heteroscedasticity, since the p-values were in excess of 0.05. The third version of the test

statistic, ‘Scaled explained SS’, which as the name suggests is based on a normalized

version of the explained sum of squares from the auxiliary regression, also gave the same

conclusion that there is no evidence for the presence of heteroscedasticity problem, since

the p-value was considerably in excess of 0.05.

Covariance between the error terms over time is zero (cov (ui,uj) = 0.) This is an

assumption that the errors are linearly independent of one another (uncorrelated with one

another). If the errors are correlated with one another, it is stated that they are auto

correlated. Brooks (2008) noted that the test for the existence of autocorrelation is made

using the Durbin-Watson (DW) test and Breusch-Godfrey test. As far as concerning this

paper the researcher used both the Durbin–Watson test and the Breusch-Godfrey test to

detect the proplem of autocorrelation.

The DW test uses two critical values ; the upper critical value (dU) and the lower critical

value (dL). According to DW test, the null hypothesis of there is no autocorrelation will

be rejected if the DW value from the regression is less than DL and greater than 4 minus

dL. But the null hypothesis is not rejected if the DW value is between dU, and 4 minus

dU. And finally, the test result will be inconclusive if the DW value is between dU and

dL, and between 4 minus dU and 4 minus dL. The rejection /non-rejection rule is given

by selecting the appropriate region from the following figure:

51 | P a g e
Rejection and non-rejection regions for Durbin-Watson Test

0 dl=1.357 du= 1.741 1.869 4-du=2.259 4-dl=2.643 4

Source: Eview output and durbin Watson table

The Durbin-Watson test statistic value in the regression result was 1.869. To identify

determinants of Ethiopian insurance companies profitability, 99 (9*11) observations were

used in the model. Therefore, to test for autocorrelation, the DW test critical values were

used. Then relevant critical lower and upper values for the test are dL= 1.357 and

dU=1.741 respectively. The values of 4 - dU = 4-1.741=2.259; 4 - dL = 4-1.357=2.643.

The Durbin-Watson test statistic of 1.869 is clearly between the upper limit (dU) which is

1.741 and the critical value of 4- dU i.e.2.259 and thus, the null hypothesis of no

autocorrelation is within the non- rejection region of the number line and thus there is no

evidence for the presence of autocorrelation. Other test for the existence of

autocorrelation is by using Breusch-Godfrey test.

Table 4.2 Breusch-Godfrey Serial Correlation LM Test:

F-statistic 0.848016 Prob. F(1,88) 0.3596

Obs*R-squared 0.944912 Prob. Chi-Square(1) 0.3310

Source: Eview output

Both versions of the test; an F-version and a χ2 version of the test indicate that the null

hypothesis of no autocorrelation should not be rejected. The conclusion from both

versions of the test in this case is that the null hypothesis of no autocorrelation is not

rejected.
52 | P a g e
Test for Normality-According to Brooks (2008), if the residuals are normally
distributed, the histogram should be bell-shaped and the Bera-Jarque statistic would not be

significant. This means that the p-value given at the bottom of the normality test screen

should be greater than 0.05 to support the null hypothesis of presence of normal

distribution at the 5 percent level.

Figure 4.1: Normality Test Result

14
Series: Standardized Residuals
12 Sample 2004 2014
Observations 99
10
Mean -8.76e-19
8
Median -0.000314
Maximum 0.059439
Minimum -0.056668
6
Std. Dev. 0.023766
Skewness -0.099509
4
Kurtosis 3.138509

2 Jarque-Bera 0.242519
Probability 0.885804
0
-0.06 -0.04 -0.02 0.00 0.02 0.04 0.06

Source: Eviews output

The above diagram witnesses that normality assumption holds, i.e., the coefficient of

kurtosis was close to 3, and the Bera-Jarque statistic has a P-value of 0.89 implying that

the data were consistent with a normal distribution assumption. Based on the statistical

result, the study failed to reject the null hypothesis of normality at the 5% significance

level.

Multicollinearity Test-Multicollinearity in the regression model suggests substantial

correlations among independent variables. This phenomenon introduces a problem

because the estimates of the sample parameters become inefficient and entail large

standard errors, which makes the coefficient values and signs unreliable. In addition,

multiple independent variables with high correlation add no additional information to the

53 | P a g e
model. It also conceals the real impact of each variable on the dependent variable

(Anderson et al., 2008). Hair et al. (2006) argued that correlation coefficient below 0.9

may not cause serious multicollinearity problem. In addition, Malhotra(2007) stated that

multicollinearity problems exists when the correlation coefficient among variables should

be greater than 0.75.

Table 4.3: Correlation Matrix between independent variables

CACL CS CIEP COE PG PCTA NANPW GDP INF

CACL 1.00

CS -0.27 1.00

CIEP -0.33 0.06 1.00

COE -0.48 0.49 0.42 1.00

PG -0.10 0.00 -0.03 -0.09 1.00

PCTA -0.10 0.51 -0.36 0.23 0.18 1.00

NANPW 0.68 -0.41 -0.51 -0.71 -0.19 -0.14 1.00

GDP 0.23 -0.45 -0.03 -0.25 0.11 -0.23 0.20 1.00

INF -0.22 0.13 0.17 0.20 0.28 0.12 -0.23 -0.32 1.00

Source: Eviews output

The method used in this study to test the existence of multicollinearity was by checking

the Pearson correlation between the independent variables. The correlations between the

independent variables are shown in table 4.3 above. All correlation results are below

0.75, which indicates that multicollinearity is not a problem for this study.

In general, all tests illustrated above were testimonials as to the employed model was not

sensitive to the problems of violation of the CLRM assumption.

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4.2 Descriptive statistics
Table 4.4 presents a summary of the descriptive statistics of the dependent and

independent variables for nine insurance companies for a period of eleven years from

2004-2014 with a total of 99 observations. Key figures, including mean, maximum,

minimum and standard deviation value were reported.

Table 4.4: Descriptive Statistics of the Variables

Variables Mean Std.Dev. Maximum Minimum Pro Obsv

ROA 0.08 0.05 0.19 -0.10 0.15 99
CACL 1.05 0.31 2.60 0.54 0.00 99
COE 0.77 0.35 1.52 0.11 0.56 99
CIEP 0.63 0.15 0.90 0.13 0.00 99
PCTA 0.16 0.08 0.47 0.03 0.00 99
CS 19.04 1.05 21.55 16.53 0.00 99
NANPW 0.83 0.44 2.46 0.30 0.82 99
PG 0.21 0.21 0.84 -0.52 0.02 99
GDP 0.11 0.01 0.13 0.10 0.26 99
INF 0.16 0.11 0.36 0.03 0.00 99

Source: Financial statements of sampled insurance companies

As indicated in the above table, the profitability measures (ROA) shows that Ethiopian

insurance company achieved on average a positive before tax profit over the last eleven

years. For the total sample, the mean of ROA was 8% with a maximum of 19% and a

minimum of -10%. That means the most profitable insurance company among the

sampled earned 19cents of profit before tax for a single birr invested in the assets of the

firm. On the other hand, not profitable insurance company of the sampled lost 10cents of

profit before tax for each birr invested in the assets of the firm. This clearly illustrates the

disparity of rates of return earned by insurance companies’. Regarding the standard

deviation, it means the value of ROA deviate from its mean to both sides by 5 percent

which indicate there was low variation from the mean. This implies that insurance

55 | P a g e
companies incurred loss need to optimize the use of their assets to increase the return on

their assets.

Concerning the underwriting risk variable, as proxies by losses incurred divided by

annual premium earned; the mean of incurred claims to earned premium ratio was 63

percent. This implies that on average, most insurance companies from the sample paid 63

percent loss incurred out of the total premium earned per year which was favorable as

compared with acceptable standard of around 70%. The highest ratio of losses incurred to

earned premium value was 90 percent which is above the maximum standard of 70%, but

the minimum value for a company in a particular year was 13 percent which is far below

the maximum standard of 70 percent. This indicates that there is high variation in

underwriting performance in insurance industry in Ethiopia during the study period.

The average value of technical provision as measured by the ratio of reserve for claims

outstanding to equity was 0.77. This implies that on average, reserve for claims

outstanding was 0.77 times equity. The highest claims outstanding to equity for a

company in a particular year was 1.52 which is far below the maximum standard of 2.5

times and the minimum ratio was 0.11times.

The average value for solvency ratio as measured by net asset to net written premium was

0.83. The standard deviation of 0.44, maximum of 2.46 and the minimum of 0.30 which

is higher than the minimum requirement of 20 percent.

Liquidity measures the ability of insurance companies to fund increases in assets and

meet obligations as they come due, without incurring unacceptable losses. The average

value of the liquidity measured by current ratio was 105% that was far below the NBE

requirement of 150% which showed the sector was operating at a low current ratio

position during the study period. The average value 1.05 indicates that for each one birr

current liability there was 1.05 birr current asset to meet obligation. The maximum value

and the minimum value was 2.60 and 0.54 respectively for the study period. The value of

56 | P a g e
standard deviation (i.e. 0.31) indicates high dispersion from the mean value of liquidity in

the case of Ethiopia insurance companies.

The average value of the growth variable as proxied by change in gross written premium

was 21percent. This implies that on average, the insurance companies’ gross premium

increased by 21 percent over the study period. While the accepted values of premium

growth range is between –33% and +33%, the maximum & minimum values of premium

growth were 84 &-52 percent respectively.This high increase and decrease in premium

growth for a company in a particular year indicates that unstable premium underwritings.

The outputs of the descriptive statistics indicate that the mean of reinsurance dependency

as proxied by premium ceded to total asset was 16%.This means that on average 16

percent of gross premium collected as percentage of total asset was ceded to reinsurance

which is below the standard of around 30%. The maximum value of premium ceded ratio

was 47 percent and a minimum value of 3 percent. The minimum ratio of premium ceded

indicate that the lower risk of dependency on reinsurance, but the higher will be the

exposure of the capital base to unforeseen above average losses and catastrophe.

Further, to check the size of the insurance company and its relationship with profitability,

logarithm of total asset is used as proxy. The mean of the logarithm of total assets over

the period 2004 to 2014 was 19.04. Size of insurance companies was highly dispersed

from its mean value (i.e. 19.04) with the standard deviation of 1.05. The maximum and

minimum values were 21.55 and 16.53 respectively. The maximum value indicating the

Ethiopian Insurance Corporation (EIC) and the minimum value was some of privately

owned insurance companies such as Global and Nice among the sampled insurance

companies.

Regarding GDP, the mean value of real GDP growth rate was 11% indicating the average

real growth rate of the country’s economy over the past 11 years. The maximum growth

of the economy was recorded in the year 2005 (i.e. 12.6%) and the minimum was in the

57 | P a g e
year 2013 (i.e. 9.8%). The country has been recording double digit growth rate with little

dispersion towards the average over the period under study with the standard deviation of

one percent. This indicates that economic growth in Ethiopia during the period of 2004 to

2014 remains stable.

Finally, othe variable employed in this study, general inflation had rate (i.e. 16.2%) of the

country on average over the past eleven years was more than the average GDP. The

maximum inflation was recorded in the year 2009 (i.e. 36.4%) and the minimum was in

the year 2010 (i.e. 2.8%). The rate of inflation was highly dispersed over the periods

under study towards its mean with standard deviation of 11 %. This implies that inflation

rate in Ethiopia during the study period was somewhat unstable.

4.2.1 Correlation Analysis

Correlation is a way to index the degree to which two or more variables are associated

with or related to each other. The most widely used bi-variant correlation statistics is the

Pearson product-movement coefficient, commonly called the Pearson correlation which

is used in this study.

According to Brooks (2008), if it is stated that y and x are correlated, it means that y and

x are being treated in a completely symmetrical way. Thus, it is not implied that changes

in x cause changes in y, or indeed that changes in y cause changes in x rather, it is simply

stated that there is evidence for a linear relationship between the two variables, and that

movements in the two are on average related to an extent given by the correlation

coefficient.

Table 4.5 below provides the Pearson’s correlation matrix for the variables used in the

analysis.

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Table 4.5 Correlation matrix

Correlation
Probability ROA CIEP COE CACL PCTA NANPW CS PG GDP INF
ROA 1.000
-----

CIEP -0.403 1.000

0.000 -----

COE -0.056 0.424 1.000

0.581 0.000 -----

CACL -0.012 -0.335 -0.485 1.000

0.909 0.001 0.000 -----

PCTA 0.380 -0.364 0.227 -0.101 1.000

0.000 0.000 0.024 0.320 -----

NANPW -0.104 -0.512 -0.708 0.684 -0.137 1.000

0.305 0.000 0.000 0.000 0.177 -----

CS 0.547 0.060 0.490 -0.270 0.514 -0.408 1.000

0.000 0.555 0.000 0.007 0.000 0.000 -----

PG 0.212 -0.032 -0.085 -0.104 0.181 -0.193 0.003 1.000

0.035 0.755 0.402 0.308 0.073 0.055 0.978 -----

GDP -0.483 -0.034 -0.246 0.228 -0.226 0.200 -0.454 0.113 1.000
0.000 0.738 0.014 0.023 0.025 0.048 0.000 0.267 -----

INF 0.057 0.167 0.203 -0.222 0.118 -0.231 0.125 0.280 -0.325 1.000
0.574 0.099 0.044 0.028 0.246 0.021 0.217 0.005 0.001 -----

Source: Financial statements of sampled insurance companies

As can be seen from the above table,the correlation result between underwriting risk

(claims incurred to earned premium) had negative correlation with return on equity and

significantly correlated at 1 percent significant level with a coefficient of -0.40. Besides,

claims outstanding to equity, current ratio and net asset to net written premium had

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negative relationship with return on equity with a coefficient of -0.06, -0.01 and -0.10

respectively. This indicates that as a ratio of technical provision, liquidity and solvency

increases, profitability moves to the opposite direction, but the negative relationship are

not statistically different from zero. In contrary to the above explained variables, the

Pearson correlation coefficients of premium growth 0.21, reinsurance dependency 0.38,

and company size 0.55 had positive relationship with return on equity at five percent, 1

percent and 1 percent significance level respectively. Further, there was negative

correlation between macro economic variable gross domestic product with return on

equity with a coefficient of -0.48 at one percent significance level and contrary,

association between inflation and return on equity was positive but statistically not

different from zero.

4.3 Regression Results and Discussion

This section presents the empirical findings from the econometric output and interview

results on determinants of insurance companies’ profitability in Ethiopia. Table 4.6 below

reports regression results between the dependent variable (ROA) and explanatory

variables. Under the following regression outputs the beta coefficient may be negative or

positive; beta indicates that each variable’s level of influence on the dependent variable.

P-value indicates at what percentage or precession level of each variable is significant.

The R-squared value measures how well the regression model explains the actual

variations in the dependent variable (Brooks, 2008). R-squared statistics and the adjusted-

R squared statistics of the model was 81% and 77% respectively. The adjusted R2 value

77% indicates the total variability of determinant of insurance companies profitability

was explained by the variables in the model. Thus these variables collectively, are good

explanatory variables to identify the determinant of insurance companies profitability in

Ethiopia. The regression F-statistic (20.4) and the p-value of zero attached to the test

statistic reveal that the null hypothesis that all of the coefficients are jointly zero should

60 | P a g e
be rejected. Thus, it implies that the independent variables in the model were able to

explain variations in the dependent variable.

Table 4.6 Regression Results for determinants of Ethiopian insurance companies’

profitability

Variable Coefficient Std. Error t-Statistic Prob.

C -0.020062 0.188358 -0.106511 0.9154

CIEP -0.230835 0.031399 -7.351733 0.0000
COE -0.057701 0.014859 -3.883378 0.0002
CACL 0.024973 0.012509 1.996438 0.0492
PCTA -0.052605 0.057185 -0.919907 0.3604
NANPW -0.084780 0.018446 -4.596187 0.0000
CS 0.029349 0.007005 4.189974 0.0001
PG 0.034256 0.018691 1.832796 0.0705
GDP -1.970838 0.564583 -3.490786 0.0008
INF -0.040773 0.029050 -1.403573 0.1643

Effects Specification

Cross-section fixed (dummy variables)

R-squared 0.810840 Durbin-Watson stat 1.869868

Adjusted R-squared 0.771140
F-statistic 20.42411
Prob(F-statistic) 0.000000

***, **, * indicates significant at 1%, 5%, and 10% significance level respectively.

Source: Financial statements of sampled insurance companies and own computation

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Table 4.6 above shows that all explanatory variables except two variables i.e. premium

ceded to total asset (reinsurance dependency) and inflation were significant impact on

profitability. Among the significant variables, underwriting risk ratio (claim incurred to

earned premium), technical provision ratio (claims outstanding to equity), solvency ratio,

company size and real GDP were significant at 1% significance level since the p-value

for those variables were 0.000. Whereas variables like liquidity and premium growth

were significant at 5% and 10% significance level respectively.

Regarding the coefficient of explanatory variables; underwriting risk ratio, technical

provisions ratio, reinsurance dependence, solvency ratio, gross domestic products and

inflation were negative against profitability as far as the coefficients for those variables

were -0.232, -0.058, -0.053, -0.085, -1.971 and -0.041 respectively. On the other hand,

variables like premium growth, company size and liquidity had a positive relationship

with profitability as far as their respective coefficients were 0.034, 0.029 and 0.025

respectively.

Regarding the interview results, in depth interviews were conducted with nine managers

(three managers from Ethiopian Insurance Corporation and six from two private

insurance companies are interviewed by using unstructured face to-face interviews. The

nine managers interviewed were from finance, underwriting and reinsurance departments.

The interview questions were fully unstructured and focused on the identification of

determinants of Ethiopian insurance companies profitability in general. More

specifically, the interview questions were also tried to identify how those factors can

influence profitability, the major determinants among the influential factors, mitigation

strategy taken by the insurance to reduce the negative influence of controllable factors

and their general opinion regarding the issue of insurance profitability.

On the question that focuses on the determinants of profitability, respondents offered

various factors, especially since the question was open ended. A number of factors were

mentioned by particular interviewees about factors affecting insurers’

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profitability.Despite varying responses, however, the most common determinants of

profitability includes variables such as underwriting and liability, investment or market

risk, reinsurance, lack of innovative products or investment opportunity and fear of risky

investments by insurance company themselves, technical reserve, liquidity, industry

effect (price cutting), number of claims, moral hazard, quality of underwriter, size,

contagion and related part, operational, technological risk, legal and regulatory, gross

domestic products, interest rate change and inflation.

The profitability determinants are individually discussed in the next Paragraph by

referring regression result of table 4.6, interview results and previous empirical studies.

Underwriting risk:- The underwriting risk emphasizes the efficiency of the insurer’s
underwriting activity and the exposure to financial loss resulting from the selection and

approval of risks to be insured. It is a risk of losses from underpriced products,

insufficient volume of premium, improper underwriting controls, the development of new

products that are not properly priced.The coefficient of underwriting which is measured

by claim incurred to earned premium ratio was negative and statistically significant at 1%

significance level (p-value=0). The results indicate that low underwriting risk produce

positive effect on profitability. It implies that higher underwriting risk increases the

operating ratio, indicating adverse effect on the firm’s profitability.This finding is

consistent with previous studies Ying Lee (2014), Burca and Batrinca (2014). They

concluded that underwriting risk has a negative influence on the insurer’s profitability,

since taking an excessive underwriting risk can affect the company’s stability through

higher expenses. The finding is consistent with the interview results suggested that

underwriting is a fundamental objective to produce profitable book of business. The

interviewees indicated that the major causes of underwriting risk are lack of adequate pre

risk evaluation and selection, difficulty of standard criteria for risk evaluation; claims

handling practice are not up to desirable practice level, most branch managers are

production oriented instead of profit oriented. Other basic the reason is moral hazard; the

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possibility that insured’s may deliberately cause an insured event or pretend that such an

event occurred to obtain insurance payments. Thus, this study supports the hypothesis

that significant negative impact of underwriting risk on insurance companies’

profitability.

Reinsurance dependence:- Insurance companies usually take out reinsurance cover to

stabilise earnings, increase underwriting capacity and provide protection against

catastrophic losses, nevertheless it involves a certain costs.The coefficient of reinsurance

dependence which is measured as ratio of premiums ceded in reinsurance to total asset

was negative, but statistically insignificant even at 10% significance level (p-

value=0.3604) indicating that its influence is negligible.The insignificant parameter

indicates that the reinsurance dependence does not affect Ethiopian insurance

profitability. Referring to previous studies, the results concerning reinsurance dependence

are mixed. Shiu (2014) found a negative relationship between reinsurance dependence

and insurers profitability, but it is not significant which is consistent with this study.

However, Ying lee (2014) found a significant negative relationship between reinsurance

dependence and insurance profits.

The interview result pointed out mixed idea about the impact of reinsurance dependence

on Ethiopian insurance companies profitability. According to the interviewees,

dependency on reinsurance has important for insurance companies’ profitability due to

protection against exposure to large or accumulation of losses, additional capacity for

insuring big risk, the higher the premium ceded the higher is the reinsurance coverage,

but determining an appropriate retention level is important for insurance companies. The

negative side of reinsurance dependence on Ethiopian insurance companies is outflow of

foreign exchange to reinsurance business which have a negative influence over the

insurance industry and economy of the country. To reduce the outflow of foreign

exchange, National Bank of Ethiopia made new directives (SRB/1/2014) about

reinsurance company establishment in Ethiopia. The objective of this directive is to

64 | P a g e
promote a financial resource mobilization and reduces cost related to cross-border

reinsurance transactions.Therefore, conclusion about the impact of reinsurance

dependence on insurers’ profitability remains ambiguous and further research is required.

Thus this study unable to reject the null hypothesis which states there is no impact of

reinsurance dependence on Ethiopian insurance companies profitability.

Liquidity:-.Liquidity is the availability of funds, or assurance that funds will be

available, to honor all cash outflow commitments (both on and off-balance sheet) as they

fall due. More than any other type of financial institution, insurance companies are

subject to unpredictable but significant demands for cash. When a disaster such as a

hurricane or earthquake occurs, insurers must be able to start making payouts very

quickly in order to avoid major hardship to policyholders. The regression results in this

research indicate that the relation between liquidity and profitability is positive and

significant at 5% significancy level (p-value= 0.0492). This result implies that more

liquid insurance have higher profitability, all other things held constant, if current assets

pay insurance firm’s current liabilities, it will have direct positive impact on profitability.

Regarding the impact of liquidity on profitability, the interviewees revealed that

insurance firm in nature must be liquid to meet claims obligation, to avoid loss of

business and damage to public image. According to the interviewees major causes of

liquidity risk are sometimes premium is not collected as expected, when the company has

no clear cash management policies, lower rate of interest at bank for time deposit. The

current study is consistent with the previous emperical findings; (Amal, 2012 and Chen &

Wong, 2004).They suggested that the insurance companies should increase the current

assets and decrease current liabilities because, companies with a lower level of liquidity

will have more cash constraints and will have more difficulties in repaying to

policyholders when loss occurred. Since liquidity measures the ability of insurance

companies to fulfill their immediate commitments to policyholders and other creditors

without having to increase profits on underwriting and investment activities and liquidate

65 | P a g e
financial assets. Consistent with this, National Bank of Ethiopia made directive No

SIB/25/2004. According to this directive, insurance companies should keep amount of

liquid cash (i.e. 65%) of total admitted asset to meet immediate commitments to

policyholders.If the insurance companies meets this commitment, they will become

sound and increase customer satisfaction and helps more premium collection from

customers and results increase in profitability. Thus, this study support the hypothesis

that liquidity has positive impact on profitability of insurance companies in Ethiopia, as

it is statistically significant.

Technical provision risk:- Technical provision risk is that the companies’ liability to
policyholders could be understated. The high level of technical provision risk indicators

may signal a bad use of capital resources or failure to generate its portfolio. An insurance

company is obliged to determine, at the end of accounting period, the technical reserve

for settling liabilities from insurance contracts and they serve for settling liabilities set

forth in the issued insurance policies. Technical reserve is generated from the technical

premium funds. Their level is determined by actuarial methods and it depends on future

liabilities and structure of insurance portfolio. Outstanding claims reserve is considered

riskier than ordinary long-term corporate debt since neither the magnitude nor the timing

of the cash flows is known.The regression result of this study show that the coefficient of

technical provision which is measured by claims outstanding to equity was negative and

statistically significant at 1% significance level (p-value=0.0002). The result indicates

that companies holding insufficient provision for outstanding will have negative impact

on profitability because understatement can result in the company being unable to

discharge its entire obligation to the public. According to the interview results, the major

causes of inadequate provision problems are lack of optional reserve arrangement such as

claims fluctuation reserve, absence of reserve for man -made or moral hazard and this

may lead to overstatement of current year’s profit but actually not. The result was

consistent with Shiu (2014) in UK found that negative but statistically insignificant

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relationship between technical provision and profitability of firms. Therefore, current

study supports the hypothesis a significant negative impact of technical provision risk on

insurance company’s profitability.

Solvency ratio (Capital Adequacy):- Solvency ratio is one of the indicators of

financial soundness. Insurance companies with higher solvency ratio are considered to be

more sound financially. Financially sound insurance companies are better able to attract

prospective policyholders and are better able to adhere to the specified underwriting

guidelines. By adhering to the guidelines, the insurance companies can expect a better

underwriting result. The coefficient of solvency ratio which is measured by net assets to

net written premiums was negative and statistically significant at 1% significance level

(p-value=0). This means that the more solvent a company is (i.e. more equity or less

underwrite premium ), the less profitability it will have.The result indicates that

insurance companies increase underwrite premium to increase the underwriting profit

without increasing their capital ,which may results an excess of liabilities over assets,

sometimes referred to as capital deficit. It follows then that the smaller the equity base in

relation to the liabilities of the company, the lower the company's ability to absorb

unforeseen shocks and unable to guarantee repayment to all claimants. The interview

result suggested that adequate capital is the principal element to kick of business, insure

continuous operation, sustainability and growth of the business and to increase retention

capacity of the insurers. While underwrite premium increase, insurance companies in

Ethiopia due to lack of capital adequacy, they may not retain premium collected from

mega projects and they may cede high percentage to cross- border reinsurers. To avoid

this problem, NBE made new directive (SIB/34/2014). According to this directine

“SIB/34/2014” about the capital increments, all insurers existing or under formation

insurers should have to increase their capital for both life and general from (3m &4m to

15m & 60m) respectively. Durinck et al. (1997) found that companies are required to use

some degree of liabilities to finance their activities if they want to increase profit.

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Assuming that the company is in its first stage, the manager will choose to invest using

the retained earnings in order to increase profitability. This means that the internal

financing will continue until the retained earnings reach the amount of zero the faster the

growth, the more external financing firms will use. However, this increase in external

financing is mainly through an increase in the liabilities, as the increase in external equity

financing was not found significant. As a company grows, the solvency ratio will thus

become smaller.Therefore one can conclude that solvency ratio was a key driver of

profitability of insurance companies in Ethiopia.

Company size:-Regarding the variable size of the insurer it can be stated that, it is much
harder for smaller companies to write insurance premiums than for bigger ones since

smaller company cannot secure their clients in the cases of aggregate uncertainty or big

catastrophe event. Larger insurers can achieve operating cost efficiencies through

increasing output i.e. they are able to realize economies of scale especially in terms of

labor costs, which is the most important factor for delivering insurance services.

Company size is computed as logarithm of total assets of the insurance company. The

regression result of this study show that the variable size is positively related to

profitability and statistically significant at the 1% level of significance (p-

value=0.0001).This indicates that profitability of large insurance companies is better than

small size companies. Profitability is likely to increase in size, because large insurance

companies normally have greater capacity for dealing with adverse market fluctuations

than small insurance companies and have more economies of scale in terms of the unit

cost, which is the most significant production factor for delivering insurance services,

complex information systems and a better expenses management. The finding of this

study is congruent with, Malik (2011), Chen and Wong (2004) and Shiu (2014).They

revealed that large corporate size enables to effectively diversify their assumed risks and

respond more quickly to changes in market conditions. An increase in total assets such as

the establishment of more branches and the adoption of new technologies enables an

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insurer to underwrite more policies which may increase the underwriting profit and the

total net profit. Hence, this study supports the hypothesis that firm size is a significant

positive determinant of insurers profitability in Ethiopia.

Premium growth:-Premium growth measures the rate of market penetration.

Concerning the premium growth, the regression results in this research imply that the

relation between premium growth and profitability is positive and significant at 10%

significancy level (p-value= 0.0909).The positive coefficient of growth in writing

premium indicates a positive relationship between growth in writing premium and

profitability. It implies that Insurance companies underwrite more premium over the

years have better chance of being profitable for the reason that they gain return from

premium collected when the excessive attention on marketing to grow premiums with a

proportionate allocation of resources towards the management of their investment

portfolios is given. The result of the study supports the findings of Chen and Wong

(2004), but their found is not significantly different from zero. This result clearly

supports hypothesis that premium growth has a positive and significant impact on

profitability of insurance companies in Ethiopia.

Gross domestic product: - Gross domestic product is the market value of all finished
goods and services produced in a country within a specified period, mostly one year. It is

a gauge of economic recession and recovery and an economy's general monetary ability

to address externalities. Oshinloye et al (2009) showed that no country can experience

meaningful development without the presence of formidable insurance industry, thereby

making insurance business in any nation indispensable irrespective of its quota to the

gross domestic product. According to Ezirim (2002), insurance industry is perceived as

an indispensable tool of economic progress, growth and development. Growth rate of

GDP reflects economic activity as well as level of economic development and as such

affect the various factors related to the supply and demand for insurance products and

services. If GDP grows, the likelihood of selling insurance policies also grows and

69 | P a g e
insurers are likely to benefit from that in form of higher profits. However, result of this

study shows that a negative coefficient of -1.970 and it was statistically significant at 1%

significance level (P-value 0.0008) indicating that growth in economic condition

measured in terms of gross domestic product have negative impact on profitability of

Ethiopian insurers for the study period. The finding is consistent with the interview

results suggests that while the country’s continuous economic growth, the growth of

insurance industry in Ethiopia is not good, because the level of awareness about

insurance in the populace is very low. Other basic the reason behind this result is while

economic growth increases activities like automobile insurance, home owner insurance,

worker compensations; the demand for insurance coverage for such activities are

relatively inelastic. Lack of innovative products or investment opportunity and fear of

risky investments by insurance company themselves, industry effect (price cutting) and

moral hazard are also other reasons for this result. The finding of this study is congruent

with (Naveed, 2008), (Maria, 2014), and Lee (2014). But their finding was not

significantly different from zero. The current study found that economic growth is not

positively affect the insurer’s profitability in Ethiopia and thus the conclusion about the

impact of Ethiopian economic growth on insurers’ profitability remains ambiguous and

further research is required.

Inflation:-The inflation could affect insurance companies’ profitability influencing both

their liabilities and assets. In expectation of inflation, claim payments increases as well as

reserves that are required in anticipation of the higher claims, consequently reducing

technical result and profitability. The coefficient of inflation was negative, but it was not

statistically significant, (p-values 0. 1643), thus the effect of inflation on Ethiopian

insurers’ profitability is not significant. The result suggested that inflation is not a

determinant of insurers’ profitability in Ethiopia. The interview result reveals inverse to

regression results. According to the interviewees, inflation has negative impact on

insurers profitability because inflation affects results of underwriting premiums, since

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policies are typically not adjusted periodically. For instance, the price of automobiles or

spare parts increased from time to time, but the price of rate chart is not adjusted for

underwrite premiums as a price increased, which resulting in costs increased faster than

revenues.Negative influences of inflation on insurers’ profitability was confirmed in

empirical studies by Shiu (2014), Pervan (2012) and Ying Lee (2014), but are not

significantly different from zero.

4.4 Summary of main findings

Generally this chapter presented the results of the structured record reviews and in depth

interview and then discussed the analysis of these results jointly. From the above data

analysis, Ethiopian insurers’ profitability is highly affected by all variables included in

this study except reinsurance dependency and inflation. The findings of the study showed

that underwriting risk, technical provision and solvency ratio have statistically significant

and negative relationship with insurers’ profitability. However, reinsurance dependence

has negative but insignificant relationship with profitability. On the other hand, variables

like liquidity, company size and premium growth have a positive and statistically

significant relationship with insurers’ profitability. In addition, economic growth rate has

significant influence on profitability whereas inflation has insignificant influence on

insurers’ profitability. The next chapter will discuss the conclusions and

recommendations of the study.

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 CHAPTER FIVE
5. Conclusions and Recommendation
The preceding chapter presented the results and discussion, while this chapter deals with

conclusions and recommendations based on the findings of the study. Accordingly this

chapter is organized into two subsections. Section 5.1 presents the conclusions and

section 5.2 presents the recommendations.

5.1. Conclusions
Insurance plays a significant role in a country's economic growth and offers financial

protection to an individual or firm against monetary losses suffered from unforeseen

circumstances. Therefore, in order to survive negative shocks and maintain a good

financial stability, it is important to identify the determinants that mostly influence the

insurers’ profitability. To this end, this study aimed at examining possible factors i.e. the

main insurance-specific and macro-economic factors that can affect Ethiopian insurance

profitability and to what extent these determinants exert impact on Ethiopian insurers

profitability. Mixed method research approach, particularly structured review of insurers’

documents and in-depth interviews are used to achieve the stated objective. More

specifically, the analyses are performed using data derived from the financial statements

of insurance companies in Ethiopia during eleven-year period from 2004-2014 by

descriptive statistics and multiple regressions and in-depth interview with company

managers. Nine insurance companies are selected as a sample from seventeen insurance

companies currently operating in Ethiopia. Fixed effect model is used to estimate the

regression equation. In the study underwriting risk, reinsurance dependence, solvency

ratio (capital adequacy), technical provision, liquidity, company size, premium growth,

real GDP and inflation are considered as independent variables while return on asset is

considered as dependent variables. The empirical findings on the effect of insurance

profitability in Ethiopia for the sample suggested the following conclusions.

72 | P a g e
The results of the regression analysis showed negative relationship between the ratio of

underwriting risk (claims incurred to earned premium) and profitability with strong

statistical significance. This shows that as minimizing underwriting risk it will certainly

improve the insurers’ profitability since taking an excessive underwriting risk can affect

the company’s stability through higher expenses. Again, the result showed a negative

relationship between reinsurance dependence and technical provision with profitability.

This indicates that as minimizing dependency on reinsurers or decreasing amount of

premium ceded will result in increased profitability. A negative relationship between

profitability and technical provision ratio implies inadequate provision hold decrease

insurance companies’ ability to pay claims and will result unable an insurer to underwrite

more policies which may decrease the underwriting profit and the total net profit. A

positive relationship between profitability and liquidity implies a good liquidity position

increases insurance companies’ ability to pay claims incurred and will have positive

impact on insurers’ profitability. The ratio of net asset to net written premium has a

negative impact on ROA with statistical significance. This implies that higher level of

solvency ratio results in lower profit. Regarding premium growth, results in this study

revealed that premium growth has a positive and significant effect on profitability. This

implies that insurance companies underwrite more premium over the years have better

chance of being profitable when the underwriters are cost conscious and profit oriented.

The logarithm of total assets has a positive impact on profitability with strong

significance coefficient. This indicates that as larger insurance companies of the country

experience more significant increases in profitability through economies of scale. The

economic growth rate has significant and negative influence on insurers’ profitability

which is inconsistency with the theory of if economy grows, the likelihood of selling

insurance policies also grows and insurers are likely to benefit from that in form of higher

profits. On the other hand, inflation has little or no impact on the profitability of

Ethiopian companies, since inflation was not significant even at 10% significance level.

73 | P a g e
In general, underwriting risk, technical provision, liquidity, company size, solvency ratio,

premium growth and gross domestic products are significant key drivers of profitability

of insurance companies in Ethiopia whereas reinsurance dependence and inflation are

insignificant determinant of insurance companies’ profitability in Ethiopia.

5.2 Recommendations
On the basis of the findings of this study, the researcher has drawn the following

recommendations:

 Since underwriting is basic activity for insurance industry in Ethiopia, the insurers

should reduce the impact of underwriting risk (amount of losses) by improving

their underwriting performance through techniques like product selections,

increase claims handling practice and gathering sufficient information or detail

about subject matter of insurance before agreement with the insured.

 The sector was operating at low liquidity position; therefore the insurers’ should

closely review liquidity risk and device the strategy like liquidity management

program and cash flow forecast to reduce the high liquidity risk.

 As far as absence of secondary market, lack of innovative products, industry

competition, price cutting and fear of risky investments by insurers themselves,

moral hazards are also factors that can affect Ethiopian insurance profitability

negatively; insurers should try their best in order to provide new product

developments, new insurance services and to participate in risky investment areas

which may in turn increases their profitability significantly.

 Finally, the study sought to investigate the determinant of insurers’ profitability in

Ethiopia. However, the variables used in the statistical analysis did not include all

factors that can affect Ethiopian insurers’ profitability. Thus, future research shall

conduct research on the issue like impact of government regulation policy and

other directives and non- financial determinant of insurance profitability such as

management quality, efficiency and productivity.

74 | P a g e
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Appendices
Appendix I: List of Insurance Companies in Ethiopia

No Name Establishment date

1 Ethiopian Insurance Corporation 1975

2 Africa Insurance Company 1/12/1994

3 Awash Insurance Company 1/10/1994

4 Global Insurance Company 11/1/1997

5 Lion Insurance Company 1/7/2007

6 NIB Insurance Company 1/5/2002

7 Nile Insurance Company 11/4/1995

8 Nyala Insurance Company 6/1/1995

9 United Insurance 1/4/1997

10 Abay Insurance Company 26/07/2010

11 Berhan Insurance 24/05/2011

12 National Insurance Company of Ethiopia 23/09/1994

13 Oromia Insurance Company 26/01/2009

14 Ethio-Life and General Insurance 23/10/2008

15 Tsehay Insurance 28/03/2012

16 Bunna Insurance 23/8/2011

17 Lucy Insurance 15/11/2012

Source: www.nbe.org.et

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Appendix II: Instrument for Unstructured face- to-face interview on the determinants of

insurance companies’ profitability in Ethiopia

1. In what condition underwriting risk, reinsurance dependence, solvency, liquidity,

premium growth, company size, technical provisions, and growth rate of GDP and

inflation affect the profitability of your company?

2. How do those variables influence your company’s profitability in general?

3. Among the problem that can influence your company’s profitability, which of them is

more affects your insurance company’s profitability?

4. Do you think that macroeconomic environments influence your insurance company’s

profitability?

5. What types of measures are taken by your company in order to reduce the influence

that affects profitability negatively?

6. Any idea or comment?

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Appendix-III: Regression Results For Determinants of insurance companies profitability

Dependent Variable: ROA

Method: Panel Least Squares
Date: 04/15/15 Time: 16:27
Sample: 2004 2014
Periods included: 11
Cross-sections included: 9
Total panel (balanced) observations: 99

Variable Coefficient Std. Error t-Statistic Prob.

C -0.020062 0.188358 -0.106511 0.9154

CIEP -0.230835 0.031399 -7.351733 0.0000
COE -0.057701 0.014859 -3.883378 0.0002
CACL 0.024973 0.012509 1.996438 0.0492
PCTA -0.052605 0.057185 -0.919907 0.3604
NANPW -0.084780 0.018446 -4.596187 0.0000
CS 0.029349 0.007005 4.189974 0.0001
PG 0.034256 0.018691 1.832796 0.0705
GDP -1.970838 0.564583 -3.490786 0.0008
INF -0.040773 0.029050 -1.403573 0.1643

Effects Specification

Cross-section fixed (dummy variables)

R-squared 0.810840 Mean dependent var 0.078252

Adjusted R-squared 0.771140 S.D. dependent var 0.054644
S.E. of regression 0.026141 Akaike info criterion -4.287630
Sum squared resid 0.055353 Schwarz criterion -3.815790
Log likelihood 230.2377 Hannan-Quinn criter. -4.096722
F-statistic 20.42411 Durbin-Watson stat 1.869868
Prob(F-statistic) 0.000000

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Appendix IV: Diagnostic tests results for OLS Assumptions

1. Normality test

Ho: Residuals are normally distributed

Ha: Residuals are not normally distributed

14
Series: Standardized Residuals
12 Sample 2004 2014
Observations 99
10
Mean -8.76e-19
8
Median -0.000314
Maximum 0.059439
Minimum -0.056668
6
Std. Dev. 0.023766
Skewness -0.099509
4
Kurtosis 3.138509

2 Jarque-Bera 0.242519
Probability 0.885804
0
-0.06 -0.04 -0.02 0.00 0.02 0.04 0.06

2. Heteroskedasticity test

Ho: The variance of the error is homoscedastic

Ha: The variance of the error is heteroscedastic

Heteroskedasticity Test: White

F-statistic 0.812644 Prob. F(9,89) 0.6058

Obs*R-squared 7.517776 Prob. Chi-Square(9) 0.5834
Scaled explained SS 11.77801 Prob. Chi-Square(9) 0.2261

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Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 04/15/15 Time: 16:49
Sample: 1 99
Included observations: 99

Variable Coefficient Std. Error t-Statistic Prob.

C 0.005833 0.003066 1.902563 0.0603

CIEP^2 7.94E-05 0.001284 0.061866 0.9508
COE^2 -0.000322 0.000378 -0.850629 0.3973
CACL^2 0.000185 0.000277 0.667476 0.5062
PCTA^2 0.007349 0.005561 1.321580 0.1897
NANPW^2 -0.000306 0.000289 -1.059292 0.2923
CS^2 -1.22E-05 6.00E-06 -2.028351 0.0455
PG^2 0.000659 0.001585 0.415857 0.6785
GDP^2 -0.051755 0.115154 -0.449438 0.6542
INF^2 0.000348 0.004457 0.077993 0.9380

R-squared 0.075937 Mean dependent var 0.000835

Adjusted R-squared -0.017507 S.D. dependent var 0.001652
S.E. of regression 0.001667 Akaike info criterion -9.860506
Sum squared resid 0.000247 Schwarz criterion -9.598373
Log likelihood 498.0951 Hannan-Quinn criter. -9.754447
F-statistic 0.812644 Durbin-Watson stat 1.957370
Prob(F-statistic) 0.605849

There is no problem of heteroscedasticity

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3. Autocorrelation test
Ho: The errors are uncorrelated with one another

Ha: The errors are correlated with one another

A) Breusch-Godfrey Serial Correlation LM Test:

F-statistic 0.848016 Prob. F(1,88) 0.3596

Obs*R-squared 0.944912 Prob. Chi-Square(1) 0.3310

B) Durbin-Watson Test

0 dl=1.357 du= 1.741 1.869 4-du=2.259 4-dl=2.643 4

There is no problem of autocorrelation

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Appendix V Ratio data used for analysis
year Insurance ROA CIEP NAPW CACL CS PG PCTA COE GDP INF
2004 EIC 0.0942 0.4843 0.6562 1.0198 20.2562 0.0212 0.1822 1.3533 0.1173 0.0735
2005 EIC 0.0986 0.5409 0.6080 1.1529 20.3211 0.0966 0.1835 1.1595 0.1264 0.0613
2006 EIC 0.0719 0.6662 1.2986 1.2307 20.4656 0.1420 0.1854 0.4934 0.1154 0.1058
2007 EIC 0.0881 0.6929 0.9822 1.2072 20.4749 0.2038 0.2116 0.6528 0.1179 0.1582
2008 EIC 0.0909 0.7177 0.7878 0.9924 20.5730 0.1943 0.2446 0.7762 0.1119 0.2530
2009 EIC 0.0868 0.7297 0.7403 1.1070 20.6827 0.1757 0.2626 0.9033 0.1004 0.3640
2010 EIC 0.1331 0.6174 0.6731 1.0872 20.8226 0.3283 0.3436 0.7845 0.1057 0.0280
2011 EIC 0.1122 0.7446 0.4806 0.9917 20.9745 0.2716 0.3449 0.9646 0.1128 0.1810
2012 EIC 0.1366 0.5591 0.3345 0.9405 21.3027 0.5066 0.3079 1.1192 0.1090 0.3410
2013 EIC 0.1652 0.6659 0.3418 0.9677 21.4558 0.3750 0.4738 1.0717 0.0982 0.1350
2014 EIC 0.1921 0.6023 0.3587 0.9849 21.5523 -0.0780 0.3047 0.8813 0.1035 0.0810
2004 AIC -0.0345 0.4882 1.6185 2.2190 18.2785 -0.5231 0.0312 0.6363 0.1173 0.0735
2005 AIC 0.0812 0.5548 0.7848 1.1551 18.2754 0.5978 0.0820 0.5121 0.1264 0.0613
2006 AIC 0.0604 0.6602 0.6886 1.1046 18.4804 0.3565 0.1455 0.4540 0.1154 0.1058
2007 AIC 0.0650 0.7768 0.5833 0.9892 18.7166 0.2779 0.1092 0.6250 0.1179 0.1582
2008 AIC 0.0685 0.7014 0.5487 0.8171 18.8482 0.1582 0.1130 0.8102 0.1119 0.2530
2009 AIC 0.0518 0.8145 0.5412 0.7856 19.0191 0.1446 0.1342 1.0127 0.1004 0.3640
2010 AIC 0.1109 0.6249 0.6022 0.8322 19.1947 0.1994 0.1217 0.9011 0.1057 0.0280
2011 AIC 0.0795 0.6165 0.5247 0.7846 19.6171 0.4738 0.1182 0.9483 0.1128 0.1810
2012 AIC 0.0793 0.6612 0.4609 0.8507 19.9655 0.5838 0.1861 1.3910 0.1090 0.3410
2013 AIC 0.1485 0.6127 0.5206 0.8890 20.1411 0.0770 0.1132 1.2153 0.0982 0.1350
2014 AIC 0.1022 0.6436 0.6315 0.8609 20.1780 0.0213 0.1255 1.0402 0.1035 0.0810
2004 Global 0.0333 0.4987 2.4633 2.6041 16.5266 0.1652 0.1344 0.1776 0.1173 0.0735
2005 Global 0.0404 0.4278 2.1480 2.2456 16.9541 0.2379 0.1024 0.1052 0.1264 0.0613
2006 Global 0.0432 0.5568 2.0201 2.3062 17.2292 0.3862 0.0936 0.1121 0.1154 0.1058
2007 Global 0.0546 0.5029 2.1175 1.5432 17.4171 0.1461 0.1002 0.1292 0.1179 0.1582
2008 Global 0.0452 0.5119 1.7416 0.8466 17.6058 0.2073 0.0902 0.1758 0.1119 0.2530
2009 Global 0.0541 0.5056 1.9987 0.9619 17.8044 0.0499 0.0861 0.2175 0.1004 0.3640
2010 Global 0.0805 0.4413 1.5971 0.8395 17.9226 0.2444 0.0759 0.1829 0.1057 0.0280
2011 Global 0.0364 0.7878 1.2508 0.9195 17.9954 0.4940 0.1171 0.2570 0.1128 0.1810
2012 Global 0.0203 0.8762 0.6860 0.9160 18.3545 0.8444 0.1249 0.5911 0.1090 0.3410
2013 Global 0.1532 0.5682 1.0522 1.1350 18.6375 -0.0228 0.0989 0.5254 0.0982 0.1350
2014 Global 0.1603 0.4841 1.3768 1.3519 18.8530 0.1452 0.0882 0.3093 0.1035 0.0810
2004 Nile 0.0157 0.7531 0.8321 0.9514 18.6772 0.1482 0.0559 0.6231 0.1173 0.0735
2005 Nile 0.0412 0.7245 0.8174 0.8388 18.8420 0.1446 0.0937 0.6799 0.1264 0.0613
2006 NILE 0.0357 0.7986 0.6455 1.0210 19.0145 0.2406 0.1188 0.9930 0.1154 0.1058
2007 Nile 0.0227 0.8550 0.5287 0.8810 19.0725 0.0991 0.0970 1.3161 0.1179 0.1582
2008 Nile -0.0265 0.8304 0.5035 0.6843 19.0552 -0.0067 0.1044 1.4956 0.1119 0.2530

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 2009 Nile 0.0217 0.6938 0.5553 0.7184 19.0884 0.1104 0.1621 1.1953 0.1004 0.3640
2010 Nile 0.1379 0.5737 0.7013 0.9275 19.2317 0.1572 0.1033 0.6235 0.1057 0.0280
2011 Nile 0.0980 0.7145 0.6049 0.9642 19.4050 0.3433 0.1058 0.5008 0.1128 0.1810
2012 Nile 0.1020 0.7051 0.5728 1.0891 19.7131 0.4486 0.1079 0.4954 0.1090 0.3410
2013 Nile 0.1096 0.7349 0.6944 1.1108 19.8631 -0.0387 0.1038 0.7620 0.0982 0.1350
2014 Nile 0.1187 0.7006 0.6370 1.0900 20.0003 0.1693 0.0882 0.7477 0.1035 0.0810
2004 Nice 0.0244 0.6558 0.5037 0.7666 17.0120 0.1548 0.1199 0.8537 0.1173 0.0735
2005 Nice -0.0471 0.7230 0.3427 0.7054 17.0574 0.1918 0.1191 1.1612 0.1264 0.0613
2006 Nice 0.0620 0.6603 0.3924 0.7321 17.2660 0.2041 0.1369 0.8475 0.1154 0.1058
2007 Nice 0.0849 0.6459 0.4154 0.9490 17.4950 0.1761 0.1162 0.9227 0.1179 0.1582
2008 Nice 0.0572 0.6740 0.4459 0.9315 17.5967 0.1573 0.1742 0.7264 0.1119 0.2530
2009 Nice 0.0463 0.6813 0.4460 0.8112 17.7498 0.1401 0.1857 0.8073 0.1004 0.3640
2010 Nice 0.0588 0.6773 0.4067 0.9921 17.9591 0.3159 0.2330 0.8420 0.1057 0.0280
2011 Nice 0.0029 0.7276 0.2992 1.1206 18.2758 0.2452 0.1620 1.4686 0.1128 0.1810
2012 Nice 0.1743 0.5405 0.3506 1.0525 18.7887 0.6795 0.1691 0.7890 0.1090 0.3410
2013 Nice 0.1237 0.5903 0.5326 1.1587 19.2143 0.1288 0.1345 0.6708 0.0982 0.1350
2014 Nice 0.0695 0.7002 0.5467 1.1232 19.3538 0.0532 0.1113 0.8386 0.1035 0.0810
2004 Africa 0.0111 0.6711 1.0231 1.2203 18.4407 -0.2096 0.1110 0.7493 0.1173 0.0735
2005 Africa -0.0037 0.7345 0.8833 1.1168 18.5067 0.1185 0.1298 0.8788 0.1264 0.0613
2006 Africa 0.0732 0.6016 1.0024 1.1610 18.8790 0.2719 0.1365 0.6882 0.1154 0.1058
2007 Africa 0.0204 0.8072 0.7922 1.0833 18.9782 0.2180 0.1570 0.8767 0.1179 0.1582
2008 Africa 0.0373 0.8175 0.5904 0.9990 19.2533 0.2949 0.1313 1.1165 0.1119 0.2530
2009 Africa 0.0478 0.8283 0.5547 0.9361 19.2878 0.1341 0.1335 1.2872 0.1004 0.3640
2010 Africa 0.0579 0.8155 0.4997 0.8890 19.6250 0.4507 0.1455 1.2174 0.1057 0.0280
2011 Africa 0.0530 0.8200 0.4080 0.8271 19.8813 0.3869 0.1337 1.3935 0.1128 0.1810
2012 Africa 0.0532 0.8540 0.3730 0.6717 20.0406 0.4030 0.1760 1.5086 0.1090 0.3410
2013 Africa 0.0619 0.8535 0.4433 0.5431 20.0234 -0.0980 0.1296 1.5200 0.0982 0.1350
2014 Africa 0.0804 0.8952 0.5361 0.6317 20.1199 0.0190 0.1485 1.5166 0.1035 0.0810
2004 Nib -0.1023 0.8384 0.9135 0.7403 17.5067 -0.0056 0.0808 0.1940 0.1173 0.0735
2005 Nib 0.0919 0.1322 1.3811 0.9825 17.9384 0.3792 0.2366 0.2002 0.1264 0.0613
2006 Nib 0.0467 0.1657 1.3722 1.0050 18.1034 0.4101 0.3444 0.2998 0.1154 0.1058
2007 Nib 0.0757 0.6671 0.6657 1.0541 18.4078 0.4258 0.1145 0.3664 0.1179 0.1582
2008 Nib 0.1122 0.6612 0.3853 0.8573 18.6529 0.5079 0.1104 0.6415 0.1119 0.2530
2009 Nib 0.0975 0.6809 0.4498 0.9426 19.0792 0.3156 0.0969 0.8437 0.1004 0.3640
2010 Nib 0.0934 0.6633 0.4399 0.9797 19.3421 0.3094 0.1210 0.8669 0.1057 0.0280
2011 Nib 0.0899 0.2909 0.9488 0.9999 19.5381 0.2576 0.4365 0.9359 0.1128 0.1810
2012 Nib 0.0885 0.2995 0.5795 0.9693 19.9792 0.5482 0.3354 1.0765 0.1090 0.3410
2013 Nib 0.1112 0.2689 1.1918 1.0518 20.0647 -0.0571 0.3881 1.0261 0.0982 0.1350
2014 Nib 0.1127 0.3049 1.5354 1.1079 20.2944 0.0632 0.3214 0.9189 0.1035 0.0810
2004 Nyala 0.0580 0.5900 1.2226 1.0757 18.5505 0.1212 0.1036 0.4088 0.1173 0.0735

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 2005 Nyala 0.0720 0.4903 1.1435 1.0837 18.5083 0.0780 0.1084 0.4411 0.1264 0.0613
2006 Nyala 0.0945 0.5932 0.8833 1.1956 18.6345 0.2700 0.1125 0.6300 0.1154 0.1058
2007 Nyala 0.0972 0.5240 0.8350 1.0771 18.6571 0.1474 0.1583 0.6048 0.1179 0.1582
2008 Nyala 0.0557 0.6822 0.6601 0.9721 18.7783 0.1725 0.1297 0.8249 0.1119 0.2530
2009 Nyala 0.1340 0.6171 0.9413 0.9063 18.8339 -0.0391 0.1632 0.6730 0.1004 0.3640
2010 Nyala 0.1377 0.5886 0.9627 0.9823 19.0508 0.3411 0.2541 0.6312 0.1057 0.0280
2011 Nyala 0.1591 0.5484 0.9785 1.0176 19.1872 0.1037 0.2137 0.5407 0.1128 0.1810
2012 Nyala 0.1820 0.4094 0.9219 1.0995 19.5459 0.3411 0.1671 0.4191 0.1090 0.3410
2013 Nyala 0.1647 0.4608 1.0309 1.1423 19.8708 0.3033 0.2002 0.6298 0.0982 0.1350
2014 Nyala 0.1434 0.5396 1.1895 1.2176 20.1119 0.0940 0.1569 0.5978 0.1035 0.0810
2004 Unic -0.0545 0.8424 0.8923 1.0633 18.0014 -0.1236 0.0944 0.6729 0.1173 0.0735
2005 Unic -0.0156 0.8111 0.9769 1.0159 17.9336 -0.0834 0.1259 0.6933 0.1264 0.0613
2006 Unic 0.0922 0.5033 1.0589 1.2362 18.2884 0.4374 0.1044 0.4734 0.1154 0.1058
2007 Unic 0.1002 0.7202 0.7464 1.1115 18.5299 0.6916 0.1941 0.6558 0.1179 0.1582
2008 Unic 0.1668 0.5878 0.7181 1.1068 18.8090 0.3579 0.2189 0.7362 0.1119 0.2530
2009 Unic 0.0472 0.7707 0.7048 1.0268 18.9672 0.0389 0.2239 1.0010 0.1004 0.3640
2010 Unic 0.1409 0.5826 0.8697 1.1695 19.1726 0.0955 0.1649 0.7027 0.1057 0.0280
2011 Unic 0.0874 0.7130 0.7699 1.1893 19.3721 0.2887 0.1731 0.7898 0.1128 0.1810
2012 Unic 0.1219 0.6413 0.7360 1.2454 19.6969 0.4762 0.1885 0.6802 0.1090 0.3410
2013 Unic 0.1732 0.5427 0.9182 1.2684 19.8845 0.0415 0.1632 0.6520 0.0982 0.1350
2014 Unic 0.1412 0.5413 0.9549 0.9112 20.0522 0.1019 0.1394 0.5877 0.1035 0.0810

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