DETERMINANTS OF PROFITABILITY OF INSURANCE FIRMS IN GHANA

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 S. Mishkin & Stanley G. Eakins (2009), financial markets and institutions not only affect your everyday life but also involve huge flows of funds – trillions of dollars-throughout our economy, which in turn affect business profits, the production of goods and services, and even the economic well-being of countries other than the United States.

Indeed, a well-functioning financial markets and institutions are one of the most important key factors in producing high economic growth, and poorly performing financial markets and institutions are one of the reasons that many countries in the world remain desperately poor.

Every firm is most concerned with its profitability. One of the most frequently used tools of financial ratio analysis is profitability ratios which are used to determine the company's bottom line. Profitability measures are important to company managers and owners alike.

If a small business has outside investors who have put their own money into the company, the primary owner certainly has to show profitability to those equity investors. 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 Ghana it has received little attention.

According to a study conducted by Ahmed et al (2011) on the determinants of performance, it indicated that size, risk and leverage are important determinants of performance of life insurance companies of Pakistan.

According to their study Return on Asset (ROA) has statistically insignificant relationship with growth, profitability, age and liquidity.

According to Wright (1992), due to the unique accounting system used by life insurance companies, profitability of the industry has always been difficult to measure as compared with other financial institutions or corporations.

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.

Kasturi (2006) argued that the performance of insurance company in financial terms is normally expressed in net premium earned, profitability from underwriting activities, annual turnover, return on investment and return on equity.

These measures can be classified as profit performance measures and investment performance measures. Kallhoefer and Salem (2008) examined the non performing loans and the profitability of the Egyptian banking sector, especially income related problems in public banks.

The profit measures used to analyze this is a banks specific version of the DuPont ROE scheme as suggested by Schierebeck. Compared to other approaches, it provides a well-organized insight into the profitability structure of a bank, using the published data from the financial statement.

Lim (2008), analyses the efficiency and profitability of Japanese banks from 2000 to 2006. The data, which are presented in terms of core profit, average Return on Assets (ROA), Return on Equity (ROE), and net interest margin, indicate the low level of profitability of Japanese banks.

Insurance firms in Ghana now fall into three categories: Life Insurance (includes life savings, accident indemnity, hospitalization Insurance and many others), Non-Life Insurance ( includes fire, consequential loss, household policy, burglary, public liability policy and many others) and Composite Insurance (a combination of Life and Non-Life insurance).

Intermediaries in the insurance industry in Ghana are brokers, loss adjusters, actuarial firms and agents. The National Insurance Commission (NIC) is the sole institution that has been mandated to regulate and supervise insurance activities in the country under the Insurance Act 724, 2006.

Globally, at the earlier stages of the insurance industry, insurance was to provide the mechanism for risk transfer but now the sector helps in channelling funds in an appropriate way to support the business activities in the economy.

The same it is in Ghana today. Insurance industry is now seemed to be making profit and attempts should be made in Ghana to find out their profitability determinants. However, the details on insurance systems vary from one country to another.

Nonetheless, a common feature known as redistributive financing is evident among all insurance systems.

This feature is based on the notion in which a large number of individuals are charged to be able to cover up the costs of their medical health services, in spite of the actuality that high payers are often low users of healthcare and the high users are likely to be those low payers (Glaser, 1991).

This is the case of all insurance services provided by all insurance firms. The large numbers help insurance firms to redistribute losses to a large range of people when even the magnitude of the loss is huge.

Based on empirical evidence, the view is that there is a high correlation between the economic growth rates and the savings ratio of developing countries.

There is therefore the need for government and the National Insurance Commission (NIC) to be more innovative to ensure the financial viability of the industry while unleashing the Insurance Industry’s tremendous potential through the liberalization of the investment premium, so that the bulk of the funds are invested in longer-term productive instruments while maintaining the financial soundness of the insurance companies.

Some developed countries have seen significant improvements in their economic fortunes and this can be partly attributable to the emergence of the insurance industry. In such countries major sources for mobilizing funds, has made huge investments that have facilitated the development of such nations.

Insurance companies are the basic long-term financial institutions because they have access to a vast potential of long term funds. If properly managed, these funds could provide a formidable pool of long-term funds for industrial investment.

Discrepancies in the payment of insurance claims arise due to the lack of understanding of insurance products by the insured. Bureaucracy is sometimes a problem in the industry because administrative approvals for instance, take longer than they should.

This can be curbed through the collaborative effort of the companies and the insuring public to enhance transparency and efficiency.

Often times, many of the insuring public failed to painstakingly read and understand the policies bought, hence when their expectations are not met, they lose confidence in the entire business of insurance and thinks insurance firms dupe them for profit.

According to Nguyen (2006) profitability is one of the most important objectives of financial management because one goal of financial management is to maximize the owner’s worth, and profitability is very important determinants of performance.

In Ghana work done on determinants of banks far outweighs insurance. In fact little effort has been made to find out the determinants of profitability of insurance firms in Ghana. In recent times the number of insurance firm’s keep increasing and those already in existence keep expanding but not much has been done to determine what fuels the increasing number of insurance firms in Ghana.

Again insurance firms are now seemed to be engaged in promotions to attract prospective clients and to tell the general public how reliable and dependable they are in settling claims.

If not all most of them now pay claims on time. However little or no attention has been given to the profitability determinants of insurance firms in terms of research particular in developing countries like Ghana.

Review of literature suggests that most of the study on firms profitability has been done in the banking sector globally than can been said about the insurance industry. It is clear from the above that, the determinants of profitability has been significantly under researched in the insurance sector globally specifically in developing countries like Ghana.

The focus of this research is to address this gap by determining some of the determinants of profitability of insurance firms in Ghana to help insurance firms increase profitability and investors to predict Ghana’s insurance firms profitability. This study, therefore sought to find out the determinants of profitability of insurance firms in their quest to manage risk.

Location: Indonesia