Determinants of operational efficiency on the financial health of non-life insurance companies in South Africa
-
DOIhttp://dx.doi.org/10.21511/ins.14(1).2023.11
-
Article InfoVolume 14 2023, Issue #1, pp. 121-135
- 427 Views
-
124 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
This study aimed to determine the effect of operational efficiency on financial health of non-life insurance companies in South Africa. Operational efficiency refers to an insurer’s ability to deliver its services while minimizing costs and maximizing profitability. A descriptive research design was used to achieve the objective of this study. The panel data from 2008–2019 used secondary data sourced from S&P Capital Q and Refinitiv Eikon, well-known databases with readily available data. The population of this study focuses on 32 non-life insurance companies with measurable markets of 57 domestic non-life insurance providers in South Africa. Data were analyzed using Fixed-effect regression, (Random-effect GLS regression, correlation, and the Hausman test. The result reveals that of all the variables, only premium growth correlates significantly (negative correlation) with financial health. This could be a result of a specific investment that resulted in a lower rate than that of a risk-free security. It is also important to note that a negative premium does not always indicate a problem. This can happen due to cancellations of reinsurance, reinsurer closures, paid off reinsurance ahead of time, under- pricing policies, inadequate reserves, high claim frequency, operational inefficiencies, investment losses, inadequate risk assessment, economic downturn, regulatory changes, catastrophic event, and any other events. It is essential for non-life insurance companies to carefully manage their underwriting practices, risk assessment, pricing strategies, and investment portfolios to avoid negative premium situations and maintain financial health.
- Keywords
-
JEL Classification (Paper profile tab)M10, C10, G22
-
References92
-
Tables5
-
Figures0
-
- Table 1. Descriptive characteristics of variables
- Table 2. Correlation analysis
- Table 3. Regression analysis fixed effect (within data)
- Table 4. Regression analysis random effect
- Table 5. Hausman test
-
- Abdikerimova, S., & Feng, R. (2022). Peer-to-peer multi-risk insurance and mutual aid. European Journal of Operational Research, 299(2), 735-749.
- Abrardi, L., Cambini, C., & Rondi, L. (2022). Artificial intelligence, firms and consumer behavior: A survey. Journal of Economic Surveys, 36(4), 969-991.
- Alhassan, A. L., & Biekpe, N. (2015). Efficiency, productivity and returns to scale economies in the non-life insurance market in South Africa. The Geneva Papers on Risk and Insurance-Issues and Practice, 40, 493-515.
- Ali, A., & Tausif, M. R. (2019). Assessing profitability and growth of insurance sector in Saudi Arabia: using financials and tangibles. Humanities & Social Sciences Reviews, 7(6), 617-624.
- Altarhouni, A., Danju, D., & Samour, A. (2021). Insurance market development, energy consumption, and Turkey’s CO2 emissions. New Perspectives from a Bootstrap ARDL Test. Energies, 14(23), 7830.
- Angelina, S., & Nugraha, N. M. (2020). Effects of Monetary Policy on Inflation and National Economy Based on Analysis of Bank Indonesia Annual Report. Technium Social Sciences Journal, 10(1), 423-435.
- Atlas Magazine. (2020). Ranking of South Africa Non-life Insurance Companies According to 2019’s Turnover. Insurance News Around the World.
- Ayako, A., Kungu, G., & Githui, T. (2015). Determinants of the performance of firms listed at the Nairobi Securities Exchange. Research Journal of Finance and Accounting, 6(12), 157-164.
- Babuna, P., Yang, X., Gyilbag, A., Awudi, D. A., Ngmenbelle, D., & Bian, D. (2020). The impact of Covid-19 on the insurance industry. International Journal of Environmental Research and Public Health, 17(16), 5766.
- Banu, A. (2022). Big data analytics – tools and techniques – application in the insurance sector. In K. Sood, R. K. Dhanaraj, B. Balusamy, S. Grima, and R. Uma Maheshwari (Eds.), Big data: A game changer for insurance industry (pp. 191-212). Emerald Publishing Limited.
- Bărbuță-Mișu, N., Madaleno, M., & Ilie, V. (2019). Analysis of risk factors affecting firms’ financial performance – Support for managerial decision-making. Sustainability, 11(18), 4838.
- Batool, A., & Sahi, A. (2019). Determinants of financial performance of insurance companies of USA and UK during global financial crisis (2007–2016). International Journal of Accounting Research, 7(1), 1-9.
- Bilbao-Terol, A., Arenas-Parra, M., Quiroga-García, R., & Bilbao-Terol, C. (2022). An extended best – worst multiple reference point method: Application in the assessment of non-life insurance companies. Operational Research, 22(5), 5323-5362.
- Bocken, N., Morales, L. S., & Lehner, M. (2020). Sufficiency business strategies in the food industry – The case of Oatly. Sustainability, 12(3), 824.
- Chen, H., Hongo, D. O., Ssali, M. W., Nyaranga, M. S., & Nderitu, C. W. (2020). The asymmetric influence of financial development on economic growth in Kenya: evidence from NARDL. Sage Open, 10(1), 2158244019894071.
- Chen, Y., Kumara, E. K., & Sivakumar, V. (2021). Investigation of finance industry on risk awareness model and digital economic growth. Annals of Operations Research, 326(1), 1-22.
- Cooper, R. N. (1993). Currency devaluation in developing countries. In P.B. Kenen (Ed.), The International Monetary System (pp. 183-211). Routledge.
- Deloitte. (2022). Africa Insurance Outlook 2022. Deloitte.
- Deyganto, K. O., & Alemu, A. A. (2019). Factors affecting financial performance of insurance companies operating in Hawassa city administration, Ethiopia. Universal Journal of Accounting and Finance, 7(1), 1-10.
- Dickler, T. A., & Folta, T. B. (2020). Identifying internal markets for resource redeployment. Strategic Management Journal, 41(13), 2341-2371.
- Du Toit, M. (2019). Minimising claims being repudiated in the short-term insurance industry: concentrating on clients with Pleroma Brokers North-West University, South Africa.
- Dwivedi, P., Alabdooli, J. I., & Dwivedi, R. (2021). Role of FinTech adoption for competitiveness and performance of the bank: a study of banking industry in UAE. International Journal of Global Business and Competitiveness, 16(2), 130-138.
- Edouard, S. (2021). Financial Management Practices on Financial Performance at Selected Private Insurance Companies, Kigali, Rwanda. International Journal of Scientific Research and Management (IJSRM), 9(10), 2492-2506.
- Elder-Vass, D. (2021). Assets need audiences: How venture capitalists boost valuations by recruiting investors to asset circles. Finance and Society, 7(1), 1-19.
- Ellili, N. O. D. (2022). Impact of ESG disclosure and financial reporting quality on investment efficiency. Corporate Governance: The International Journal of Business in Society, 22(5), 1094-1111.
- Errandonea, I., Beltrán, S., & Arrizabalaga, S. (2020). Digital Twin for maintenance: A literature review. Computers in Industry, 123, 103316.
- Fadah, I., Putri, I. F., Ulfa, L., & Budi, I. (2021). Determinants of Performance of Sharia Insurance Registered at OJK. Proceedings of the 5th International Conference on Sustainable Innovation (ICoSI) (pp. 15-20). Universitas Muhammadiyah Yogyakarta, Indonesia.
- Grewal, D., Hulland, J., Kopalle, P. K., & Karahanna, E. (2020). The future of technology and marketing: A multidisciplinary perspective. Journal of the Academy of Marketing, 48, 1-8.
- Hemrit, W. (2020). Determinants driving Takaful and cooperative insurance financial performance in Saudi Arabia. Journal of Accounting & Organizational Change, 16(1), 123-143.
- Himanshu, R., Mushir, N., & Suryavanshi, R. (2021). Impact of COVID-19 on portfolio allocation decisions of individual investors. Journal of Public Affairs, 21(4), e2649.
- Hirdinis, M. (2019). Capital structure and firm size on firm value moderated by profitability. International Journal of Economics and Business Administration, 7(1), 174-191.
- Husna, A., & Satria, I. (2019). Effects of return on asset, debt to asset ratio, current ratio, firm size, and dividend payout ratio on firm value. International Journal of Economics and Financial Issues, 9(5), 50-54.
- Ichsan, R., Suparmin, S., Yusuf, M., Ismal, R., & Sitompul, S. (2021). Determinant of Sharia Bank’s Financial Performance during the Covid-19 Pandemic. Budapest International Research and Critics Institute-Journal (BIRCI-Journal), 4(1), 298-309.
- Ilyas, A. M., & Rajasekaran, S. (2019). An empirical investigation of efficiency and productivity in the Indian non-life insurance market. Benchmarking: An International Journal, 26(7), 2343-2371.
- Isayas, Y. N. (2021). Financial distress and its determinants: Evidence from insurance companies in Ethiopia. Cogent Business & Management, 8(1), 1951110.
- Jaloudi, M. M. (2019). The efficiency of Jordan insurance companies and its determinants using DEA, slacks, and logit models. Journal of Asian Business and Economic Studies, 26(1), 153-166.
- Karman, A., & Savanevičienė, A. (2021). Enhancing dynamic capabilities to improve sustainable competitiveness: insights from research on organisations of the Baltic region. Baltic Journal of Management, 16(2), 318-341.
- Kaydos, W. (2020). Operational performance measurement: increasing total productivity. CRC press.
- Killins, R. N., & Chen, H. (2022). The impact of the yield curve on the equity returns of insurance companies. International Journal of Finance & Economics, 27(1), 1134-1153.
- Kimani, F. K. (2021). Effect of Inflation on Financial Performance of Insurance Companies in Kenya. University of Nairobi.
- Kiptum, G. K. (2022). Relationship between Kenya’s economic growth and inflation. SN Business & Economics, 2(12), 189.
- Kolodko, G. W. (2021). Shortageflation 3.0: War economy–State socialism–Pandemic crisis. Acta Oeconomica, 71(S1), 13-34.
- Kozak, S. (2011). Determinants of profitability of non-life insurance companies in Poland during integration with the European financial system. Electronic Journal of Polish Agricultural Universities, 14(1), 1-9.
- Kramarić, T. P., Miletić, M., & Blaževski, R. K. (2019). Financial stability of insurance companies in selected CEE countries. Business Systems Research: International journal of the Society for Advancing Innovation and Research in Economy, 10(2), 163-178.
- Kripa, D. & Ajasllari, D. (2016). Factors affecting the profitability of insurance companies in Albania. European Journal of Multidisciplinary Studies, 1(1), 352-360.
- Leach, J. C., & Melicher, R. W. (2020). Entrepreneurial finance. Cengage Learning.
- Losada-Otálora, M., & Alkire, L. (2019). Investigating the transformative impact of bank transparency on consumers’ financial well-being. International Journal of Bank Marketing, 37(4), 1062-1079.
- Mavlutova, I., Babenko, V., Dykan, V., Prokopenko, N., Kalinichenko, S., & Tokmakova, I. (2021). Business restructuring as a method of strengthening company’s financial position. Journal of Optimization in Industrial Engineering, 14(Special Issue), 105-115.
- Mazviona, B. W., Dube, M., & Sakahuhwa, T. (2017). An analysis of factors affecting the performance of insurance companies in Zimbabwe. Journal of Finance and Investment Analysis.
- Mehmood, T. (2021). Does information technology competencies and fleet management practices lead to effective service delivery? Empirical evidence from E-commerce industry. International Journal of Technology, Innovation and Management (IJTIM), 1(2), 14-41.
- Moretto, A., & Caniato, F. (2021). Can Supply Chain Finance help mitigate the financial disruption brought by Covid-19? Journal of Purchasing and Supply Management, 27(4), 100713.
- Mose, N., & Kaboro, J. (2019). Does inflation rate convergence spur exchange rate volatility? Empirical evidence from sub-Saharan Africa. Asian Journal of Economic Modeling, 7(2), 95-109.
- Msomi, T. S. (2023). Macroeconomic and firm-specific determinants of financial performance: Evidence from non-life insurance companies in Africa. Cogent Business & Management, 10(1), 2190312.
- Nariswari, T. N., & Nugraha, N. M. (2020). Profit growth: impact of net profit margin, gross profit margin and total assets turnover. International Journal of Finance & Banking Studies, 9(4), 87-96.
- Nguyen, P. A., Nguyen, A. H., Ngo, T. P., & Nguyen, P. V. (2019). The relationship between productivity and firm’s performance: Evidence from listed firms in Vietnam stock exchange. The Journal of Asian Finance, Economics and Business (JAFEB), 6(3), 131-140.
- Olarewaju, O. M., & Msomi, T. S. (2022). Factors affecting the profitability of reinsurance companies in sub-Saharan Africa: Evidence from dynamic panel analysis. Cogent Business & Management, 9(1), 2093485.
- Olarinre, O. T., Sunday, S. O., & Gabriel, E. D. (2020). Effects of claims management on profitability of insurance companies in Nigeria. British Journal of Management and Marketing Studies, 3(4), 106-114.
- Osazefua, I. J. (2019). Operational efficiency and financial sustainability of listed manufacturing companies in Nigeria. Journal of Accounting and Taxation, 11(1), 17-31.
- Owoyele, S. (2017). Factors Influencing Employee Motivation and Its Impact on Employee Performance (Master’s Thesis). Centria University of Applied Sciences.
- Özen, A., & Çankal, E. (2020). Determinants of Non-Life Insurer Profitability in Turkey. Atatürk Üniversitesi Sosyal Bilimler Enstitüsü Dergisi, 24(4), 1779-1797.
- Papadamou, S., Siriopoulos, C., & Kyriazis, N. A. (2020). A survey of empirical findings on unconventional central bank policies. Journal of Economic Studies, 47(7), 1533-1577.
- Park, K. G., & Stańko, D. (2019). Macro-dimensional supervision of large pension funds (IOPS Working Papers on Effective Pensions Supervision, No.30).
- Peksevim, S., & Ercan, M. (2023). Do pension funds provide financial stability? Evidence from European Union countries. Journal of Financial Services Research, 1-32.
- Pinkus, D. (2023). Pension Fund Investment: Implications for the Real Economy (Ph.D. Thesis). Copenhagen Business School.
- Prakash, B. (2023). RPA for Insurance Claims Processing Enhancing Efficiency, Accuracy and Customer Satisfaction. International Journal of Research Radicals in Multidisciplinary Fields, 2(1), 45-47.
- Rajapathirana, R. J., & Hui, Y. (2018). Relationship between innovation capability, innovation type, and firm performance. Journal of Innovation & Knowledge, 3(1), 44-55.
- Rajesh, R. (2020). Exploring the sustainability performances of firms using environmental, social, and governance scores. Journal of Cleaner Production, 247, 119600.
- Risal, N. (2020). Determinants of insurance companies’ profitability: Analysis of non-life insurance companies in Nepal. Elk Asia Pacific Journal of Finance and Risk Management, 11(3), 9-17.
- Santri, S. H., Yaswirman, Y., Warman, K., & Fauzi, W. (2022). Accountability answers company insurance life based investing against the risk of failure to pay for policyholders. Linguistics and Culture Review, 6(S1), 427-437.
- Septina, F. (2022). Determinant of financial performance for general insurance companies in Indonesia. Jurnal Ecodemica Jurnal Ekonomi Manajemen dan Bisnis, 6(1), 88-97.
- Sharma, A., Jadi, D. M., & Ward, D. (2021). Analysing the determinants of financial performance for UK insurance companies using financial strength ratings information. Economic Change and Restructuring, 54, 683-697.
- Shetty, A., Shetty, A. D., Pai, R. Y., Rao, R. R., Bhandary, R., Shetty, J., Nayak, S., Keerthi Dinesh, T., & Dsouza, K. J. (2022). Block chain application in insurance services: A systematic review of the evidence. SAGE Open, 12(1), 21582440221079877.
- Siddik, M. N. A., Hosen, M. E., Miah, M. F., Kabiraj, S., Joghee, S., & Ramakrishnan, S. (2022). Impacts of Insurers’ Financial Insolvency on Non-Life Insurance Companies’ Profitability: Evidence from Bangladesh. International Journal of Financial Studies, 10(3), 80.
- Skeoch, H., & Ioannidis, C. (2023). The barriers to sustainable risk transfer in the cyber-insurance market.
- Statistics South Africa (Stats SA). (2022). Consumer inflation lowest in the years.
- Sudirman, G., & Anthoni, L. (2021). Factors affecting profit growth in insurance companies listed on the Indonesia Stock Exchange in 2017–2019. Journal of Economics and Business Letters, 1(3), 1-8.
- Taheri, R. H., Miah, M. S., & Kamaruzzaman, M. (2020). Impact of working environment on job satisfaction. European Journal of Business and Management Research, 5(6).
- Tefera, H. (2016). Internal factors influencing dividend payout of Ethiopian insurance companies (Master’s Thesis). Addis Ababa University, Ethiopia.
- Tegegn, M., Sera, L., & Merra, T. M. (2020). Factors affecting profitability of insurance companies in Ethiopia: panel evidence. International Journal of Commerce and Finance, 6(1), 1-14.
- Terdpaopong, K., & Rickards, R. C. (2021). Thai non-life insurance companies’ resilience and the historic 2011 floods: Some recommendations for greater sustainability. Sustainability, 13(16), 8890.
- The Global Economy. (2020). South Africa: Insurance company assets.
- Tien, N. H. (2021). Relationship between inflation and economic growth in Vietnam. Turkish Journal of Computer and Mathematics Education (TURCOMAT), 12(14), 5134-5139.
- Tran, T. M. T., Yuen, K. F., Li, K. X., Balci, G., & Ma, F. (2020). A theory-driven identification and ranking of the critical success factors of sustainable shipping management. Journal of Cleaner Production, 243, 118401.
- Tsvetkova, L., Bugaev, Y., Belousova, T., & Zhukova, O. (2021). Factors affecting the performance of insurance companies in Russian federation. Montenegrin Journal of Economics, 17(1), 209-218.
- Ujunwa, A., & Modebe, N. J. (2011). Repositioning insurance industry for operational efficiency: The Nigerian case. Journal of Applied Finance and Banking, 1(3), 15.
- Umar, B., Clayton, H., Uzayr Jeenah, & Gökhan Sari (2020). Beyond Covid-19: Charting the road to recovery for South African insurers. McKinesy & Company.
- Urom, C., Yuni, D., Lasbrey, A., & Emenekwe, C. (2019). Examining the non-linearities in inflation-growth nexus: Further evidence from a fixed-effect panel threshold regression approach for the SACU region. Studies in Economics and Econometrics, 43(3), 31-59.
- Wai, P. P. (2019). Customer Perceptions Towards Motor Vehicles Insurance Claims Management System of First National Insurance (FNI) (Master’s Thesis).
- Wanke, P., Azad, M. A. K., Emrouznejad, A., & Antunes, J. (2019). A dynamic network DEA model for accounting and financial indicators: A case of efficiency in MENA banking. International Review of Economics & Finance, 61, 52-68.
- Yi, H.-T., Yeo, C., Amenuvor, F. E., & Boateng, H. (2021). Examining the relationship between customer bonding, customer participation, and customer satisfaction. Journal of Retailing and Consumer Services, 62, 102598.
- Zainudin, R., Ahmad Mahdzan, N. S., & Leong, E. S. (2018). Firm-specific internal determinants of profitability performance: An exploratory study of selected life insurance firms in Asia. Journal of Asia Business Studies, 12(4), 533-550.
- Zhang, M., Long, R., Wei, K., Tan, Q., & Zhang, W. (2022). China quality award and the market value of the firm. Total Quality Management & Business Excellence, 33(11-12), 1387-1402.