Determinants of Performance: A Case of Life Insurance Sector of Pakistan NAVEED AHMED Hailey College of Commerce, University of the Punjab, Lahore
Dec 24, 2015
Determinants of Performance: A Case of Life Insurance Sector of Pakistan
NAVEED AHMEDHailey College of Commerce,
University of the Punjab, Lahore
The performance of any firm not only plays the role to increase the market value of that specific firm but also leads toward the growth of the whole industry which ultimately leads towards the overall prosperity of the economy.
Measuring the performance of insurers has gained the importance in the corporate finance literature because as intermediaries, these companies are not only providing the mechanism of risk transfer but also helps to channelizing the funds in an appropriate way to support the business activities in the economy.
•Insurance companies have importance both for businesses and individuals as they indemnify the losses and put them in the same positions as they were before the occurrence of the loss. In addition, insurers provide economic and social benefits in the society i.e. prevention of losses, reduction in fear and increasing employment.
Therefore, the current business world without insurance companies is unsustainable because risky businesses have not a capacity to retain all types of risk in current extremely uncertain environment.
Financial statistics reported the phenomenal growth of Pakistani life insurance companies as these companies comprise 52% and 69% share of entire (life plus non-life) insurance market in terms of net premiums and assets (Insurance Year Book, 2007). In addition, the premium of these life insurers increased by 36% in 2007 (Insurance Year Book, 2007) shows the remarkable progress of life insurance sector of Pakistan
Therefore, what determines the performance of the life insurance industry is an important discussion for the regulators and policy makers to support the sector in achieving the excellence so that desirable economic fruits could be reaped from the help of the life insurance sector of Pakistan
•Wessels (1988)•Chiarella et al. (1991) •Kjellman and Hansen (1995)•Rajan (1995) •Wiwattanakantang (1999) •Chen and Jiang (2001) •Miguel and Pindado (2001) •Nivorozhkin (2002) •Frank and Goyal (2003)
•Cassar and Holmes (2003) •Low and Chen (2004) •Buferna et al. (2005) •Huang and Song (2006) •Daskalakis and Psillaki (2007) •Cheng and Weiss (2008) •Bhaird and Lucey (2008) •Li et al. (2009) •Chang et al. (2009)
Sample and Data
Currently, there are five life insurance companies operating in Pakistan and all these five companies are selected to measuring their performance over the period of seven years from 2001 to 2007. For this purpose, financial data has been collected from financial statements (Balance Sheets and Profit and Loss a/c) of insurance companies and “Insurance Year Book” which is published by Insurance Association of Pakistan.
The following statistical analysis have been used to deduce the results of present study:
Descriptive Analysis Correlation Analysis Regression Analysis
Regression Model
PR = β0 + β1 (LG) + β2 (TA) + β3 (SZ) + β4 (LQ) + β5 (AG) + β6 (RK) + β7 (GR) + ε
Where:• PR = Performance (Net income before interest and tax divided by total
assets)• LG = Leverage (Total debts divided by total assets)• SZ = Size (Log of premiums)• GR =Growth (Percentage change in premiums)• TA = Tangibility of assets (Fixed assets divided by total assets)• LQ = Liquidity (Current assets divided by current liabilities)• AG = Age (Difference b/w observation year and establishment year)• RK = Risk (standard deviation of ratio of total claims to total
premiums)• ε = the error term
Years Leverage Size
Mean SD Min Max Mean SD Min Max
20010.80 0.21 0.45 0.99 6.02 2.12 3.06 8.93
20020.81 0.20 0.47 0.99 6.21 2.11 3.29 9.07
20030.82 0.19 0.51 0.99 6.50 2.08 3.57 9.20
2004
0.79 0.24 0.38 0.99 6.68 2.09 3.56 9.312005
0.83 0.21 0.47 0.99 6.95 2.03 3.96 9.532006
0.84 0.20 0.49 0.99 7.21 2.02 4.24 9.682007
0.79 0.30 0.26 1.00 7.51 2.06 4.50 10.03
Years Growth Performance
Mean SD Min Max Mean SD Min Max
200111.53 11.90 3.22 32.39 0.02 0.01 0.00 0.03
200222.21 23.52 3.68 60.99 0.02 0.01 0.00 0.03
200337.18 32.62 8.30 90.71 0.02 0.01 0.00 0.03
2004
22.20 27.93 -1.78 61.16 0.03 0.02 0.00 0.052005
31.18 10.30 24.97 48.98 0.02 0.02 0.00 0.052006
31.79 26.14 3.74 72.78 0.03 0.02 0.00 0.062007
34.82 9.25 22.44 45.66 0.07 0.07 0.00 0.17
Years Tangibility Liquidity
Mean SD Min Max Mean SD Min Max
20010.03 0.02 0.00 0.06 1.70 0.76 1.07 2.65
20020.03 0.02 0.00 0.06 1.73 0.86 1.14 3.01
20030.03 0.02 0.00 0.05 2.18 1.11 1.22 3.72
2004
0.02 0.02 0.00 0.04 2.24 1.77 1.09 4.852005
0.02 0.02 0.00 0.04 3.02 2.26 1.15 5.942006
0.02 0.01 0.00 0.03 3.98 2.72 1.36 7.372007
0.02 0.02 0.00 0.05 6.36 8.63 1.33 16.33
Years Age Risk
Mean SD Min Max Mean SD Min Max
200116.60 20.40 6.00 53.00 1.92 1.33 0.70 3.94
200217.60 20.40 7.00 54.00 0.83 0.47 0.40 1.34
200318.60 20.40 8.00 55.00 0.58 0.45 0.18 1.34
2004
19.60 20.40 9.00 56.00 3.34 3.08 0.00 7.232005
20.60 20.40 10.00 57.00 4.70 2.15 1.23 6.362006
21.60 20.40 11.00 58.00 3.60 3.86 0.51 9.722007
22.60 20.40 12.00 59.00 6.35 6.51 1.78 16.00
Leverage Size Growth Tangibility Liquidity AgeLeverage Pearson
Correlation
Sig. (2-tailed)
Size Pearson Correlation .374**
Sig. (2-tailed) .000Growth Pearson
Correlation .077 .072
Sig. (2-tailed) .661 .680Tangibility Pearson
Correlation -.476** -.142** .051
Sig. (2-tailed) .000 .000 .771Liquidity Pearson
Correlation -.225** -.429* .052 .229
Sig. (2-tailed) .000 .025 .796 .250Age Pearson
Correlation .415* .401** -.153 -.356** .491**
Sig. (2-tailed) .013 .000 .379 .000 .009Risk Pearson
Correlation -.427* -.200 -.060 .084 .364** -.071
Sig. (2-tailed) .012 .256 .334 .538 .000 .771
Model
Unstandardized Coefficients
Standardized
Coefficie
nts
t Sig.B Std. Error Beta(Constant) .010 .051 .204 .841Leverage -.265 .090 -1.579 -2.940 .008*
Size .038 .009 1.722 4.120 .001*Growth -4.69 .000 -.032 -.245 .809
Tangibility .507 .367 .183 1.382 .183Liquidity .001 .003 .058 .205 .840
Age -.003 .003 -.235 -1.169 .257Risk -.004 .002 -.374 1.903 .072**
The results reveal that leverage, size and risk are most important determinant of performance of life insurance sector whereas ROA has statistically insignificant relationship with age, growth, tangibility and liquidity.