Contrasting the Effect of Risk- and Non Risk-Based Capital Structure on Insurers’ Performance in Nigeria

Sunday Akpan,Fauziah Mahat,Bany-Ariffin Noordin,Annuar Nassir

doi:10.3390/socsci6040143

Abstract

Literature on capital-based regulation and performance of insurers in emerging market is not only limited; it is incomplete, particularly on a comparative basis. This has continuously attracts researchers’ interest and concerns for practitioners and policy makers. This paper therefore examines the effect of capital structure on performance of insurers comparatively before and after the implementation of risk-based capital (RBC) policy in Nigeria to determine which policy regime enables insurers to perform better. Descriptive statistics are employed to describe the characteristics of the data while the hypotheses are tested using two-stage estimation procedure of fixed and random effect models. Results reveal that insurance capital structure (measured by technical provision ratio) has a significant positive effect on insurance performance (measured by earnings per share and return on asset) during non-RBC regime when compared to RBC regime. Based on these findings, it is concluded that insurers in Nigeria performed better under non-RBC than RBC era. This finding provides important insight to managers, regulators and investors by fostering more understanding of how to manipulate and regulate insurance capital for performance optimization under RBC scenarios.

Highlights

The practice of predicting future organizational behaviour and decision making based on historical information and past performance indices is commonplace in social and management sciences
The dependent variable in this study is insurance performance measured by earnings per share (EPS) and returns on asset (ROA) while the independent variable is capital structure represented by technical provision ratio (TPR)
EPS is insignificant in the model, it has, shown a theoretically expected negative sign with TPR in both eras, and so has Returns on Assets (ROA) in risk-based capital (RBC)

Summary

Introduction

The practice of predicting future organizational behaviour and decision making based on historical information and past performance indices is commonplace in social and management sciences. One of the areas with increased interest is capital structure and firm performance. Capital structure is considered the foundation of corporate existence and has been studied extensively in corporate finance and related fields (Dhaene et al 2017). It has become an important area where policies and regulations are targeted. Under RBC policy, insurers are required to hold higher capital in line with the level of risk assumed, whereas under non risk-based capital (NRBC) regime, they are not. ] and performance management (Zec 2012), there is reasonable justification for investigating measures of capital structure in relation to performance under these different policy regimes In either regime, capital structure is affected; and because capital and its allocation are linked to insurance [ . . . ] and performance management (Zec 2012), there is reasonable justification for investigating measures of capital structure in relation to performance under these different policy regimes

Methods

Results

Discussion

Conclusion