Abstract
The study is designed to identify the determinants of profitability in the insurance industry of Pakistan. The panel data set of 41 insurance companies (life, non-life, and takaful insurance) from 2007-2017 was employed. Hausman's specification and Breusch-Pagan Lagrange multiplier (LM) tests have selected the most appropriate test i.e. fixed effect and pooled OLS model for this study. The results of pooled OLS and fixed effect model reveal that insurancespecific and macroeconomic factor like leverage, business risk, and inflation rate are negative but significantly affect the profitability of the insurance sector. However, size and GDP rate has a positive and statistically significant influence on profitability. Liquidity and growth are insignificant determinants of the study. This is the first study that covers the entire insurance industry, which is also composed of the takaful industry, along with firm-specific and country-specific attributes and applies the most suitable models for the study. Thus, this study is very important for top-echelon and policy- makers of the insurance sector of Pakistan regarding the profitability of the firm and wealth of the shareholders.
Highlights
The major function of a financial system is to grease the machinery assisting the economic operation of a country
Testing for Multicollinearity “Variance Inflation Factor (VIF) and Tolerance (TOL) Value of VIF is less than 10 and tolerance (1/TOL) is less than 1 indicates that the data is free of Multicollinearity”
Debt ratio is proved negative and significant determinant of profitability across both models pooled Ordinary Least Square (OLS) and fixed effect model. These findings are in line with the prior studies completed by Ahmad et al (2011) in the life insurance sector, Malik (2011) in the insurance industry of 34 companies in 2005-2009; Sumeria and Bilal. (2013) in insurance companies of Pakistan
Summary
The major function of a financial system is to grease the machinery assisting the economic operation of a country. Financial institutions play a central role in economic development of a country by providing valuable services in money and capital market. Firms meet the needs of internal and external stakeholders by developing competitive strategies and enhancing market shares. Insurance companies enhance financial stability, facilitate trade, commerce, capital arrangements and mobilize savings The management can handle the risky situation more efficiently by mitigating losses and balance government security plans (Skipper, 2001). Profitability is an imperative parameter of performance, because it reflects management efficiency in term of asset utilization (Rahman et al, 2012)
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