The Effect of Risk Management on the Financial Performance of Insurance Companies in Ethiopia

Abstract

This study examined the effect of risk management on financial performance of insurance companies in Ethiopia using the data of 16 insurance companies during the period of 2014-2019. We employed the two step systems GMM to handle the possible existence of endogeneity, heteroskedasticity, and autocorrelation problems. The results revealed that liquidity and solvency risks have adverse effects on both the short-run and long-run financial performance of Ethiopian insurance companies. However, while technical reserve risk and underwriting risk have a negative effect on the short-run performance, they have a positive effects on the long-run financial performance of insurance companies. The study also confirms a positive effects of reinsurance on both the short-run and long-run financial performance of Ethiopian insurance companies. This study finally recommends that Ethiopian insurance companies should pay greater attention to liquidity risk, solvency risk, technical reserve risk, underwriting risk and reinsurance risk.