Liquidity Management and Financial Performance of the Nigeria Insurance Industry
CHAPTER ONE
OBJECTIVES OF THE STUDY
The general objective for this study is to investigate on liquidity management and financial performance of the Nigeria insurance industry. The specific objectives are:
- To examine in details the liquidity position of Nigeria insurance industry.
- To identify causes of illiquidity or factors that influence liquidity management.
- To examine how the Nigeria insurance industry is able to adjust their liquidity and control management in Nigeria financial environment.
CHAPTER TWO
LITERATURE REVIEW
Introduction
This section conducts an evaluation of literature which forms the framework of the research. It starts by presenting the theoretical framework, discusses the financial performance determinants, empirical reviews, presents the conceptual framework, and finally provides the literature summary.
Theoretical Framework
The Liquidity Preference Theory, the Shiftability Theory, and the Modern Portfolio Theory guided the study.
Liquidity Preference Theory
In “The General Theory of Employment Interest and Money”, Keynes (1936) introduced the theory which describes to the total money the public can hold given the level of interest rates. Holding liquid assets can be explained by 3 reasons; First, for ordinary transactions, second, for precautionary purposes against emergencies, and third they are employed for speculative purposes. Keynes showed that transaction deposits are inversely proportional to the rate of interest (Ferrouhi & Lehadiri, 2013). The main argument in this theory is that an increase in money supply at low interest rates will lead to increase in cash balances and discourage savings and investment. The reason is that economic entities expect the interest rates to rise later in the future.
The theory further argues that the volatility in interest rates in the various economies triggered this push for an avenue that was seen in the development of this theory. The theory suggested that the financial institutions did not have to maintain old liquidity standards as they have no impact on asset stability in a bank. Diamond and Rajan (2001) posit that this theory focused on delivering abilities to meet the needs of liquidity. There is a correlation between management of liability and liquidity. It is a core tool to make decisions setting out to utilize the value of stakeholders. Asset liability management (ALM) entails managing the elements of balance sheet which mainly entails assessing and quantifying risks and with regard to the structure of asset/liabilities implemented by financial firms to alleviate the eminent risks.
The relevance of the theory to the research is that is gives firms a chance to alleviate risk and to overcome the inconsistencies of interest income after accounting for interest expense for the short term period and overall value of firms is sustained for a long period (Ferrouhi & Lehadiri, 2013). The advocates of the theory posit that an appropriate ALM liquidity, solvency and profitability of financial firms enables firms’ credit risk to be managed and reduced. Financial firms’ liabilities have various differing costs which is dependent in the pattern of maturity and tenor. The same way, these are made up of various categories with different yield relying on the factors of risks and maturity. The main goal of the theory is to connect assets and liabilities in hedging liquidity risk.
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
This section covers the methods employed throughout the research. It covers the study design, research population, collection of data and data and the analysis of the gathered data.
CHAPTER FOUR
DATA ANALYSIS, RESULTS AND INTERPRETATION
Introduction
An in-depth analysis and interpretation of the gathered data and results is the focus of this chapter. Data was gathered from Nigeria insurance corporations. The sources of data included, annual statements for 2014-2018 and different publications. Data was gathered based on the research variables; that is financial performance indicated by ROA; asset quality, capital adequacy, size of the firm and liquidity management.
CHAPTER FIVE
SUMMARY CONCLUSIONS AND RECOMMENDATIONS
Introduction
A high level summary of the results, conclusions and policy recommendations as well as highlights of the study limitations with respect to the goals of the research are the focus of this chapter.
Summary
The research objective was to determine the effect of liquidity management on the financial performance of Insurance Corporations in Nigeria. The research used secondary data from annual financial statements of 47 insurance companies and other industry publications covering the period from 2014-2018. The data collected was based on 5 research variables; financial performance as the dependent variable was measured by annual ROA while liquidity management as measured by a ratio of premiums to total assets, was the independent variable under study. There were three control variables; Asset quality, capital adequacy and firm size.
Multiple regression analysis was used to analyze the relationship between the variables under study. Test of statistical assumptions was carried out on the individual variables under study and on the statistical model itself confirm that it’s adequacy in predicting the relationship between the variables involved. The results of all statistical tests of regression analysis revealed that no assumptions were violated hence the conclusions drawn were not biased.
Statistical package developed by IBM Corporation, SPSS V 25.0 was used to generate quantitative output of statistical results.
Descriptive statistics applied to analyze the data collected include the statistical measures of mean, standard deviation and range (the difference between maximum and minimum values).
The results show that Liquidity jointly influenced financial performance of insurance corporations in Nigeria represented by r=0.891. The R squared value of 0.794 revealed that the independent
variables contributed to 79.4% of the financial performance variance of insurance corporations in Nigeria. At a 5% confidence level, the F statistic was significant, implying that the predictor variables show financial performance variation and the model was significant.
The outcomes indicated that when predictor variables are constantly held, financial performance is 0.831, the research showed that increasing asset quality results in a rise of profitability by 0.636, more it was recorded that a rise in management of liquidity increased financial performance by 0.721, an increase in capital adequacy increases financial performance by 0.701 and an increase in the size of firms increases financial performance by 0.523.
Conclusion
The analysis on the previous chapter shows that liquidity is a financial performance important determinant. The correlation between ROA and deposit to asset and liquidity ratio is positive, meaning that a rise in liquidity results in an improvement in insurance firms’ financial performance in Nigeria. The research draws the conclusion that liquidity jointly influences insurance firm’s financial performance as revealed by the r value 0.891. The R squared value of 0.794 revealed that the independent variables contributed to 79.4% of the financial performance variance of insurance corporations in Nigeria. At a 5% confidence level, the F statistic was significant, implying that the predictor variables show financial performance variation and the model was significant.
Recommendations for Policy and Practice
The study made the recommendation that IRA needs to formulate new requirements of liquidity since it will contribute to an upward impact on insurance firms’ earnings and promote economic stability. Insurance companies play a critical role in protecting businesses and individuals from adverse events and earn their revenues primarily from premiums and investment income. Insurance companies mainly have two broad divisions; property and casualty and life and health. In order to ensure greater stability and profitability of the industry, IRA should also consider formulation of
policies which require insurance companies to give a higher proportion of their portfolio to Life and Health Division since their cash flows are fairly predictable and due to their long-term nature. This will boost the liquidity position of insurance companies which lead to a stronger financial performance.
Insurance companies with a higher proportion of property and casualty division vis a vis life and health experience a high level of uncertainty in their claims operations and therefore require a high level of liquidity. Such companies should invest heavily in highly liquid securities.
Insurance companies ought not to only pay attention to financial performance but to also guarantee efficient management of liquidity. This promotes their growth. Moreover, these firms ought not to possess a high level of liquidity but devise ways of ensuring the sustainability of liquidity. The liquidity that is in excess ought to be used for short term investments for ROI increase.
The IRA ought to develop forums that allow all its stakeholders to engage with each other to formulate conducive and practical policies of regulation to attain firms’ growth. IRA ought to give insurance firms a chance to use other techniques in addressing their surplus withdrawals and in lowering the liquidity risk. The IRA ought to promote the application of online payment platforms and other forms of online payments for large transactions. This will create a faster cash turnaround time and help stimulate economic activities in the country at large.
IRA and AKI should formulate guidelines on prudent underwriting of risks, pricing of adequate premiums for bearing risk and diversification of risk. Such guidelines directly affects the liquidity position of insurance corporations, which by extension affects the insurance corporations’ financial performance.
Capitalization of insurance corporations is also critically important and the regulatory bodies should specify minimum capital levels based on size and risk on insurance companies. A well- coordinated approach across countries and regions will also ensure that systemic risk, where the
failure of one insurance company creates a contagion effect, is mitigated given the inter-linkages between financial organizations in a globalized system.
Limitations of the Study
The researcher came across some difficulties while undertaking the study, the financial statements of some of the insurance firms were not availed to the researcher in time for their inclusion in the research, thus the reduction in the sample population from which data was gathered.
The research targeted firms in Nigeria, hence the irrelevance of the findings in other nations where the insurance industry operates in different environments.
The research concentrated on a time period of only 5 years; this is not enough time for proper conclusions to be made.
Secondary data from financial statements was gathered from selected insurance firms, websites of NSE and IRA. A research based on primary data is recommended which will involve the use of questionnaires from selected respondents.
The research study applied multiple regression analysis. Regressions relations tend to change over time i.e they suffer from parameter instability.
REFERENCES
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