the effect of financial risk on performance of insurance companies in ethiopia by daniel sisay addis

120 Pages·2017·1.35 MB·English

THE EFFECT OF FINANCIAL RISK ON PERFORMANCE
OF INSURANCE COMPANIES IN ETHIOPIA
BY
DANIEL SISAY

ADDIS ABABA UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE

JANUARY, 2017
ADDIS ABABA, ETHIOPIA
THE EFFECT OF FINANCIAL RISK ON PERFORMANCE
OF INSURANCE COMPANIES IN ETHIOPIA

A THESIS SUBMITTED TO ADDIS ABABA UNIVERSITY COLLEGE OF
BUSINESS AND ECONOMICS DEPARTMENT OF ACCOUNTING AND FINANCE
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR DEGREE OF
MASTERS OF SCIENCE IN ACCOUNTING AND FINANCE.
BY
DANIEL SISAY

ADVISOR
ABEBAW KASSIE (PHD)

JANUARY, 2017
ADDIS ABABA, ETHIOPIA
Declaration
I, Daniel Sisay, hereby declare that the thesis work entitled “ The effect of financial risk on
performance of insurance companies in Ethiopia” submitted by me for the award of the
degree of Masters of Science in Accounting and Finance of Addis Ababa University at
Addis, Ethiopia, is my original work and it has never been presented in any university. All
sources and materials used for this thesis have been duly acknowledged.

Name Daniel Sisay Advisor’s Name Abebaw Kassie (PhD)

Signature: _______________ Signature: _______________

i
Certification
Addis Ababa University
School of graduate studies
This is to certify that the thesis prepared by Daniel Sisay entitles: The effect of financial risk
on performance of insurance companies in Ethiopia and submitted in partial fulfillment of
the requirements for the degree of masters of Science in accounting and finance compiles
with the regulations of the university and meets the accepted standards with respect to
originality and quality.

Approved by:

Internal Examiner Signature Date______

External Examiner Signature Date______

Advisor Abebaw Kassie (PhD) Signature Date______

____________________________________________________
Chair of Department or Graduate Program Coordinator

ii
Acknowledgment
My deepest and heartfelt thank goes to the Almighty God and his mother St. Marry, who
follow me in all aspect of my life.
First, I would like express my deepest gratitude to my advisor, Abebaw Kassie (PhD), for his
support, encouragement, invaluable comments, advice and guidance at various stages of my
study. Thank you very much!!!
I would also like to extend my deepest gratitude for Zenegnaw Abiy (PhD) of Addis Ababa
University for spending his valuable time during the model specification stage of the study as
well as his assistance during the analysis stage of the study.
I am grateful to the staff of NBE particularly Miss Yemsrach Lemma for her support in
directing me in the right direction during the data gathering process. I also wish to thank my
colleague and friend Omer Mohammed and Henok Tefera for their support during my study
helping me to better myself.
I would also like to convey my sincere thanks to my parents, whose unconditional love and
silent prayers encouraged and protect me throughout my life. Finally I would like to thank
my entire friend for their immeasurable assistance throughout my study.

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Table of Contents
Declaration ................................................................................................................................. i
Certification .............................................................................................................................. ii
Acknowledgment ..................................................................................................................... iii
Table of contents ...................................................................................................................... iv
List of acronyms and abbreviations ......................................................................................... vi
List of Tables ......................................................................................................................... viii
List of Figures .......................................................................................................................... ix
Abstract ......................................................................................................................................x
CHAPTER ONE: INTRODUCTION ....................................................................................1
1.1 Background of the study ......................................................................................................1
1.2 Statement of the problem .....................................................................................................3
1.3 Research question ................................................................................................................5
1.4 Objective of the study ..........................................................................................................5
1.4.1 General Objective ..........................................................................................................5
1.4.2 Specific Objectives ........................................................................................................5
1.5 Scope of the study ................................................................................................................5
1.6 Limitations of the study .......................................................................................................6
1.7 Significant of the study ........................................................................................................6
1.8 Structure of the study ...........................................................................................................7
CHAPTER TWO: LITERATURE REVIEW .......................................................................8
2.1 Theoretical Literature...........................................................................................................8
2.1.1 Meaning of risk .............................................................................................................8
2.1.2 Meaning of financial risk ..............................................................................................8
2.1.3 Financial risk in insurance .............................................................................................9
2.1.4 Risk management theory .............................................................................................24
2.1.5 General view of risk on insurance companies in Ethiopia .........................................25
2.1.6 Performance of insurance companies ..........................................................................27
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2.1.7 Financial risk and performance in insurance ...............................................................28
2.2 Review of Empirical studies ..............................................................................................29
2.3 Literature gap .....................................................................................................................39
2.4 conceptual frame work ......................................................................................................41
CHAPTER THREE: RESEARCH METHODOLOGY ....................................................42
3.1 Research design .................................................................................................................42
3.2 Research approach .............................................................................................................42
3.3 Population of the study ......................................................................................................43
3.4 Sample and sampling techniques .......................................................................................44
3.5 Data sources and instruments.............................................................................................44
3.6 Data analysis ......................................................................................................................45
3.7 Model specification ............................................................................................................49
3.8 Variables description and hypothesis development ...........................................................50
3.9 Operationalization of the study variables ..........................................................................57
CHAPTER FOUR: DATA ANALYSIS AND PRESENATION .......................................58
4.1 Descriptive statistics ..........................................................................................................58
4.2 Correlation analysis ...........................................................................................................61
4.3 Regression model tests .......................................................................................................63
4.3.1 Model selection ...........................................................................................................63
4.3.2 Tests for CLRM assumptions ......................................................................................65
4.4 Analysis of regression and interview result .......................................................................72
4.4.1 Discussion of regression and interview result .............................................................76
CHAPTER FIVE: SUMMARY, CONCULSION AND RECOMMENDATION ...........85
5.1 Summary of findings..........................................................................................................85
5.2 Conclusions ........................................................................................................................86
5.3 Recommendation ...............................................................................................................88
5.4 Direction for future research ..............................................................................................90
References ...............................................................................................................................91
Appendixes

v
List of acronyms and abbreviations

ARCH Autoregressive Conditional Heteroscedasticity
AARDLB Alberta Agriculture and Rural Development’s Livestock Business
BPR Business Process Reengineering
CLRM Classical Linear Regression Model
COSO Committee of Sponsoring Organizations
CP Contingency planning
CR Credit risk
CSA Central Statics Agency
CSA Central statics agency
DW Durbin–Watson
dL Durbin critical lower value
dU Durbin critical upper value
D411 Dummy Variable for Nice insurance company on 2011
D415 Dummy Variable for Nice insurance company on 2015
ERM Enterprise Risk Management Theory
GDP Gross Domestic product
IAP Insurance association of Pakistan
ISD Insurance Supervision Directorate
JB Jarque Bera
LR Liquidity risk
MOFED Ministry of finance and economic development
NAIC National Association of Insurance Commissions
NBE National Bank of Ethiopia
OLS Ordinary Least Square
RBS Risk based supervision
RIR Reinsurance risk
RMPs Risks management programs
ROA Return on Assets Ratio
SAM Solvency Assessment and Management
vi
SR Solvency risk
TPR Technical provision risk
UIC Uganda Insurance Commission
UR Underwriting risk

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List of Tables
Table 3.1 Description of variables and their expected relationship.....................................57
Table 4.1 Descriptive Statistics............................................................................................58
Table 4.2 Correlation Analysis of Variables........................................................................61
Table 4.3 Hausman Test ......................................................................................................64
Table 4.4 Heteroskedasticity Test........................................................................................66
Table 4.5 Rejection and non-rejection regions for Durbin-Watson test..............................67
Table 4.6 Breusch-Godfrey Serial Correlation LM Test......................................................67
Table 4.7 Correlation Matrix between independent variables.............................................70
Table 4.8 Result of model specification Test: Ramsey-RESET test....................................71
Table 4.9 Regression result...................................................................................................72
Table 4.10 Interviewees’ detail descriptions.........................................................................74
Table 4.11 Comparison of test result with expectation.........................................................84

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