Financial Risk and Financial Performance of the Insurance Companies

Abstract

Considering the significance of insurance industry in the international economy and its impact on the service sector, it is of critical importance for these firms to function properly and achieve their goals. Due to the changes in external environment and nature of business, insurance industries encounter various types of financial and non-financial risks. This study identifies and evaluates the financial risks faced by European Insurance Firms and their impact on the financial performance of these companies, using Return and Assets (ROA) and Return on Equity (ROE) as the proxy for financial performance. For this purpose, secondary data has been gathered from 2016 to 2020 for top eight (08) insurance companies in Europe. Using SPSS, the data has been analyzed through descriptive statistics, correlation analysis, and regression analysis. The findings of the research depict that underwriting risk, reinsurance risk, and solvency risk are negatively correlated with the ROA, whereas the highly leverage firms have better ROA and lower ROE. In addition to this, the smaller sized firms perform better in terms of ROA. The results of regression analysis showed that performance of insurance companies can be more statistically significantly predicted in terms of ROA using the predictor variables (underwriting risk, reinsurance risk, solvency risk, liquidity risk, and financial leverage) in comparison with the ROE.