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The determinants of life insurance companies profitability in South Africa: new evidence from a dynamic panel threshold estimation technique

Author

Listed:
  • Sylvester Senyo Horvey
  • Jones Odei-Mensah
  • Albert Mushai

Abstract

Purpose - Insurance companies play a significant role in every economy; hence, it is essential to investigate and understand the factors that propel their profitability. Unlike previous studies that present a linear relationship, this study provides initial evidence by exploring the non-linear impacts of the determinants of profitability amongst life insurers in South Africa. Design/methodology/approach - The study uses a panel dataset of 62 life insurers in South Africa, covering 2013–2019. The generalised method of moments and the dynamic panel threshold estimation technique were used to estimate the relationship. Findings - The empirical results from the direct relationship reveal that investment income and solvency significantly predict life insurance companies' profitability. On the other hand, underwriting risk, reinsurance and size reduce profitability. Further, the dynamic panel threshold analysis confirms non-linearities in the relationships. The results show that insurance size, investment income and solvency promote profitability beyond a threshold level, implying a propelling effect on life insurers' profitability at higher levels. Below the threshold, these factors have an adverse effect. The study further points to underwriting risk, reinsurance and leverage having a reduced effect on life insurers' profitability when they fall above the threshold level. Practical implications - The findings suggest that insurers interested in boosting their profit position must commit more resources to maintain their solvency and manage their assets and returns on investment. The study further recommends that effective control of underwriting risk is critical to the profitability of the life insurance industry. Originality/value - The study contributes to the literature by providing first-time evidence on the determinants of life insurance companies' profitability by way of exploring threshold effects in South Africa.

Suggested Citation

  • Sylvester Senyo Horvey & Jones Odei-Mensah & Albert Mushai, 2024. "The determinants of life insurance companies profitability in South Africa: new evidence from a dynamic panel threshold estimation technique," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 20(7), pages 2998-3026, January.
  • Handle: RePEc:eme:ijoemp:ijoem-08-2022-1225
    DOI: 10.1108/IJOEM-08-2022-1225
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    More about this item

    Keywords

    Life insurance; Profitability; Solvency; Underwriting risk; Threshold; G22; C24; L25;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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