Yardstick International College

Department of business Master of business Administration (MBA)

Financial institutions and investment management Assignment One

(First year Second Semester online program)

Submitted by-Gezahegn Yenew

ID MAO/1924/13

Submitted to Instructor Kirubel (Ass.Prof)

Goshu, Deresa. "The Effects of risk managmenet on financial performance of insurance

companies in Ethiopia. (financial, operational and eneterprise management risk
dimension)." INTERNATIONAL JOURNAL FOR INNOVATIVE RESEARCH IN
MULTIDISCIPLINARY FIELD, 10, Oct 2019: 75-84.

April 2022 GC
 1. Summary of the Article focusing on the following major issues

Purpose of the study: - The purpose of this study was to examine risk management on the
financial performance of insurance companies in Ethiopia.

Problem Statement: - The statement of problem of the article resides on filling the continued
gap of effect of risk management on financial performance from perspectives of financial,
operational and enterprise management risk.

The General Objectives:- The general objective of this study is empirically to examine the
effect of risk management on the financial performance of non-life insurance companies in
Ethiopia

Data Used:-Methodologically, the study was conducted using a quantitative research

approach and its design was an explanatory research design in order to investigate the effects
of risk management on the financial performance of insurance companies in Ethiopia. Its
source of data was only secondary data, collected from the financial statements of these
insurance companies under the study.

The method of data analysis used in the study was regression analysis using a diagnostic test,
which suggests the model passes the tests of serial correlation, non-normality of the errors,
heteroscedasticity associated with the model, multi-co linearity, and finally ramset reset.

The following are the findings of the research

Since there is a relationship between profitability and liquidity, non-life insurance with a
greater liquidity ratio will generate more profits for their companies and improve the ability
of insurance companies to pay claims incurred by policyholders and creditors. Therefore, if
claims and other obligations of insurance firms are settled promptly for policyholders and
creditors alike, those insurance firms will win the public's trust and be able to expand policy
sales and profit. As a result, it is anticipated that Ethiopian non-life insurers with more liquid
assets will perform better than those with less liquid assets. Due to the weaker liquidity of
insurers, they will face more cash flow problems and more.

According to the study's findings, technical reserve (as determined by safety ratio) has a poor
correlation with profit but is not statistically significant.
One of the key determinants that might negatively affect the financial performance of
insurance firms is operational efficiency. The study also discovered a negative correlation
between profitability (as assessed by return on assets) and claim settlement risk (calculated as
the ratio of claims incurred to net premiums received).

The variable asset utilization ratio, which is employed in the study under discussion as a
proxy for operational risk, has a positive association with the return on assets of the insurance
businesses and is statistically significant at the 1% level of significance. A 1 unit rise in assets
is revealed by the regression output.

In general, the article concludes the following. The study's findings show that financial,
operational, and enterprise management risk can have an impact on the financial performance
of insurance businesses. Financial risk as measured by liquidity ratio and technical reserve
(safety ratio), has a mixed impact on the financial performance of insurance companies.
However, liquidity ratio was found to be statically significant at a 1 percent significance
level, whereas technical reserve (safety ratio) was found to be negatively significant but not
statically significant in the same way. Second, the operational risk, which is determined by
the claim settlement ratio, cost to income, and asset utilization ratio, has a variety of effects
on the insurance firms' financial standing.

Enterprise risk management, which is determined by firm or company size, was the study's
last explanatory variable. The study's findings indicate that, at a 5% level of significance, the
size of the insurance firm has a positive link with profit. From the viewpoints of financial,
operational, and enterprise management, the study concludes that there is a significant
correlation between risk management and the financial performance of insurance businesses
in Ethiopia.

In order to decrease the number of claims for every earned premium, the study advises claims
administrators in the Ethiopian insurance sector to manage their claims procedures
effectively. Thus, effective claim management includes being proactive in identifying and
paying real claims; accurately estimating the reserve associated with each claim; reporting on
a regular basis; limiting unnecessary expenses; and avoiding protracted legal disputes and,
whenever feasible, quickly addressing claims.

2. My opinion about the strength and weakness of the Article

The strong points of the study were the method of data collection and data analysis used by
the researcher. Sometimes the primary sources of data, like workers and managers, may
distort information, so the data collected from the financial statements of the insurance
companies is more reliable and credible if the statement is recorded correctly.

The other strong points of the article are the literature review part which is its usage of
empirical review of prior studies conducted by other researchers.

In case of novelty of the study it gives significant information on the title of the study, risk
management on the financial performance of insurance companies.

The weakness of the study, according to my opinion, is that the source of data for the study
was only secondary data collected from the financial statements of those insurance
companies. Rather, the study did not use additional data sources like workers, managers, and
clients as a primary source of data, which means the method also used mixed methodology in
order to triangulate the results obtained from the data analysed by the regression analysis.

The other weakness of the study, in my opinion, was that there was no mentioned or listed
insurance like Abay, Awash, Anbesa, and others, and there should be a number of insurance
companies mentioned. The other weakness of the article is that it did not mention the specific
objectives of the study.

In my opinion the review of related literature should contain theoretical framework, research
gap and conceptual frameworks, but in the article these all are not available. It is the other
weakness of the study

3. The general contribution of the article to the overall topics of my course

This study has a contribution for my course financial investment and institutional
management because most of insurance companies in Ethiopia are profit making institutions.
So any risk in the financial institutions should be managed carefully. So knowing such effects
of risk management on financial performance of profit making insurance companies
contribute more and supports to know more on ideas on the course of FIIM.