FINANCIAL PERFFORMANCE OF NON-LIFE INSURANCE COMPANIES OF

NEPAL

by:

Prashant Raj Neupane

Registration No: 026-2-3-05581-2019
Kathmandu Don Bosco College

A thesis submitted to the Office of Dean

Faculty of Management, Purbanchal University
in partial fulfillment for the degree of
Executive Master of Business Administration (EMBA)

February, 2023
Kathmandu
 DECLARATION

I, Prashant Raj Neupane declare that this thesis entitled Financial Performance of Non-

Life Insurance Companies of Nepal submitted in partial fulfillment of the EMBA Degree

of the Faculty of Management, Purbanchal University is my original work carried out

under the supervision of Dr. Bharat Singh Thapa, and has not been submitted anywhere

for the award of any other degree or commercial purpose. In keeping with the ethical

practice in reporting scientific information, due acknowledgements have been made

wherever the findings of others have been cited.

…………………………..

Prashant Raj Neupane

PU Reg. No: Date: 026-2-3-05581-2019

 ACKNOWLEDGEMENT

This thesis work “Financial Performance of Non-Life Insurance Companies of

Nepal” has been prepared for fulfilling partial requirement of the Executive Master's
Degree in Business Administration (EMBA).

I am extremely grateful to my thesis supervisor Dr. Bharat Singh Thapa for his
constant encouragement, patient guidance and valuable supervision at every stage of
my research work. This work would not have been materialized at the present shape
without his incisive observation and intellectual direction.

I am deeply indebted to all the professors, readers as well as the staff members of
Administration Department of Kathmandu Don Bosco College, whose suggestions
and cooperation made me able to complete this thesis. I am also thankful to all the
concerned staff respective organizations, who helped me by providing necessary
secondary data.

I would also like to thank Mr. CM Sukralia for his continuous motivation and
technical support during the study. The study would have been incomplete without
his observation and continuous directions.

Similarly, I would like to express debt of gratitude to my family members for their
continuous inspiration and support during the entire period of the study. At last, but
not least I cordially would like to express my gratitude to my friends who directly
indirectly assisted me to prepare this thesis.

Moreover, it is needless to say that to error is human and I am also no exception, so

I apologize for any errors and mistakes committed in this thesis work.

Prashant Raj Neupane

Kathmandu Don Bosco College

 LIST OF TABLES

Page No.
Table 4.1 : Number of insurance companies and observations for study 46

Table 4.2 : Descriptive Statistics 47

Table 4.3 : Pearson Correlation Coefficient Matrix 48

Table 4.4 : Regression Analysis with ROA as dependent variable 50

Table 4.5 : Regression Analysis with ROE as dependent variable 51

Table 4.6 : Regression Analysis with EPS as dependent variable 51

Table 4.7 : Collinearity Statistics 52

 ABBREVIATIONS

AD: Anno Domini

BS: Bikram Sambat
CEE: Central and Eastern European
DEA: Data Envelopment Analysis
EPS: Earning Per Share
ERM: Enterprise Risk Management
FS: Firm Size
GDP: Gross Domestic Product
IP: Insurance Premium
IRS: Increased Return to Scale
IS: Investment Size
LIC: Life Insurance Corporation
NIA: Nepal Insurance Authority
NLI: Non-Life Insurance
ROA: Return on Assets
ROE: Return on Equity
SEBON: Securities Board of Nepal
SPSS: Statistical Package for Social Sciences
VIF: Variable Inflation Factor
 ABSTRACT

This study examines the financial performance of Nepalese non-life insurance companies.

The dependent variables are return on assets, earning per share and return on equity while

independent variables include insurance premium, firm size, investment size and

solvency ratio. Seventeen non-life insurance companies with 124 observations for the

period of 2013/14 to 2020/21, were selected for this study. The data were collected from

insurance and financial statistics published by Nepal Insurance Authority and annual

reports of the selected Nepalese insurance companies. The correlation coefficient and

regression models were estimated to test the significance and importance of liquidity

management on financial performance of Nepalese insurance companies. The results

shows that insurance premium has positive impact on return on assets, earning per share

and negative impact on return on equity. It means that increase in insurance premium

leads to increase in return on assets and earning per share but decrease in return on equity.

Likewise, firm size has positive impact on return on assets and negative impacts in return

on equity and earning per share. It indicates that increase in firm size leads to increase

return on assets and decrease in return on equity and earning per share. Similarly,

investment size has positive impact on return on assets, earning per share and return on

equity. It means that increase in investment leads to increase in return on assets, earning

per share and return on equity. Likewise, solvency ratio has negative impact on financial

performance indicating that increase in solvency ratio leads to decrease in financial

performance. The study also concludes that insurance premium followed by investment

size and firm size is the most influencing factor that explains financial performance of

Nepalese insurance companies.

 TABLE OF CONTENTS

Page No.
COVER PAGE

DECLARATION

CERTIFICATE OF THE SUPERVISOR

VIVA-VOCE SHEET

APPROVAL

ACKNOWLEDGEMENT

LIST OF TABLES

ABBREVIATIONS

ABSTRACT

CHAPTER I: INTRODUCTION…………………………………………….............. 1
1.1 Background of the study…………………………………………………... 1
1.2 Statement of the problem………………………………………………….. 4
1.3 Objective of the study……………………………………………………... 6
1.4 Significance of the study…………………………………………………... 6
1.5 Limitation of the study…………………………………………………….. 7
1.6 Organization of the report…………………………………………............. 8

CHAPTER II: LITERATURE REVIEW……………………………………............. 10

2.1 Conceptual review………………………………………………………… 11
2.2 Empirical review………………………………………………………….. 20
2.3 Conceptual framework…………...……………………………………….. 34
 2.4 Research Gap……………………………………………………………… 36

CHAPTER III: RESEARCH METHODOLOGY…………………………………… 37

3.1 Introduction……………………………………………………………..… 37
3.2 Research design…………………………………………………………… 37
3.3 Population and sample…………………………………………………….. 38
3.4 Nature and source of Data…………………………………………............. 39
3.5 Data collection procedure…………………………………………............. 39
3.6 Tools and techniques for data analysis…………………………………….. 40

CHAPTER IV: OBSERVATION AND ANALYSIS………………………………... 45

4.1 Data collection…………………………………………………………….. 45
4.2 Descriptive statistics………………………………………………............. 47
4.3 Correlation analysis……………………………………………………….. 48
4.4 Regression analysis……………………………………………………….. 49

CHAPTER V: RESULTS AND DISCUSSION……………………………………... 53

5.1 Results…………………………………………………………………….. 53
5.2 Discussion…………………………………………………………............ 54

CHAPTER VI: FINDINGS, CONCLUSION AND RECOMMENDATION……….. 58

6.1 Findings…………………………………………………………………… 58
6.2 Conclusion………………………………………………………………… 60
6.3 Recommendation………………………………………………….............. 60

REFERENCES

APPENDIX
 1

CHAPTER I

INTRODUCTION

1.1 Background of the study

Financial institutions have come to be known for their crucial contribution

to the success of many economies. The contributions of financial

institutions to economic success, as evidenced from the 2007-2008 financial

crisis and its impact, have drawn the attention of academia into investigating

various aspect of the sectors’ performance and risk related issues. At the

center of this growing interest specifically regarding financial performance

of the insurance sector, is the important contribution of insurance in the

general economic development and wealth creation of a country. Insurance

can be defined as a means of providing protection against possible

eventualities through specialized functions such as funds mobilization for

investments and the underwriting of risks.

Many aspects of life and business depend on the effectiveness of insurance

to embark on various projects and decisions such as business investments,

acquiring property and long-term insurance. Insurance is one major means

whereby people and businesses share and transfer their risks to third parties,

especially for those risks that cannot be avoided in the value creation

processes, irrespective of sector. One way to absorb risk and ensure stability

of financial activities by firms into the foreseeable future, is by way of

insurance or reinsurance. The types of insurance are mostly categorized

under two main business models namely, general insurance business and
 2

long-term insurance business, also referred to as “non-life” and “life”

insurance respectively. The business of general insurance comprises those

non-life and short-term insurance policies such as property and liability

insurance, motor insurance, accident and health insurance, engineering,

transportation and guarantee, among many others. Long-term insurance on

the other hand comprises those long-term related policies such as life

assurance, permanent health insurance, pension, and linked long term

insurance.

In the pace of rapid growth and development of insurance industries, it is

very important to develop appropriate strategies that might aid the insurance

practitioners to develop appropriate insurance products and services.

Insurance manages the risk of uncertainly in an effective way and plays a

significant role in mobilizing domestic savings, turning the capital into

productive investments by managing loss and maintain financial stability

(Reddy, 2015). The non-life insurance companies hence play as a crucial

role in promoting the trade and commerce activitieswhich contributes to the

sustainable growth of an economy.

In recent times, much attention has been drawn to the determinants of

insurance companies’ profitability owing to the direct impact of insurer

profitability on all stakeholders such as; shareholders, consumers, investors,

and employees (Kaya, 2015). Alomari and Azzam, (2017) considers

insurance as a “complementary sector for the financial, production and

services sectors” of any economy. Furthermore, efficient allocation of

resources is achieved through a well-developed insurance sector by

functions such as the transfer of risk and mobilization of savings

 3

(Charumathi, 2012). As underwriters, these companies are not only

providing good mechanisms for transferring risk but also help to boost

entrepreneurial confidence in appropriate ways, so as to support investment

growth and general economic activities (Kazeem, 2012).

Pant & KC (2017) stated that service industries are that part of economy

that offers services rather than the tangible objects. Insurance is a distinct

kind of service. It provides awareness to people against protection of life

and property. It mobilizes the savings of common people, industries, and

financial institutions to create capital. The non-life insurance companies

provide financial support to the risk against loss of property as well as

bodily injury and risk of accidental death.

Ghimire (2013) stated that the people who purchase the insurance policies are

the policyholders of the company. The large number of policy holders leads

to the large amount of premium collection for the minimization of

occurrence of various risks and uncertainties that may happen by

reimbursing to few who suffer from those risks.

Grundl, Dong, & Gal (2016) found that insurance companies invest the

premiums in stocks, bonds, and other interest-bearing accounts. From this

investment income, an insurance company can pay claims, commissions,

and administrative costs while otherwise financing its operation. The

ultimate objectives of the investment directive are safeguarding the reserve

fund of insurance companies and secure minimum amountof earnings to pay

policyholders' future liabilities without any burden of financial scarcity.

In a summary, the contributions of the insurance industry to general

 4

economic developments include; the transfer, absorption and spread of

financial risks and losses, promotion of investments through the creation of

businesses and embarking on projects, the efficient allocation of resources

and the promotion of savings. Thus, it is necessary to understand the

financial performance of the non-life insurance companies to identify their

financial strength so that there is increase in their retention capacity. Hence,

this study is basically focused on the financial performance analysis of non-

life insurance sectors in Nepal based on the firm size, premium income,

solvency ratio and the size of investment made by the companies.

1.2 Statement of the problem

After the commencement of insurance act (1993), non-life insurance sector

has been developed dramatically and made a significant growth over the

years. There are 20 non-life insurance companies which are in operation.

Insurers should have a good financial performance so that it can perform

financially well, ensure customer satisfaction and give a good return to the

investors. The main reason for inconsistency in the financial performance

is lack of proper analysis of the companies’ financial position and better

strategies to be implemented for a good return to all the stakeholders.

The financial performance of an insurance company is measured in terms

of net premiums earned, return on investment, return on equity and profits

earned from underwriting activities (Chen & Wong, 2004). It can be

divided into the profit performance and investment performance measures.

The organization’s earning and increase in the value as indicated by the

increment of share price are the major indicators of financial performance.

 5

The major factor influencing the performance of insurance companies is

internal factors, namely the company’s size, company’s age, underwriting

risk and leverage (Ismail, 2013). Prior studies exploring the relationship

between the capital structure and financial performance in the Nepali

financial institutions revealed both positive and negative relationships.

Those studies are focused on commercial banks, trading and manufacturing

companies rather than the insurance sector. The insurance sector as a non-

depository institution has been facing challenges to incorporate the optimal

capital structure to increase their financial performance. In the light of the

above theoretical underpinnings, this study provides empirical evidence on

the impact of firm specific factors and the capital structure on financial

performance of non-life insurance companies in Nepal.

Liberalization, privatization and globalization throughout the world

brought about a vast change and advancement in the insurance sector in our

country. Due to the entry of many new private insurers into this sector,

competition among themselves increased and every insurance company

brought their own new techniques and innovative products, provided

various incentive schemes on policies. They attracted new customers and

tried to maintain better customer relationship. To do so, the insurance

company is expected to be financially solvent and very strong by being

profitable in their operation. As a layman, customers consider profitability

as the major determinant to understand the financial performance of a

company. Financial performance refers to the measure to identify how well

a firm or a company uses its assets and generate profits. Hence, measuring

the determinants or factors affecting the financial performance is the need

 6

for the study.

The major problems of non-life insurance sector are about developing

effective policies and designing better plans and programs for improving

the financial indicators. This research is conducted in order to provide

appropriate suggestions for overcoming difficulties and for the growth and

development of non-life insurance sectors. Thus, the present study aims to

analyze the financial performance of the non-life insurance companies and

is expected to answer the following research questions:

1. Is there an effect of firm size on the financial performance of non-life

insurance company?

2. What effect does the premium collection has on the financial

performance of non-life insurance company?

3. Does the solvency ratio have effect on the financial performance of the

non-life insurance company?

4. Will there be any effect due to investment size on the financial

performance of the non-life insurance company?

1.3 Objective of the study

This study incorporates three financial performance indicators return on

assets (ROA), return on equity (ROE) and earning per share (EPS). Based

on these indicators, the objective of this study is listed below:

1. To examine the effect of firm size on financial performance of the

industry

2. To explore the effect of solvency ratio on financial performance of

 7

the industry

3. To determine the effect of insurance premium and financial

performance of the industry

4. To study the effect of investment size on financial performance of

the industry

1.4 Significance of the study

In the modern business world, full of risks and uncertainties, insurance

companies have played an important role in minimization those risks and

uncertain events that may occur. Insurance manages the risk of uncertainly

in an effective way and plays significant role in mobilizing domestic

savings and maintain financial stability. The non-life insurance companies

play as a crucial role in promoting trade and commercialactivities which

contributes to the sustainable growth of an economy. This study helpsto

analyze how the premium is being collected in the non-life insurance

company and how the collected fund is being mobilized in the effective

investment sector. Nowadaysin the pace of rapid growth and development

of insurance industries, there is huge competition among the companies in

context of the premium collection and attracting new customers and

retention of the old customers. Most of the past studies in the Nepali context

either explored the financial performance and capital structure aspects.

Some of the studies analyzed the impact of capital structure and financial

performance in the banking sector. In the Nepali context, the studies

examining the impact of capital structure on the financial performance of

 8

non-depository institutions and the comparative study between life and

non-life companies with the variables included below is still to be explored.

There are a few studies that incorporates the relevance of firm specific

factors in the context of Nepal and factors that influence the capital

structure decision using more recent data. So, it is very important to clearly

understand the financial performance of non-life insurance company to

develop appropriate strategies that might aid the insurance practitioners to

develop appropriate insurance products and services.

1.5 Limitation of the study

Like every research has its own limitations, this study also has some

limitations via- inadequate coverage of the insurance companies, time taken

and other variables. Thereis significant place for arguing about the accuracy

and reliability in data collection. Major limitations of this study are listed

as below:

1. The whole study is limited to only four independent variables viz.,

total assets, total equity, total liabilities and net profit and three

dependent variables ROA, ROE and EPS.

2. The study is concentrated on the balance sheet data published in the

annual report of respective insurance company and various sources

related with secondary data.

1.6 Organization of the report

The report of this study comprises of six chapters which are as follows:
 9

Chapter I: This chapter gives an overview of the background of the study,

problem statement, purpose of the study, significance of the study,

limitation of the study.

Chapter II: This chapter reviews the theoretical base of the study as well

as the previous studies with relationship between operational efficiency

and profitability.

Chapter III: This chapter covers the method used in the conduct of this

study from the process of data collection to data analysis.

Chapter IV: This chapter discusses the observation and analysis of data

collected. Here we analyze the financial performance of general insurance

company. And the result of correlation and regression between financial

performance and firm specific factor is presented.

Chapter V: This chapter summarizes the overall results and discussion

through the results of the study and compare it with previous literatures.

Chapter VI: This chapter summarizes the findings and conclusions made

through the study. Also, some recommendations to insurance company is

provided regarding the financial performance.

References and Appendix is provided at the end of the chapter.

 10

CHAPTER II

LITERATURE REVIEW

This chapter highlights the literature that is available in concerned subject

through research work and relevant study on this topic, review of journals

and articles and review of previous thesis. Winchester & Salji (2016) posted

that formal literature review present a critical approach to a subject which

helps in planning a research project. The literature reviews are designed to

provide an overview of sources you have explored while researching a

particular topic and to demonstrate to your readers how your research fits

within a larger field of study It provides descriptive, analyticsummary of

the existing material relating to a particular topic or area of study. This

process involves a systematic examination of prior scholarly works.

Review of literature critically analyses the information gathered by

identifying gaps in current knowledge by showing limitations of theories

and points of view and by formulating areas for further research and

reviewing areas of controversy. It helps a researcher to get knowledge about

the following aspects:

1. What kinds of researches has been done in the topic?

2. What theories have been developed?

3. What approaches have been used by other researchers?

4. How others have conducted their study?

5. How much are their research applicable?

 11

6. Whether there are certain gaps that can be fulfilled by the current

study?

2.1 Conceptual review

This part of the research covers theoretical review of terms and items used

in thesis writing. The sources of this part are review of books, booklets,

journals, annual reports,etc. The following studies have been undertaken on

conceptual framework:

Meaning of insurance:

Insurance is a means of protection from financial loss. It is a form of risk

management, primarily used to hedge against the risk of a contingent or

uncertain loss. An entity which provides insurance is known as an insurer,

insurance company, insurance carrieror underwriter. The main functionof

insurance is to provide certainty of payment against the occurrence of

sudden loss arising due to happening of uncertain event. Thus, insurance

removes uncertainty.

Mishra (2001) explains that the function of insurance is primarily to

decrease the uncertainty of event. Insurance also provides protection against

the probable chances of loss. The time and amount of loss are uncertain and

at the happening of risk, the person will suffer loss in absence of insurance.

The insurance guarantees the payment of loss and thus protects the assured

from sufferings. Although insurance cannot check the happening of risk but

can provide for losses at the happening of risk and thereby creates security

to the insured.
 12

Reigel & Miller (1963) stated that insurance as a social device whereby

uncertain risks of individuals may be combined in a group and thus made

more certain; small periodic contributions by the individuals providing a

fund out of which those who suffer lossesmay be reimbursed. The insurance

minimizes the worries and miseries of losses arising due to death of insured

or destruction of property. The carefree person can devote himself in a better

manner towards the achievement of objectives which results in enhancing

his efficiency and rapid economic growth.

History of insurance

The modern age of civilization dawns on the back of the history of fires and

accidents that has taken a lot of risks but has always been backed by a certain

backing up for centuries. The concept of insurance has been around as long

as the human civilization.Countries and the citizens have a need to spread

the risk among large number of peopleand to move the risk to the entities that

can handle it. The first written form of insurance appeared in the ancient

Babylonian monument with the code of king Hammurabi inscribed in it. The

first written form of insurance appeared in the ancient Babylonian

monument with the code of king Hammurabi inscribed in it. The investors

and underwriters who gathered there could read it and those willing to take

the risk set premium signed on the bottom of the manifest beneath the figure

indicating the share of cargo for which they were taking responsibility

("Research Guides", 2020).

Hamburg Feuerkasse (English: Hamburg Fire Office) is the first officially

company providing Fire Insurance in the world and the oldest insurance
 13

enterprise to the public having started to give its services in 1676 AD. The

first life insurance policy was taken out in the early 18th century. The

Amicable Society for a Perpetual Assurance Office founded in London in

1706 by William Talbot and Sir Thomas Allen. “Accident Insurance”

became available in the 19th century. The history of insurance traces with

the development of the modern business against risk especially regarding

cargo, property death automobile accidents and medical treatments. The

first life insurance policy was taken out in the early 18th century. The

Amicable Society for a Perpetual Assurance Office founded in London in

1706 by William Talbot and Sir Thomas Allen.“Accident Insurance” became

available in the 19th century (Beattie, 2020).

The history of insurance industry in Nepal is not long. It has its roots in the 20 th

century. The first insurance company, "Nepal Insurance and Transport

Company Ltd" (now named Nepal Insurance Co. Ltd) was established in

1947. As a private insurance company with limited capital, the Nepal

Insurance and Transport Company Ltd was not successful to provide all

types of insurance facilities all over the country. Then immediately, the

HMG established Rastriya Beema Sansthan under the Insurance Act 1968.

After re-establishment of democracy, Nepal also implemented the policy of

privatization and economic liberalization and globalization and new

Insurance Act 1992 was introduced. At present there are 41 insurance

companies in Nepal including 19 Life insurance companies, 20 non-life

insurance companies and two Re-insurance companies.

 14

Development of Insurance in Nepal

Nepalese insurance is still in its growth stage despite of its history of

seventy-three years. The first insurance company in Nepal was established

in 1947 AD until then Insurance companies from India were operating in

Nepal.

Gurung (2009) examined that the development of insurance is closely

related to the industrialization of Nepal in 1940s when the first joint stock

company Biratnagar Jute Mill was established in 1936 AD The First bank,

Nepal Bank limited was established in 1973 AD. In the same period there

were a lot of industries popping up in the terai belt. Indian companies took

the initiative to insure the industries. Nepal bank provided the loans and to

insure these loans Nepal bank established Nepal Insurance and

transportation company in 1947 AD as its subsidiary which is the first truly

Nepal insurance company. Now 65 years after the first Nepali insurance

company set up, there are 19 life insurance and 20 non-life insurance

companies with more than 450 branches throughout the country.

Until the fiscal year 2008/09 these insurance companies providing direct

employment opportunity to 2,895 employees. In terms of number of

companies, number of policies sold and revenue earned, there has been

spectacular rise in the insurance business. Thereare still many areas that the

Nepali insurance sector has not been able to cover, but there is no denying

the act that the sector is witnessing accelerated growth. Nepal Insurance

Authority an autonomous body, established to develop, systemize,

regularize and regulate the insurance business of Nepal under Insurance Act,
 15

2022.

Types of Insurance

There are generally two types of insurance:

Life Insurance

In general, life insurance is a type of coverage that pays benefits upon a

person’s deathor disability. In exchange for relatively small premiums

paid in the present, the policyholder receives the assurance that a large

amount of money will be available in the future to help his or her

beneficiaries pay debts and funeral expenses. McMaken (2019) analyses

that some forms of life insurance can also be used as a tax-deferred

investment to provide funds during a person’s lifetime for retirement or

everyday livingexpenses. The life insurance includes term, endowment, and

whole life insurance.

Non-life Insurance

Non-life insurance is any other insurance other than life insurance. Life

insurance which is broken down into permanent and term life policies

whereas non-life insurance has many different types of insurance policies

usually covering people, property or legal liabilities.

Property Insurance:

Mostly called fire insurance policy the property insurance policy is provided

to peoplewho want to insure themselves from the insurance against the risk

of Fire, earthquake,explosion, storm, tempest flood, landslide, and various

other risks.
 16

Marine Insurance:

Marine insurance is the insurance that is done for bearing the risk of the

goods that arein transit or being delivered from the factory to the vendor

these insurances were the first major form of insurance in the real world. To

make the business secure and to avoid unnecessary losses, Marine Transit

Insurance provides coverage against both imports and exports. Marine cargo

has many risks and especially for Nepal where we do not have our own

dockyard, it would take longer time for the goods to reach its destination.

Auto Insurance/Motor Insurance:

This Insurance covers both the damage of the vehicles and the Third-Party

Liability under Comprehensive Vehicle Policy. It also covers the Personal

Accident of the driver and the passengers.

Loss of Profits Insurance:

Loss of profit insurance is the insurance against the loss of profits or

earnings that are lost because of the interruption of business due to some

unforeseen circumstances which can be any disasters causing the business

to halt its operations.

Home Insurance:

Household Insurance Policy covers private dwellings and/or household

contents (including computers and ancillary equipment) against perils such

as fire, natural calamities, theft or attempted theft, loss of rent or cost of

alternative accommodation, legal liability to members of the public as a

house owner, and personal accidents.

 17

Travel Insurance:

Travel insurance is the insurance done in order to cover the various risks an

individual may be exposed to during their travel to foreign country.

Aviation Insurance:

The insurance that is done by an airlines company with regards to the risks

that their airplanes are exposed to various risks involved in the aviation

industry.

Cash in transit Insurance:

Cash in Transit is specifically designed to protect the insured from: Loss of

money arising out any cause. Loss of or damage to safe/strong room. Any

case in which money is being carried. The goods or property of the insured

or for which the insured is legally responsible caused by theft or attempted

theft.

Personal Accident Insurance:

If you're unable to work in the wake of an accident-causing injury or due to

illness, your personal accident insurance policy will provide you with a

weekly income for a set period of time. You can choose to cover loss of

income due to injury, illness or both.

Hospitalization/Medical Insurance:

Hospital cover pays for some or all of the costs of hospital treatment as a

private patient,including doctors' fees and hospital accommodation. General

treatment cover helps with the cost of services such as physiotherapy, dental

and optical treatment.

 18

Public Liability Insurance:

Public Liability Insurance covers your businesses liability for injuries to

another personor damage to their property. The likelihood of being sued for

negligence is unpredictable and could be costly. Our Public Liability

Insurance covers your business against claims for negligent acts, which

cause personal injury or property damage.

Fidelity Guarantee Insurance:

Fidelity Guarantee Insurance cover for loss of money or property belonging

to your business as a result of fraud, theft or dishonesty committed by

employees.

Engineering Insurance:

Engineering insurance refers to the insurance that provides economic

safeguard to the risks faced by the ongoing construction project, installation

project, and machines andequipment in project operation. Insurance Period:

the same as the construction period of the project.

Non-Life Insurance Companies of Nepal

Non-life or General insurance companies aims in providing safeguard

against the financial loss of any property or liability in which period of

safeguarding is generally for one year. The policyholders do not expect the

financial return from the policy of general insurance as it is non-refundable.

Generally, there are two types of policies: (i)Personal policy having small

amount per policy but large numbers policies, (ii) Commercial business

having large value per policy, customized customers, and small number of
 19

policies. The rise in non-life insurance sectors showed a turn around after

the dreading earthquake of 2015. Today, public are more likely aware about

the importance of insurance (Ghimire, 2013).

There are 20 non-life insurance companies in the current scenario of

Nepalese market which are listed as under.

1. Ajod Insurance Company Limited

2. Everest Insurance Company Limited

3. General Insurance Company Nepal Limited

4. IME General Insurance Company Limited

5. Himalayan General Insurance Company Limited

6. Lumbini General Insurance Company Limited

7. National Insurance Company Limited

8. Neco Insurance Company Limited

9. Nepal Insurance Company Limited

10. NLG Insurance Company Limited

11. Oriental Insurance Company Limited

12. Prabhu Insurance Company Limited

13. Premier Insurance Company (Nepal) Limited

14. Prudential Insurance Company Limited

15. Rastriya Beema Company Limited

16. Sagarmatha Insurance Company Limited

17. Sanima General Insurance Company Limited

18. Shikhar Insurance Company Limited

19. Siddhartha Insurance Company Limited

20. United Insurance Company (Nepal) Limited

 20

2.2 Empirical review

Kumari (2015) stated that expanding liberalization in the insurance industry

with worldwide financial crisis, a great deal of challenges has been faced in

monitoring investment of insurance companies. Investment Management

should ensure that investment returns preserve for the solvency, meet

regulatory requirements on its financial constraints and ensure profitable

insurance business. The insurers should optimize the use of assets so as to

increase the return on assets and decrease the operating cost. The main

reason for incurring losses in the companies may be attributedto the lack of

cost efficiency and high operating cost. The variables such as liquidity, loss

ratio, investment performance, operating margin, growth in premium,

tangibility is significant in measuring the profitability of the insurers

(Hussanie & Joo, 2019).

Larger company has larger market share and market power in respect of

customers and volume of investment (Berger & Goldberg, 1997). Likewise,

Niresh (2012) concluded that firm size has positive impact on performance

of firm. Similarly, Butt & Hasan (2009) determined a positive and

significant relationship between firm size and financial performance.

According to Sufain et al. (2009), there is a positive impact of firm size on

performance. Similarly, the effect of bank size on profitability is found to

be positive (Smirlock, 1985). Firms’ size has a strong positive affiliation

with profitability (Bagchi, 2013).

Most of the studies measuring the influence of firm size on profitability

have found results with positive direction between firm size and
 21

profitability (Vijayakumar et al.,2010; Serrasqueiro et al.,2008). At the

same time some of the studies have concluded that direction between firm

size and profitability as a negative one. (Becker et al.,2010).

Burca & Batrinca (2014) found that there is positive influence of premium

on the return on assets. According to Kaya (2015), profitability of non-life

insurance companies is statistically and positively related to the premium

collected. Similarly, Jibran et al. (2016) found that there is positive

relationship between premium and profitability. Same as, Suheyli (2015)

found that premium has a positive and statistically significant relationship

with profitability. Likewise, Lire (2016) revealed a positive relationship

between premium and profitability.

According to Gulati & Jain (2011), there is positive and significant

relationship of solvency ratio and financial performance. Similarly,

Chaudhary & Kiran (2011) observed a positive relationship of solvency

with financial performance of insurance companies. Likewise, Khidmat &

Rehman (2014) showed that the solvency ratio has positive and highly

significant impact on the financial performance of firms. Same as, Obudho

(2014) established that solvency risk was positively affect the financial

performance of insurance companies in Kenya.

Bouwknegt & Pelsser (2002) opined that at establishing the liquidity risk

and its effect of financial performance of listed insurance companies. The

study also found that operational, market and credit risks have negative

effect on the financial performance of these companies. Profitability and

liquidity are effective indicators of the corporate health and performance of

 22

not only insurance companies, but all profit- oriented ventures. The cash

assets generally consist of receivables from customers and inventories of

complete goods and unprocessed materials (Bhunia, 2012). Liquidity plays

a crucial role in successful operation of a banking and insurance business.

Every stakeholder is interested in the liquidity position of an insurance

company. Thus, banking and insurance firms should safeguard that it does

not hurt from lack of or excess liquidity to cover up its short-term

obligations (Kurawa & Abubakar, 2014). Likewise, Gonga & Sasaka (2017)

found that liquidity had an insignificantly positive impact on firm’s financial

performance.

According to Adebayo et al. (2011), there is significant relationship between

liquidity and profitability. According to Mathuva (2009), there is positive

relationship between profitability and liquidity of insurance company in

Kenya. Similarly, Bagchi (2013) found that there is a negative relationship

between the measures of liquidity management and firms’ profitability.

Bank’s liquidity is positively related to profitability and negatively related

to the size of the bank and interest margin (Vodova, 2013). Al-Tamini &

Obeidat (2013) revealed that there is positive relationship between liquidity

management and profitability.

Deygabti & Alemu (2019), investigated the factors affecting financial

performance of insurance companies in Hawassa City where seventeen

insurance companies were selected with the data of ten years from 2008 to

2018. The result of this study showed that five variables such as

underwriting, solvency ratio, premium growth, inflation rate and growth of

 23

GDP have significant effect on financial performance of the insurance

companies whereas the variables like reinsurance dependence, company size

and interest rate have no significant effect on financial performance of

Hawassa city Administration. The findings from the descriptive analysis

showed that the insurance companies were averagely generating positive

ROA.

Boadi, Antwi, & Lartey (2013) had stated that in their study to investigate

the determinants of insurance companies` profitability the Return on Assets

was used as dependent variable implication of profitability against a set of

independent variables. The internal determining factors were leverage,

tangibility, liquidity, size, risk and growth.

Kumari (2015), has conducted a research study on "Determinants of

Insurance Investment: A case study of Life Insurance Corporation of India".

The study suggests that premium and claim is significantly influenced by

the investment of insurance sector. As a result of expanding liberalization in

the insurance industry with worldwide financial crisis, a great deal of

challenges has been faced in monitoring investment ofinsurance companies.

This study concluded that the financial operators are getting liberalized in

taking decisions in a developed and regulated environment and take the

responsibility for decisions. He states that underwriting and investment are

two essential and related business activities of insurance companies. It is

derived from this study that in general, a relatively high proportion of

variation of dependent variable investment is accounted for by the

independent variables; premium and claim.

 24

Cavalcante, Sobreio & Kimura (2018), conducted research in "Determinants

of the non-life insurance market in Brazil" which presented paper provides

the study of the relationship between the economic growth and financial

development as determinants of NLI. The consumption of premium

consumption using data from a highly volatile economic environment. The

empirical study revealed that there is a positive relationship among

economic growth, credit and the NLI market in Brazil. The result also finds

out that Granger casualty between economic growth and NLI premiums in

Brazil.

Pant & KC (2017), has referred insurance as a financial intermediary plays a

significant role in economic growth of any country in his journal

"Contribution of Insurance in Economic Growth of Nepal". This study

presents that insurance may contribute to economic growth by long term

investment through capital that is collected from accumulated saving from

individuals. Considerable debate has been made whether financial

institutions contribute to economic growth or not. Development of insurance

and reinsurance business is must for the economic development of any

country as it reduces uncertainty and encourages long term investment.

Insurance also helps in economic growth by promoting financial stability,

mobilizing and channelizing savings, supporting trade and commerce,

entrepreneurial activity, social programs etc. the long-term investment

horizons help in effective risk management and long-term finance. Hence,

insurance mobilizes the savings of the people into investment for economic

growth. A sound insurance market can pave the way for effective and

systematic resource allocation by risk transfer and mobilization of savings.

 25

Hussain & Kumari (2016), has conducted a research study on "Strategies for

Long Term Investment by Non-Life Insurance Companies in India". It

studies major determinantsof long-term investment of the non-life insurance

industry of India. The annual financial statements of nineteen non-life

insurance companies covering a period of 5 years (2011-2015) were sampled

and analyzed through panel regression. The findings indicate that, as

expected, highly liquid, highly profitable and large size insurance

companies have invested more in long term than lowly liquid, lowly

profitable and small size companies. This article states that insurance

companies can invest their funds in short-term and long-term financial

instruments viz., securities of money market and capital market.

Gründl, Dong & Gal (2016), in his article, "The evolution of insurer

portfolio investment strategies for long-term investing" has provided an

overview of the evolving investment strategies of insurers and identifies the

opportunities and constraints they may face with respect to long-term

investment activity. The report investigates the extent to which changes in

macroeconomic conditions, market developments and insurance regulation

may affect the role of insurers in long-term investment financing. Large

insurers hold relatively more diversified insurance and investment products,

which give large insurers wider range to invest in various portfolios. He

stated that insurers can change their asset allocation toward a riskier

investment portfolio after collecting premiums from policyholders or reduce

their equity capital endowment to the minimum regulatory capital required,

leading to a higher probability of insolvency. This article has analyzed the

insurance regulation and its impact on insurer investment strategies. This

 26

global trend toward (more) risk-based capital regimes may influence

insurers’ abilities or willingness to make long-term investments. Insurers’

investment strategies are contingent on a plethora of factors, including

regulatory requirements which could be one of the most important. Indeed,

regulatory requirements can either incentivize or dis-incentivize long-term

investment. Regulatory factors that have a noticeable influence on insurer

investment strategies, and thus also on long-term investment, are, for the

most part, either quantitative regulations concerning insurers’ capital

endowment or risk governance requirements. To evaluate long-term

investment projects, one will have to take into account both uncertainty over

cash flows and illiquidity of the projects. Both aspects will contribute to low

project values that lessenthe extent of own funds in the solvency balance

sheet. This can be seen as an – economically reasonable – obstacle to long-

term investment.

Available solvency ratio means the excess value of assets over the value of

insurance liabilities and other liabilities of policyholders’ and shareholders’

funds (Charumathi, 2012). The result in his study indicated that there is a

significant positive relationship between profitability and solvency ratio.

Solvency ratio is an important indicator of the financial health of an

insurance firm and denotes its ability to survive in the long run. Insurance

companies with higher solvency margin are considered to be sounder

financially. Financially sound insurance companies are better able to attract

prospective policyholders and are better able to adhere to the specified

underwriting guidelines. Insurance companies with higher solvency margin

outperform those with lower solvency margin (Suheyli, 2015). On the other
 27

hand, assuming that the company is in its first stage, the manager will choose

to invest using the retained earnings in order to increase profitability. This

means that the internal financing will continue until the retained earnings

reach the amount of Zero. Furthermore, (Burca & Batrinca, 2014) found that

the faster the growth, the more external financing firms will use. However,

this increase in external financing is mainly through an increase in the

liabilities, as the increase in external equity financing was not found

significant. As a company grows, the solvency ratio will thus become

smaller.

Jerene (2016), presented journal article whose main objective of study was

to identify factors that determine the profitability in India. This study covers

a time period of 2006 to 2016. The collected data was obtained from the

financial report of eight general insurance companies. The variables such as

company size, liquidity and inflation found statistically significant factors

in determining the insurance companies` profitability in India. The study

suggest that insurance managersmay put significant attention on managing

current assets and liability to maintain optimal liquidity position.

Ortynski (2016), identifies the determinants of the performance of general

insurance companies in Poland in his research. The given research was done

using a panel datasetconsisting of a firm specific factors and macroeconomic

factors over the period of year 2006-2013. The study proves that there was

a statistically significant relationship between the variables with

profitability performance being negatively affected by underwriting activity

and the size of a company has positive relationship with its profitability. In
 28

addition to this there is a statistically significant and positive relationship

between profitability ratio of technical activity and the macroeconomic

variable.

Datu (2016) found significant impact for company size, financial leverage,

input cost, reinsurance and underwriting risk on both return on assets (ROA)

and operating ratio within the Philippine non-life insurance sector.

Similarly, Lee (2014) explored the effects of firm specific factors on return

on assets (ROA) and operating ratio, in Taiwan’s property liability industry

using a panel data study over the period 1999 to 2009. The findings show

that factors such as; return on investment, underwriting risk, reinsurance

usage, financial holding group, and input cost, significantly impact

performance both in return on assets (ROA) and operating ratio. In addition,

Hailegebreal, (2016) found profitability was negatively and significantly

impacted by technical provision, leverage, and underwriting risk on

performance, whereas premium growth, age and solvency had a positive

relationship with profitability. Other factors with no significant effect on

profitability included size of the company, reinsurance dependency,

tangibility of assets, and liquidity.

Kaya (2015), conducted research which investigates the firm specific

factors affecting the profitability of non-life insurance companies operating

in Turkey over the period of 2006 to 2013. For the given research purpose

data were collected from 24 non-life insurance companies in Turkey. The

profitability of Turkish non-life insurance companies is the size of company,

age of the company, loss ratio, current ratio and premium growth rate. The
 29

results obtained from this study shows that large non-life insurance

companies have higher profitability than small non-life insurance

companies. Therefore, the managers of non-life insurance companies should

give importance to their growth strategies.

Reddy (2015), had studied the investment pattern of life insurance industry

during post reform period in India where he observed that insurance markets

in India are showing clear signs of expansion towards achievement of

sustainable growth. The study concludes the investment pattern by life

insurers have been on the rise both absolutely and relativelywith respect to

central government securities, investment subject to exposure norms,

infrastructure and social sector is a welcome feature. This study presents the

investment pattern of Life Insurance Corporation of India for the years

2003-2009. It shows that shows that the observed phenomenon of greater

share of investment of LIC within country holds good with respect to all

other heads of investment which includes loans,securities, special deposits

for central government, house property and other investments. The main

emphasis on the investments and diversion of cash resources towards

statutory investments avenues which are very essential in view of the

investorprotection is the significant reason for the decline in current ratio

does not otherwise signify that the liquidity crunch. The investment portfolio

is generally overwhelmed by long-term assets, but one part of funds is

invested in short-terms instruments for securitization of liquidity.

Investment portfolio must be in accordance with liquidity need,

profitability, reinsurance arrangements, leverage and stream of premium.

This study performed an empirical test of the determinants of investment

 30

pattern of insurance companies using a framework derived from the

organizational economics literature. It was found that, as expected, highly

liquid, highly profitable and large size companies have invested more in

long term than lowly liquid, lowly profitable and small size companies.

Ghimire (2014), researched on the investment portfolio of insurance

companies of Nepal where he researched the real status of investments

portfolio structure of both life and non-life insurance companies of Nepal.

The investment policy of the insurance fund is basically directed by twin

goals: solvency and profitability. This means they must guarantee

commitments but generate financial income as well. In this regard,

investment regulation must be concerned with the risks inherent both in the

investments themselves and in the commitments that those investments are

intended to cover. Insurance companies are significant providers of funds to

the banking system both through outright holdings of debt and as effective

providers of funds through financing operations such as securities lending.

He stated that the total asset of insurance industries has been increased over

the last decades, the investment fund of insurance also is increasing in the

same trends and direction. He concluded that the ultimate objectives of the

investment directive is safeguarding the reserve fund of insurance

companies and secure minimum amount of earnings to pay policyholders'

future liabilities without any burden of financial scarcity.

Bikker (2014), investigates the cost efficiency and competitive behavior of

the non-life insurance market in the Netherlands in his research where it

focuses on the period over 1995-2012. The first measure is unused scale
 31

efficiency expects to be low under fierce competition. The research finds out

that operation cost is constant, and profit fluctuates without clear upwards

or downwards trends. Using the PCS indicator of competition for the non-

life insurance market, he observed the significant impact of marginal costs

on both market shares and profits. The research also finds that there is a

significant impact of marginal costs on market shares and on profits for

health and fire and post-reform the impact of marginal costs or efficiency on

market shares is somewhat weaker for healthinsurance, due to the inclusion

of the less dynamic public insurance.

Ghimire (2013), also researched the financial efficiency of non-life

insurance industries of Nepal which presented an analytical study to

understand the level of soundness of 16 private sector non-life insurance

companies with the help of financial ratios. This research concludes that

insurers have been able to fulfill most of the legal compliance. The financial

progress of the insurance industry has been improving gradually. The failure

of the insurance industry effects the entire economy including banking,

trade and commerce. Nepalese insurers are improving and maintaining the

financial stability and development of overall insurance activities. The

researcher suggested that insurers have to invest at least 75 percent of their

total investment in government securities, treasury bills and banks' fixed

deposits. The remaining 25 percent can be invested in financial companies,

debenture schemes and housing schemes to make a profitable return. The

overall financial efficiency of the non-life insurance companies during the

study period was not as good as expected. According to him the insurance

regulatory authority needs to make proper planning and guidelines for the
 32

overall growth and development of insurance industry.

Gurung (2011), studied the insurance and its business in Nepal which

reveals that the performance of insurance business in Nepal is satisfactory.

The growth of insurance policies for both life and non-life insurance

companies has been increasing and significant during the study period.

Similarly, the progressive trend of premium collection reached to higher

level of success over the years. He has mentioned that thestudy of various

insurance business indicators such as premium collection and their

investments, growth of insurance policies, analysis of investment, etc. are of

paramountimportance for government as well as policy makers of insurance

authority. He has concluded that as institutional investors, insurance

companies may act as principal for their own account, and thereby invest the

assets of the insurance companyin a wide array of financial instruments i.e.,

share, 76 The Journal of Nepalese Business Studies debenture, etc. in order

to produce sufficient income to meet their obligations in the form of

promised insurance benefits (SEBON, 2007). They basically invest in

corporate securities, government bonds and in commercial and development

banks as fixed deposit.

Kozak (2011), researched on determinants of profitability of non-life

insurance companies in Poland during the integration with the European

Financial System which shows the affect in profitability of non-life

insurance sector in Poland. In the given research to determine profitability

tests were conducted for 25 non-life insurance companies for the period of

2002-2009. In the research a regression model with elimination of the

 33

impact of heteroscedasticity and autocorrelation was use. The research

concluded that the reduction in share of motor insurance in the portfolio with

simultaneous increase of other types of insurance, has a positive impact on

the profitability and cost-efficacy of the insurance.

Afza & Ashgar (2010), in their research applied non-Parametric Data

Envelopment Analysis (DEA) in order to estimate the technical efficiency

of non-life insurance company in Pakistan. This study investigates the

technical efficiency based on size of non-life insurers and found that on

average large non-life insurers were more technically efficient than larger

scale economics. The analysis of scale economics in different size of life

suggested that the most increase in return to scale was found in non-life

insurers. Furthermore, he concludes that most of the non-life insurance

companies in Pakistan, particularly the small and medium size insurers are

inefficient due to increasing return to scale (IRS).

Malik, (2011) during the period from 2005 to 2009 empirically examined

the effect of company specific factors on the return on insurers’ assets

(ROA) for both life and non-life samples in Pakistan and found no evidence

to support a relationship between profitability and the age of insurer.

However, he found a significantly positive association between profitability

and volume of capital, and size of company. In addition, leverage ratios and

loss ratios of insurers significantly and negatively influenced profitability of

insurance companies in Pakistan. Similarly, Naveed, Zulfiqar & Ishfaq

(2011) found factors such as underwriting risk, size of company, and

liquidity to be important determinants of the capital structure of life insurers

 34

in Pakistan proxied on leverage. They also, concluded on a negative

relationship between profitability and leverage of life insurance companies.

In the context of Nepal, stability of insurance sector helps to maintain

stability in the economy (Baral, 2005). Likewise, Joshi (2004) found that

the liquidity and insurance companies are positively related to insurance

profitability. Same as, Maharjan (2007) revealed that the capital adequacy

and liquidity is positively associated with the insurance profitability.

Likewise, Shrestha (2012) found positive and significant association

between liquidity and profitability of banks of Nepal. Similarly, Pradhan

and Shrestha (2016) revealed negative relationship between quick ratio and

profitability measured in terms of return on equity. Likewise, Poudel (2012)

found an inverse impact on banks’ financial performance; however, the

default rate is the most predicator of bank and financial institutions

performance. Same as, Jha (2012) showed that the liquidity position has

negative impact on financial performance.

2.3 Conceptual framework

Different empirical evidences suggested that financial performance of

financial institutions especially that of insurance companies can be affected

by various internal and external factors. Hence, this study refers premium

collection as independent variable and investment pattern, net profit, claim

paid ratio and financial performance as independent variables. All the

independent variables are determined by one independent variable i.e.,

premium collection. These were showed as follow:

 35

Independent Variables Dependent Variables

Firm Size

Insurance Premium
Financial Performance
(ROA, ROE and EPS)
Solvency Ratio

Investment Size

Fig 1: Conceptual Framework (Source: Becker, 2010)

Figure illustrates the proposed theoretical model of this study. The model

consists of two dependent Return on Assets and Return on Equity and three

independent variables firm size, insurance premium, solvency ratio and

investment size.

Firm size

Size refers to bank size that is considered as total assets. Larger company

has larger market share and market power in respect of customers and

volume of investment (Berger & Goldberg, 1997).

Insurance premium

Premium is the amount of money that an individual or a business must pay

for an insurance policy (Chaudhari & Kiran, 2011).

 36

Solvency ratio

Solvency ratio is the ability of a company to meet its long-term fixed

expenses and to accomplish long term expansion growth. A solvency ratio

greater than 20% is considered financially healthy. The higher ratio better

equipped a company is to pay off its debts and survive in the long term

(Bawa, 2013).

Investment

Investment is the use of money to acquire assets that will be used for the

production of goods or services to generate income (Investopedia).

2.4 Research Gap

The previous studies are focused on commercial banks, trading and

manufacturing companies rather than the insurance sector. The insurance

sector as a non-depository institution has been facing challenges to

incorporate the optimal capital structure to increase their financial

performance. In the light of the above theoretical underpinnings, this study

provides empirical evidence on the impact of firm specific factors on

financial performance of non-life insurance companies in Nepal. This study

focuses to fill the gap between existing theory and its implication in

Nepalese insurance industry by determining the impact of firm specific

factors on financial performance of non-life insurance companies during

2013/14-2020/21.
 37

CHAPTER III

RESEARCH METHODOLOGY

3.1 Introduction

Research methodology is a way to systematically solve the research problem.

It may be understood as a science of studying how research is done

scientifically. In it we study the various steps that are generally adopted by

a researcher in studying the research problem along with the logic behind

them. It is necessary for the researcher to know not only the research

methods/techniques but also the methodology. The topic of the study has

been done for overall study on premium collection, firm size and solvency

ratio ofnon-life insurance sector of Nepal by modelling in Microsoft Excel

and SPSS. In order to reach and accomplish the objectives of the study,

different activities are carried out. For this purpose, the chapter aims to

present and reflect the methods and techniques that are carried and followed

during the study period.The research methodology that is adopted for the

present study is mentioned in this chapter, which deals with research design,

source of data, data collection, processing and tabulating procedure and

methodology (Kothari, 2004).

3.2 Research design

Research design is the framework of research methods and techniques

chosen by a researcher. It is a plan for the collection and analysis of data to

 38

investigate, obtain and answer to research questions. The main objective of

this study is to analyze and evaluate financial performance of non-life

insurance sector of Nepal based on ROA, ROE and EPS.

The study follows the descriptive and analytical research design using

positivism philosophy and deductive approach. The descriptive research

design has been adopted for fact-finding and adequate information

gathering. It explains the real and actual conditions, situations and facts. The

causal-comparative research design has used to establish the cause-and-

effect relationship between firm specific factors and financial performance

variables. The quantitative data have been collected from the secondary

sources obtained from the annual reports of selected insurance companies.

Balance sheets and income statements extracted from annual reports for the

selected insurance companies have been the fundamental data source of this

particular study. The panel data are used to fulfill the objective of the study.

3.3 Population and sample

Population can be explained as a comprehensive group of individuals,

institutions, objects and so forth with have a common characteristic that are

the interest of a researcher. A sample is a collection of items or elements from

a population or universe.Hence, a sample is only a portion or subset of the

universe or population. It comprises some observations selected from the

population.

The total number of non-life insurance companies established in Nepal are

the population of this study and among them, the chosen companies for the
 39

study are the samples from total population. There are 20 non-life insurance

companies operating in Nepal (Nepal Insurance Authority, 2021). Due to

unavailability of reliable data and resources, three insurance companies viz.,

Rastriya Beema Company Limited, The National Insurance Company

Limited and The Oriental Insurance Company Limited has been disregarded.

Hence, in this study the population and the sample were the same.

3.4 Nature and source of Data

The research is based on secondary source of data. All the adequate data are

collected from secondary sources. This refers that the data are already used

and gathered by others. Secondary data are mostly used for this research

purpose. Therefore, the major sources of secondary data relating to the capital

structure of non-life insurance companies was collected from Annual Reports

of concerned insurance companies, Internet, Insurance act and directives,

Nepal Insurance Authority guidelines, articles, thesis and journals.

3.5 Data collection procedure

The task of data collection begins after a research problem has been defined

and research design plan was selected for the research. For this research,

secondary data was used; as primary data was not possible to extract due to

the privacy of insurance companies. So, in order to collect the secondary

data following sources were used:

1. Annual reports of non-life insurance companies

2. Internet browsing and articles

 40

3. Bulletins, articles published by the insurance companies

4. Official website of the selected companies

3.6 Tools and techniques for Data analysis

After the completion of data collection, it was necessary to arrange the data

so that it makes some sense to the researcher and extract appropriate amount

of data required to the research. Hence, the extracted data was processed and

analyzed in descriptive way by coding and tabulating them using various

mathematical tools, financial tools and statistical tools as per the requirement

in order to achieve the objective of the study.

In reference to the requirements of the topic, more emphasis was given to

the statistical tools rather than financial tools. The evaluation of the data was

carried out to the pattern of data available. Different tools have been selected

according to the nature of data as well as subject matter.

Financial analysis tools

Generally, the financial analysis tools were used for the purpose of the

assessment of the financial position to an organization. For the purpose of

this study, two indicators of financial performance return on assets and

return on equity are evaluated in the study.

The Model

The study assumes that the insurance performance depends upon different

variables. The dependent variables selected for the study were return on

equity, earning per share and return on assets. Similarly, the selected

independent variables are firm size, solvency ratio, insurance premium and
 41

the size of investment made by the insurance companies. To explain the

influence of the independent variables on the dependent variables, multiple

regression analysis was used. A model for analysis was done by Becker

(2010). Similar model equation is designed to test the hypothesis.

Performance = f (firm size, solvency ratio, insurance premium, investment

size)

More specifically, the given model has been segmented into following

models:

ROA= β0 + β 1 FS + β 2 SOL +β 3 IP + β 4 IS + e

ROE= β0 + β 1 FS + β 2 SOL +β 3 IP + β 4 IS + e

EPS= β0 + β 1 FS + β 2 SOL +β 3 IP + β 4 IS + e

where,

ROA = Return on assets, defined as the profit after tax to total assets, in

percentage.

ROE= Return on equity, defined as the profitability of the organization in

relation to equity

EPS= Earnings per share

FS= Firm size, defined as the total size of assets. (Natural logarithm of total

assets)

SOL= Solvency ratio, defined as the company’s ability to meet its debt

obligations
 42

IP= Insurance Premium, defined as total premium collected (Natural

logarithm of total premium)

IS=Investment Size, defined as total size of investment made by the

insurance companies (Natural logarithm of total investment made)

Natural logarithm is used because coefficients on natural log scale are

directly interpretable as approximate proportional difference; with a

coefficient of 0.06, a difference of 1 in x corresponds to an approximate 6%

difference in y and so forth (Gelmon & Hill, 2007).

The following section describes the independent variables used in this study

along with hypotheses.

Firm size

Firm size refers to insurance size that is considered as total assets. Larger

company has larger market share and market power in respect of customers

and volume of investment (Berger & Goldberg, 1997). Likewise, Niresh

(2012) concluded that firm size has positive impact on performance of firm.

Similarly, Butt & Hasan (2009) determined a positive and significant

relationship between firm size and financial performance. According to

Sufain et al. (2009), there is a positive impact of firm size on performance.

Similarly, the effect of bank size on profitability is found to be positive

(Smirlock, 1985). Firms’ size has a strong positive affiliation with

profitability (Bagchi, 2013). Based on it, this study develops the following

hypothesis:

H1: There is a positive relationship between firm size and financial

 43

performance.

Insurance premium

Premium is the amount of money that an individual or a business must pay

for an insurance policy (Chaudhari & Kiran, 2011). Likewise, Burca &

Batrinca (2014) found that there is positive influence of premium on the

return on assets. According to Kaya (2015), profitability of non-life

insurance companies is statistically and positively related to the premium

collected. Similarly, Jibran et al. (2016) found that there is positive

relationship between premium and profitability. Same as, Suheyli (2015)

found that premium has a positive and statistically significant relationship

with profitability. Likewise, Lire (2016) revealed a positive relationship

between premium and profitability. Based on it, this study develops the

following hypothesis:

H2: There is a positive relationship between insurance premium and

financial performance.

Solvency ratio

Solvency ratio is the ability of a company to meet its long-term fixed

expenses and to accomplish long term expansion growth. A solvency ratio

greater than 20% is considered financially healthy. The higher ratio better

equipped a company is to pay off its debts and survive in the long term

(Bawa, 2013). According to Gulati & Jain (2011), there is positive and

significant relationship of solvency ratio and financial performance.

Similarly, Chaudhary & Kiran (2011) observed a positive relationship of

solvency with financial performance of insurance companies. Likewise,

 44

Khidmat & Rehman (2014) showed that the solvency ratio has positive and

highly significant impact on the financial performance of firms. Same as,

Obudho (2014) established that solvency risk was positively affect the

financial performance of insurance companies in Kenya. Based on it, this

study develops the following hypothesis:

H3: There is a negative relationship between the solvency ratio and financial

performance.

Investment size

Investment size refers to the investment made by the insurance companies

on the government securities, fixed deposits in commercial and development

banks, mutual funds, etc. Abdikadir (2017) found that there is negative

relationship between size of investment and the financial performance of

banks in Kenya. Similarly, Cleary (1999) established that the investment

made by any firm negatively affects the financial performance. Based on it,

this study develops the following hypothesis:

H4: There is positive relationship between the investment size and financial

performance.
 45

CHAPTER IV

OBSERVATION AND ANALYSIS

In this chapter, collected raw data was screened, analyzed and presented in

mathematical manner in reference to the research methodology of third

chapter. All therelevant data collected for the selected insurance companies

are presented, analyzed and interpreted in order to achieve its objective. All

the mentioned tools were used to present the data. The analysis of data

consisted of organizing, tabulating and evaluating the collected data. Since

the theoretical concepts are already discussed in previous chapters, so in this

chapter only quantitative analysis was done.

4.1 Data collection

Table 4.1 shows the list of non-life insurance companies and their study

period. The data comprised of the net profit, total assets, net premium, total

equity and total liabilities of the insurance companies within the study

period. Based on these data the solvency ratio, firm size, premium size,

investment size, return on assets and return on equity were calculated which

were used for analysis.

 46

Table 4.1: Number of insurance companies and the observations for study
Insurance Companies Study Period No. of

observations

NLG Insurance 2013/14 to 2020/21 8

Premier Insurance 2013/14 to 2020/21 8

Prudential Insurance 2013/14 to 2020/21 8

IME General Insurance 2013/14 to 2020/21 8

Neco Insurance 2013/14 to 2020/21 8

Lumbini General Insurance 2013/14 to 2020/21 8

Himalayan General Insurance 2013/14 to 2020/21 8

Everest Insurance 2013/14 to 2020/21 8

Sagarmatha Insurance 2013/14 to 2020/21 8

Shikhar Insurance 2013/14 to 2020/21 8

Siddhartha Insurance 2013/14 to 2020/21 8

Prabhu Insurance 2013/14 to 2020/21 8

Nepal Insurance 2013/14 to 2020/21 8

United Insurance 2013/14 to 2020/21 8

Sanima General Insurance 2017/18 to 2020/21 4

General Insurance Company 2013/14 to 2020/21 4

Ajod Insurance Company 2013/14 to 2020/21 4

Total 124
 47

4.2 Descriptive statistics

Table 4.2 shows the statistics of the dependent variable and independent

variable. Dependent variables are ROA (return on assets as net income

divided by total assets) and ROE (net income divided by total equity) and

independent variables are IP (insurance premium specified as natural log of

premium collected), FS (firm size specified as natural log of total assets of

firm), IS (Investment size specified as natural log of the investment made by

insurance companies) and SOL (Solvency ratio specified as total equity

divided by total liabilities). The described statistics are based on the data

from 17 sample insurance companies with 124 observations from 2013/14

to 2020/21. Table 4.2 presents the descriptive statistics of selected dependent

and independent variables during the period 2013/14 to 2020/21.

Table 4.2: Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

ROA 124 -24.19% 21.42% 7.0238% 5.157%
ROE 124 -478.12% 3242.78% 43.8198% 294.129%
EPS 124 -85 84 29.25 19.668
FS 124 19.35 22.94 21.39 0.763
IP 124 11.626 21.783 19.626 1.447
SOL 124 -18.08% 12377.50% 232.9838% 1205.956%
IS 124 17.489 22.128 20.859 .707

(Source: SPSS Output)

 48

4.3 Correlation analysis

Table 4.3: Pearson Correlation Coefficient Matrix

ROA ROE EPS FS IP SOL IS
1 .137 .847** -.136 .201* -.111 .018
ROA
.129 .000 .132 .025 .219 .840
.137 1 .173 -.181* -.108 -.024 -.154
ROE
.129 .054 .044 .234 .789 .087
.847** .173 1 -.052 .268** -.193* .043
EPS
.000 .054 .568 .003 .032 .639
-.136 -.181* -.052 1 .575** -.163 .914**
FS
.132 .044 .568 .000 .071 .000
*
.201 -.108 .268** .575** 1 -.704** .563**
IP
.025 .234 .003 .000 .000 .000
*
-.111 -.024 -.193 -.163 -.704** 1 -.083
SOL
.219 .789 .032 .071 .000 .359
**
.018 -.154 .043 .914 .563** -.083 1
IS
.840 .087 .639 .000 .000 .359
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
(Source: SPSS Output)

Having indicated the descriptive statistics, Pearson correlation coefficients

are computed and the results are presented in Table 4.3. This table shows the

Pearson correlation coefficients among different dependent variables and

independent variables. Dependent variables are ROA (return on assets as net

income divided by total assets), ROE (net income divided by total equity)

and EPS (Earning Per Share) and independent variables are IP (insurance

premium specified as natural log of premium collected), FS (firm size

specified as natural log of total assets of firm), IS (Investment size specified

as natural log of the investment made by insurance companies) and SOL

(Solvency ratio specified as total equity divided by total liabilities).

 49

4.4 Regression analysis

Based on the following two models, the linear regression analysis was

carried out in MS Excel.

ROA= β0 + β 1 FS + β 2 SOL +β 3 IP + β 4 IS + e

ROE= β0 + β 1 FS + β 2 SOL +β 3 IP + β 4 IS + e

EPS= β0 + β 1 FS + β 2 SOL +β 3 IP + β 4 IS + e

where,

ROA = Return on assets, defined as the profit after tax to total assets, in

percentage.

ROE= Return on equity, defined as the profitability of the organization in

relation to equity

EPS= Earning per share, defined as the net income divided by the share

floated

FS= Firm size, defined as the total size of assets. (Natural logarithm of total

assets)

SOL= Solvency ratio, defined as the company’s ability to meet its debt

obligations

IP= Insurance Premium, defined as total premium collected (Natural

logarithm of total premium)

IS=Investment Size, defined as total size of investment made by the

insurance companies (Natural logarithm of total investment made)

 50

Table 4.4: Regression Analysis with ROA as dependent variable

Coefficients Standard t Stat P-value

Regression Statistics
Error
Intercept 0.16052 0.12340 1.30086 0.19582
Multiple R 0.489208717
FS -0.07033 0.01361 -5.16686 0.00000
R Square 0.239325168
IP 0.01750 0.00572 3.05823 0.00275 Adjusted R
0.213756267
Square
SOL -0.00053 0.00057 0.91910 0.35990 Standard
0.045730728
Error
IS 0.05128 0.01562 3.28322 0.00135
Observations 124
ANOVA

Significance

df SS MS F F

Regression 4 0.078298 0.019575 9.36001 1.3E-06

Residual 119 0.248865 0.002091

Total 123 0.327163

(Source: MS Excel Output)

Table 4.4 shows the regression analysis of the independent variables FS,

IP, SOL and IS and their effect with the dependent variable ROA.
 51

Table 4.5: Regression Analysis with ROE as dependent variable

Coefficients Standard t Stat P-value

Regression Statistics
Error
Intercept 14.5084 7.8844 1.8401 0.0682
Multiple R 0.212639
FS -1.0505 0.8697 -1.2079 0.2295
R Square 0.045215
IP -0.3627 0.3655 -0.9921 0.3232 Adjusted R
0.013122
Square
SOL -0.0438 0.0366 -1.1945 0.2346
Standard Error 2.921936
IS 0.7490 0.9980 0.7505 0.4544
Observations 124
ANOVA

Significance

df SS MS F F

Regression 4 48.11367 12.02842 1.408858 0.2352

Residual 119 1015.988 8.537711

Total 123 1064.101

(Source: MS Excel Output)

Table 4.5 shows the standard coefficients of the independent variables

FS, IP, SOL and IS and their effect with the dependent variable ROE.

Table 4.6: Regression Analysis with EPS as dependent variable

Standard Regression Statistics

Coefficients t Stat P-value
Error
Intercept 44.7319 49.1476 0.910154 0.364581 Multiple R 0.412672

FS -17.8108 5.421052 -3.28549 0.001338 R Square 0.170298

Adjusted R
IP 6.660176 2.278615 2.922905 0.004152 Square 0.142409

SOL 0.119527 0.228347 0.523445 0.601638 Standard Error 18.21401

IS 11.24581 6.22092 1.80774 0.073173 Observations 124

 52

ANOVA
Significance
df SS MS F
F
Regression 4 8102.991 2025.748 6.106247 0.000167
Residual 119 39478.26 331.7501
Total 123 47581.25
(Source: MS-Excel Output)

Table 4.6 shows the standard coefficients of the independent variables

FS, IP, SOL and IS and their effect with the dependent variable EPS.

Similarly, table 4.7 shows the collinearity statistics to check

multicollinearity of the independent variables used.

Table 4.7: Collinearity Statistics

Model Collinearity Statistics

Tolerance VIF

1 (Constant)

FS .157 6.349

IP .248 4.031

SOL .356 2.812

IS .139 7.179

(Source: SPSS Output)

 53

CHAPTER V
RESULTS AND DISCUSSION

5.1 Results

The results are based on panel of data of seventeen non-life insurance

companies with 124 observations for the period from 2013/14 to 2020/21.

The results obtained in the previous chapter can be listed as:

1. The descriptive statistics of the data collected showed that in the

non-life insurance companies of Nepal there is a standard

deviation of 5.157% in ROA, 294.129% on ROE, 19.668 in EPS,

0.763 in firm size, 1.447 in insurance premium, 1205.956% in

solvency ratio and 0.707 in investment size. It shows that the firm

size, insurance premium, return on assets and investment size is

averagely distributed while there is high deviation in EPS, ROE

and solvency ratio.

2. Under the Pearson correlation coefficient matrix among different

dependent and independent variables the negative sign in the

coefficient indicated the negative relationship between the

variables.

3. Having indicated the Pearson correlation coefficient, the

regression analysis has been carried out and the results were

tabulated. More specifically, it shows the regression results of

firm size, insurance premium, solvency ratio and investment size

 54

in the financial performance of Nepalese insurance companies.

4. The regression analysis with ROA as dependent variable showed

that only 23.39% of the variability is observed in the target

variable explained by the regression model.

5. The regression model where ROE was used as dependent variable

showed variability of only 4.52%.

6. In the regression model with EPS as independent variable,

17.02% of the variability is observed.

7. Based on Variable Inflation Factor, multicollinearity test was

done. Since the VIF values are less than 10, there is no significant

signs of multicollinearity between the independent and

independent variables.

5.2 Discussion

From the descriptive statistics as mentioned, it is seen that the firm size

of the insurance companies is averagely distributed in the insurance

industry. There is moderate deviation in the size of the premium

collected and the size of the investment made by the insurance company.

The high deviation can be seen in the solvency ratio, EPS and ROE since

three insurance companies were new entrants during the study period

taken.

The Pearson correlation coefficient matrix table showed the correlation

coefficient between the dependent and independent variables. It shows

 55

that there is negative relationship between firm size and ROA. It

indicates that increase in firm size leads to decrease in return on assets.

Similarly, it also shows that the insurance premium has positive relation

with ROA. It shows that once there is increase in insurance premium,

there is increase in return of assets. It can also be seen that the size of

investment is positively related to return on assets meaning that the

increase in investment by the company increases the return on the assets

of the company. The table also shows that solvency ratio is negatively

related to return on assets implying that higher increase in the solvency

ratio decreases the return on total assets. From the table, it is seen that

the firm size has negative relationship with ROE. This implies that

higher the size of the firm, lower is the return on equity to the

shareholders. Furthermore, the insurance premium also has negative

relationship in regards to the return on equity. This implies that increase

in insurance premium decreases the return on equity. Also, the size of

investment has shown negative relationship with return on equity. It can

also be seen that the solvency ratio inversely affects the return on equity.

The table also showed the relationship between firm size, insurance

premium, solvency ratio and size of investment on EPS of the company.

There is negative relationship between firm size and EPS which shows

that EPS decreases with increase in firm size. The insurance premium

and investment size have positive effect on EPS implying that increase

in insurance premium and size of investment increases the EPS. The

negative relationship between solvency ratio and EPS shows that EPS

decreases with increase in solvency ratio.

 56

Regression analysis with regards to dependent variable return on assets

was done and tabulated. The coefficients for firm size are negative with

return on assets. It implies that increase in firm size has negative impact

on return on assets. The result is similar to that of Vijayakumar &

Tamizhselvan (2010) and also aligns with (Becker, 2010). Likewise, the

beta coefficient for insurance premium is positive with return on assets.

It indicates that increase in insurance premium has positive impact on

return on assets. It is also seen that the coefficient of investment size is

positive with return on assets indicating that increase in size of

investment increases the return on assets. This finding is consistent with

the findings of Kaya (2015). Similarly, the beta coefficient for solvency

ratio is negative with return on assets. This is similar to the result

obtained by (Obudho, 2014).

Also the relationship between the firm size, insurance premium,

investment size and solvency ratio on return on equity was derived. The

firm size has negative relationship with the return on equity. The

premium income as well as solvency ratio also has negative relationship

with return on equity. However, there is positive relationship of return

on equity with the investment size. The result is consistent to the result

of (Vijayakumar & Tamizhselvan, 2010).

In the regression analysis between independent variables firm size,

insurance premium, solvency ratio and size of investment with the

dependent variable EPS, the firm size and solvency ratio had negative

coefficients which explained that they have negative relationship with

 57

the EPS meaning that increase in those variables will decrease in EPS.

This result is contradictory to that of Obudho (2014) who found that the

firm size and solvency ratio has positive impact on EPS.

 58

CHAPTER VI

FINDINGS, CONCLUSION AND RECOMMENDATIONS

6.1 Findings

In this study, it is seen that firm size has negative impact on return on

assets. Increase in firm size means increase in the total assets. Unless

there is a significant increase in profit in relation to the increase in firm

size, we can see it affects the return on assets negatively, thus affecting

the financial performance of the company.

The analysis also showed that insurance premium has positive impact on

the return on assets. Increase in the insurance premium of non-life

insurance is a source of income generation for non-life insurance

company. Hence, there is increase in the net profit of the insurance

company with increase in premium which positively impacts the return

on assets.

It is seen that solvency ratio has negative effect on return on assets.

Increase in solvency ratio means there is increase in long term liabilities

and provisions which reduces the net profit. Thus, there is decrease in

return on assets with increase in solvency ratio.

However, the size of investment has a low positive impact on return on

assets. Increase in the investment results in increase of the investment

income which ultimately increases the profit of the organization. Hence

increase in investment size increases the financial performance of the

 59

organization.

Likewise, it is seen that increase in firm size decreases the return on

equity. This is because there will be increase in the equity of the

organization. Also, the premium income of insurance company has

negative impact on return on equity. This is because in non-life insurance

company, the premium income for previous year becomes asset for the

ongoing year unless any liability arises from the premium received. This

in turn increases the equity. Thus, there is reduction in return on equity

for an increase in insurance premium.

The solvency ratio has negative response to return on equity. In this

study, the solvency ratio has been defined as the ratio between total

equity and total liabilities. The increase in solvency ratio means increase

in equity which ultimately decreases the return on equity.

On the other hand, it is seen that increase in investment has positive effect

on return on equity. This is because of the investment income that is

generated due to the investment made by the insurance companies.

Regarding EPS, it can be seen that the firm size and solvency ratio has

negative impact on EPS. The result is contradictory to previous research.

This implies that non-life insurance companies should explore alternate

strategies to generate profit when the size of the firm increases.

 60

6.2 Conclusion

The study concludes explaining the financial performance of non-life

insurance companies of Nepal based on ROA, ROE and EPS. During the

study four independent variables viz., firm size, solvency ratio, insurance

premium and investment size were taken into account.

From the study, it was seen that there is positive relationship between the

firm size and financial performance of the industry implying that a

positive increase in firm size strengthens the financial performance of the

company.

Also, the study explains that the solvency ratio has negative effect on the

financial performance of the industry. An increase in the solvency of the

insurance company decreases the financial performance of the company.

The study also explored the positive effect of the insurance premium

collection and size of investment made by the insurance company on the

financial performance. If the insurance companies collect larger premium

and make bigger investments, the financial performance improves.

The study thereby concludes that the firm size, insurance premium, size

of investment and the solvency ratio has significant effect on return on

assets but the significance is minimum with respect to return on equity.

6.3 Recommendation

The recommendation is made as per the analysis of data and the major

findings of the study. On the basis of the study, the following corrective
 61

actions are introduced:

1. It is recommended for the insurers to develop new products,

innovative ideas to compete in the market so that they can

increase their premium income which ultimately leads to better

financial performance.

2. The insurers can take prompt decision in choosing the investment

portfolios and increase the return in investment. As it is clearly

seen that investment size has positive impact on the financial

performance, there should be diversification in the investment

patterns.

3. The regulatory board might look into creating effective directives

so that the insurance companies can ply with the growing market

of the insurance and thus help in improving the financial

conditions of the insurance market.

4. The insurance companies are recommended to develop strategies

to reduce the inconsistency of the ratios of premium collection

and investment patterns. Since, there are lot of fluctuations in the

analysis of data in the time period of five years, so the companies

should take effective action to develop their consistency for

growthand success of the company.

5. The insurance companies could focus on the portfolios which can

benefit the customers through which more people are likely to

purchase the insurance. The companies can create various

 62

schemes in portfolios like health insurance, motorinsurance, etc.

which could attract a large number of customers.

6. The insurance acts and regulations need to be updated and the

policies needs to be prompt and scientific. The procedure of

insurance should be digitalized and should not be time

consuming. The companies should eliminate unnecessary

process and services should be easy and convenient in order to

increase the customers and earn higher premium.

7. The insurance companies are recommended focus on retention of

existing customers as they are the assets of the company and

retained customers can attract new customers which can help in

collecting more premiums and earning higher profit.

8. The marketing strategies can be developed, and various training

and development programs should be conducted for marketing

division. Since, there is high competition in the market, the

prompt marketing approach should be developed for expanding

the insurance business.

9. The rules and regulations relating the investment aspect of the

company must be objective oriented. The insurers should

develop the investment pattern to invest in diversifies areas

which are safe, less risky and more profitable. The investment

policies should be differentiating nature and the regulatory limits

relating investment should be changed according to the change in

overall macro-economic condition of the country.

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