RELATIONSHIP BETWEEN REINSURANCE AND FINANCIAL PERFORMANCE OF GERNERAL INSURANCE COMPANIES IN SRI LANKA

Abstract

The objective of this study is to identifying the relationship between reinsurance and the financial performance of general insurance companies in Sri Lanka. It will help firms to take reinsurance decisions to enhance their profitability. Reinsurance is the most used risk management tool by insurance companies. It reduces bankruptcy risk, expands capacity, stabilization of loss experience, catastrophe protection, etc. And also, there were negative effects on insurance companies because of the cost of the reinsurance facility. Using this study, it can identify the relationship between reinsurance and the financial performance of general insurance companies in Sri Lanka. This study is conducted by using quantitative data gathered through the Insurance Regulatory Commission of Sri Lanka (IRCSL) annual reports and annual reports of general insurance companies. Data has been gathered for ten years of the period 2009 to 2018. The target population of the study is the fifteen general insurance companies in Sri Lanka. Out of these fifteen general insurance companies’ seven general insurance companies chose as samples for this study. Using Eviews 10 software this study was analyzed the panel data model and other specific tests. According to that found the most fitted model is Cross-section Fixed-Effect Model for this study. Return on Asset (ROA) used as a dependent variable to measure the performance of the firm and used five independent variables of Reinsurance Demand, Financial Leverage, Firm Size, Underwriting Risk, and Asset Volatility as reinsurance representing variables. Through this, it can clearly identify the relationship between reinsurance and financial performance of the general insurance companies in Sri Lanka. So, using this study, the researcher found there was a positive significant relationship between Reinsurance Demand and performance. Also, Financial Leverage and Underwriting Risk show a negative significant relationship with firm performance, and Firm Size and Asset Volatility provide there was not any significant relationship between reinsurance and financial performance in the Sri Lankan general insurance market.