FINANCIAL RISK AND THE VALUATION OF LIFE INSURANCE COMPANIES IN NIGERIA: A 2008 – 2017 ANALYSIS

Mfon Sampson Ukpong, John Olakunle Folarin

Abstract


This study is an attempt to investigate the relationship between financial risk and the valuation of life insurance companies in Nigeria. Financial risk being the risk organizations are exposed to in financial markets is represented by liquidity risk and interest rate risk while the value of the life insurance industry is assessed through the return on equity and the combined ratio. The authors seek to achieve two objectives which are to determine the relationship between changes in interest rate and the combined ratio and to investigate the relationship between liquidity risk and the return on equity of life insurance companies in Nigeria. The expost facto research design is adopted for the study and biannual data is sourced from Nigerian Insurers’ Association (NIA), CBN Statistical Bulletin and World Bank database spanning through 2008 – 2017. Descriptive statistics, stationarity tests, and cointegration tests are carried out on the data to test the suitability of the data. Hypothesis are tested through regression analysis which reveals that whereas there is a significant relationship between interest rate risk and the combined ratio, there is no significant relationship between liquidity risk and the return on equity. It is therefore recommended that life insurers should adopt a risk-based approach in their operations to enhance the value of the sector. An effective inculcation of appropriate risk management practices would help the insurer to identify internal and external risks which are likely to pose challenges to the value of the life insurance industry.

JEL: G22; E43

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Keywords


liquidity risk, interest rate, return on equity, combined ratio, life insurance, Nigeria

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DOI: http://dx.doi.org/10.46827/ejmms.v5i4.912

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