Capital Adequacy and the Financial Performance of Insurance Companies: The Nigeria Experience

Abstract

The study examined capital adequacy on the financial performance of insurance firms, with a specific focus on the Nigerian insurance sector. The study adopted an ex-post facto research design, using a 15-year(2007 – 2021) time series secondary data. The sample consisted of nine insurance companies using purposive sampling to ensure a cross-representation of different tiers within the industry. This study explored key variables: capital adequacy and insurers' performance. Capital adequacy (CA) is measured using shareholders’ funds, and insurance companies' performance is measured using the return on asset (ROA), return on equity (ROE), claims ratio (CR), profitability ratio (PR), and turnover ratio (TR). Shareholders’ funds were calculated as the sum of issued share capital, retained earnings, and reserves as reported in the companies' financial statements. The data was analysed using descriptive statistics, correlation, and regression to unveil the relationship between capital adequacy and the financial performance of insurance companies. The findings revealed a positive significant correlation between capital bases and financial performance, indicating that companies with strong capital base will generate higher premium income, leading to increased profitability. This implies that insurance companies with adequate capital reserves are better positioned to achieve improved returns and increased premium income to settle claims promptly.