The Effect of Reinsurance on Performance of General Insurance Companies in Sri Lanka
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Date
2021
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Uva Wellassa University of Sri Lanka
Abstract
The intense, risky climate tightens the Sri Lankan insurers to make less performance and lack
confidence in their future existence. So, the insurance companies have to use a risk transferring
mechanism to another capable insurer to get protection against their financial complications when in
their business routine. Some insurance companies suspend and amalgamate with other insurance
companies due to unexpected catastrophes and growing their liability in the current scenario. Thus,
Government rules also are imposed to increase their reinsurance portion. By considering this
situation, the researcher intended to examine the effect of reinsurance on the performance of the
general insurance sector using evidence from Sri Lanka. The researcher used secondary data from 07
general insurance companies in Sri Lanka from 2010 to 2019 to carry out this study. ROA and
Underwriting profit/loss ratio used as the proxies for the performance of the general insurance
companies. The explanatory variable of the study was reinsurance measured by retention ratio, net
claims ratio, net commission ratio, and ceded reinsurance ratio. Findings were obtained through the
panel data regression, revealing that the net claims ratio has a significantly negative effect on the
performance of general insurance companies. In contrast, Ceded reinsurance ratio has a significantly
positive effect on the performance of general insurance companies. Further, net commission ratio
carries the positive effect, while the retention ratio carries negative effect on the performance of
general insurance companies. Although the effect is statistically insignificant in the Sri Lanka
context. So, this study concludes that general insurance companies should effectively manage their
quality of the underwriting procedures and claim cost to increase their performance.
Keywords: Reinsurance; Performance of general insurance companies; Net claims ratio; Ceded
reinsurance ratio; Underwriting profit/loss ratio; ROA
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Keywords
Business Management, Financial Management, Insurance industry, Marketing