Liquidity Management And Financial Performance Of The Nigeria Insurance Industry

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Liquidity Management And Financial Performance Of The Nigeria Insurance Industry


This study examined the impact of liquidity management and financial performance on the Nigeria insurance industry. Secondary data used in this study were carried from text books, journals, magazines and newspaper. Our findings indicate that there was a positive relationship between liquidity management and the profitability of the Nigeria insurance industry. Based on this findings we recommend that should be prudent in extending credit facilities to their client/customers to avoid problem of load loss management and competence in financial system should be enhanced to increase asset quality.

Chapter One


1.1 Background of the Study

Liquidity management is a concept that is receiving serious attention all over the world especially with the current financial situations and the state of the world economy. Some of the striking corporate goals include the need to maximize profit, maintain high level of liquidity in order to guarantee safety, attain the highest level of owner’s networth coupled with the attainment of other corporate objectives. The importance of liquidity management as it affects corporate profitability in today’s business cannot be over emphasised. The crucial part in managing working capital is required maintenance of its liquidity in day-to-day operation to ensure its smooth running and meets its obligation (Eljelly, 2004). Liquidity plays a significant role in the successful functioning of a business firm.

Liquidity entails meeting obligations as they fall due and striking a balance between the current assets and current liabilities. Jensen (1986) observes that companies are strained when their level of liquidity is low and have negative working capital. This is because either inadequate liquidity or excess liquidity may be injurious to the smooth operations of the organization (Janglani and Sandhar, 2013). Almeida et al (2002) proposed a theory of corporate liquidity demand that is based on the assumption that choices regarding liquidity will depend on firms’ access to capital markets and the importance of future investment to the firms. The model predicts that financially constrained firms will save a positive fraction of incremental cash flows, while unconstrained ones will not. The cost incurred in a cash shortage is higher for firms with a larger investment opportunity set due to the expected losses that result from giving up valuable investment opportunities. A liquid company takes advantage of available investments, cash discounts and lower interest charges on borrowings. Hence there is a relationship between cash holdings and investment opportunity and thus financial performance.

The difficulties experienced by some banks and other financial institutions during the financial crisis were due to lapses in basic principles of liquidity management. In response, as the foundation of its liquidity framework, the Committee in 2008 published Principles for Sound Liquidity Risk Management and Supervision (“Sound Principles”). Liquidity is the ability of a bank to fund increases in assets and meet obligations as they come due, without incurring unacceptable losses (Basel Committee on Banking Supervision, 2013). The liquidity of an asset depends on the underlying stress scenario, the volume to be monetized and the timeframe considered. Therefore, efficient and effective liquidity management is crucial if the survival and prosperity of firms is to be assured. According to the Banking Act (2014) and CBK Prudential Guideline (2013), an institution shall maintain such minimum holding of liquid assets as the Central Bank may from time to time determine. Kenyan banks are required to maintain a statutory minimum of twenty per cent (20%) of all its deposit liabilities, matured and short term liabilities in liquid assets. Liquidity Ratio is determined by net liquid assets and total short term liabilities.

1.2 Statement of the Problem

As uncertainty led funding sources to evaporate during the recent financial crises, many financial institutions especially banks quickly found themselves short on cash to cover their obligations as they came due (Bordeleau,2010) . In the aftermath of the crisis, there was a general sense that the institutions had not fully appreciated the importance of liquidity management and the implications of such risk to the firms themselves, as well as the wider financial system. Liquid assets such as cash and government securities generally have a relatively low return, holding them can impose an opportunity cost in a financial institution. In the absence of regulation, it is reasonable to expect companies will hold liquid assets to the extent they help to maximize the firm’s financial performance and profitability. Beyond this, policy makers have the option to require larger holdings of liquid assets, for instance, if it is seen as a benefit to the stability of the overall financial system. The problem becomes how to select or identify the optimum point or the level at which a financial institution can maintain its liquid assets in order to optimize its return. This problem becomes more pronounced as good numbers of institutions especially financial companies are engrossed with profit and performance maximization and as such they tend to neglect the importance of liquidity management.

Problems sometimes also evolve from banks inordinate urge to make phenomenal profit. In the process of doing this there is the tendency for these banks to get carless in the resources utilization and particularly their management of liquidity.

The resultant effect is usually loss substance and consequently, loss accumulation, a situation which can lead to banking failure. The marginal loans in the banking system calls to mind the important factor that national government of all` time preoccupy themselves with banks. This shows the degree of importance attached to liquidity and its management by these governments and deviation from its ratio or inadequacy of it management always spells trouble for the banking concerned.

The far reacting consequences of inadequate liquidity management can also be examined. Apart from profit declines. Other of attendant consequences to a bank includes loss of confidence in the particular bank its inability to fulfill both its short term and long-term obligation, lack of trust on the part o depositors and other customers alike; and the concomitant reduction in level of operations.

A recent example of the eminent distress facing Nigeria bank which is as a result of improper liquidity position management as well as loan loss- accumulation (marginal loans). These problems make it glaring that there is a need to carry out a study on liquidity management and financial performance of the Nigeria insurance industry.

1.3 Objectives of the Study

The general objective for this study is to investigate on liquidity management and financial performance of the Nigeria insurance industry.

The specific objectives are:

  1. To examine in details the liquidity position of Nigeria insurance industry.
  2. To identify causes of illiquidity or factors that influence liquidity management.
  3. To examine how the Nigeria insurance industry is able to adjust their liquidity and control management in Nigeria financial environment.

1.4 Research Question

The following research questions were formulated from the research objective

  1. What is the liquidity position of Nigeria insurance industry ?
  2. What is the causes of illiquidity or factors that influence liquidity management ?
  3. How does the Nigeria insurance industry adjust their liquidity and control management in Nigeria financial environment ?

1.5 Significance of the Study

The results might prove valuable in the assessment of firms’ financial position through its profitability ratios. Employees will find this study useful and will appreciate the best liquidity level that can meet their daily liquidity requirements. AKI will utilize the findings to appreciate the extent to which fraud affects the industry’s financial performance. The Insurance Regulatory Authority (IRA) will find this study useful in instituting measures that will be practical in executing its supervisory responsibilities. The general public is the immediate beneficiaries of insurance products.

Findings of the proposed study would act as a guide to Finance managers in insurance companies as well as other sectors to make investment decisions that would satisfy stakeholders interests with regard to liquidity and profitability. The literature provided in this study will benefit the scholars and researchers in that they will be able to expand their knowledge on the impact of fraud on the extent to which liquidity management affects the financial position of insurance entities. The study will also be useful to researchers as a secondary data to review the literature.

1.7 Scope / Limitation of the Study

The study on the liquidity management and financial performance of the Nigeria insurance industry will be carried out in National Insurance Commission (NIC), it will cover the period

Chapter Five

Summary Conclusions and Recommendations

5.1 Introduction

A high level summary of the results, conclusions and policy recommendations as well as highlights of the study limitations with respect to the goals of the research are the focus of this chapter.

5.2 Summary

The research objective was to determine the effect of liquidity management on the financial performance of Insurance Corporations in Nigeria. The research used secondary data from annual financial statements of 47 insurance companies and other industry publications covering the period from 2014-2018. The data collected was based on 5 research variables; financial performance as the dependent variable was measured by annual ROA while liquidity management as measured by a ratio of premiums to total assets, was the independent variable under study. There were three control variables; Asset quality, capital adequacy and firm size.

Multiple regression analysis was used to analyze the relationship between the variables under study. Test of statistical assumptions was carried out on the individual variables under study and on the statistical model itself confirm that it’s adequacy in predicting the relationship between the variables involved. The results of all statistical tests of regression analysis revealed that no assumptions were violated hence the conclusions drawn were not biased.

Statistical package developed by IBM Corporation, SPSS V 25.0 was used to generate quantitative output of statistical results.

Descriptive statistics applied to analyze the data collected include the statistical measures of mean, standard deviation and range (the difference between maximum and minimum values).

The results show that Liquidity jointly influenced financial performance of insurance corporations in Nigeria represented by r=0.891. The R squared value of 0.794 revealed that the independent variables contributed to 79.4% of the financial performance variance of insurance corporations in Nigeria. At a 5% confidence level, the F statistic was significant, implying that the predictor variables show financial performance variation and the model was significant.

The outcomes indicated that when predictor variables are constantly held, financial performance is 0.831, the research showed that increasing asset quality results in a rise of profitability by 0.636, more it was recorded that a rise in management of liquidity increased financial performance by 0.721, an increase in capital adequacy increases financial performance by 0.701 and an increase in the size of firms increases financial performance by 0.523.

5.3 Conclusion

The analysis on the previous chapter shows that liquidity is a financial performance important determinant. The correlation between ROA and deposit to asset and liquidity ratio is positive, meaning that a rise in liquidity results in an improvement in insurance firms’ financial performance in Nigeria. The research draws the conclusion that liquidity jointly influences insurance firm’s financial performance as revealed by the r value 0.891. The R squared value of 0.794 revealed that the independent variables contributed to 79.4% of the financial performance variance of insurance corporations in Nigeria. At a 5% confidence level, the F statistic was significant, implying that the predictor variables show financial performance variation and the model was significant.

5.4 Recommendations for Policy and Practice

The study made the recommendation that IRA needs to formulate new requirements of liquidity since it will contribute to an upward impact on insurance firms’ earnings and promote economic stability. Insurance companies play a critical role in protecting businesses and individuals from adverse events and earn their revenues primarily from premiums and investment income. Insurance companies mainly have two broad divisions; property and casualty and life and health. In order to ensure greater stability and profitability of the industry, IRA should also consider formulation of policies which require insurance companies to give a higher proportion of their portfolio to Life and Health Division since their cash flows are fairly predictable and due to their long-term nature. This will boost the liquidity position of insurance companies which lead to a stronger financial performance.

Insurance companies with a higher proportion of property and casualty division vis a vis life and health experience a high level of uncertainty in their claims operations and therefore require a high level of liquidity. Such companies should invest heavily in highly liquid securities.

Insurance companies ought not to only pay attention to financial performance but to also guarantee efficient management of liquidity. This promotes their growth. Moreover, these firms ought not to possess a high level of liquidity but devise ways of ensuring the sustainability of liquidity. The liquidity that is in excess ought to be used for short term investments for ROI increase.

The IRA ought to develop forums that allow all its stakeholders to engage with each other to formulate conducive and practical policies of regulation to attain firms’ growth. IRA ought to give insurance firms a chance to use other techniques in addressing their surplus withdrawals and in lowering the liquidity risk. The IRA ought to promote the application of online payment platforms and other forms of online payments for large transactions. This will create a faster cash turnaround time and help stimulate economic activities in the country at large.

IRA and AKI should formulate guidelines on prudent underwriting of risks, pricing of adequate premiums for bearing risk and diversification of risk. Such guidelines directly affects the liquidity position of insurance corporations, which by extension affects the insurance corporations’ financial performance.

Capitalization of insurance corporations is also critically important and the regulatory bodies should specify minimum capital levels based on size and risk on insurance companies. A well- coordinated approach across countries and regions will also ensure that systemic risk, where the failure of one insurance company creates a contagion effect, is mitigated given the inter-linkages between financial organizations in a globalized system.

5.5 Limitations of the Study

The researcher came across some difficulties while undertaking the study, the financial statements of some of the insurance firms were not availed to the researcher in time for their inclusion in the research, thus the reduction in the sample population from which data was gathered.

The research targeted firms in Nigeria, hence the irrelevance of the findings in other nations where the insurance industry operates in different environments.

The research concentrated on a time period of only 5 years; this is not enough time for proper conclusions to be made.

Secondary data from financial statements was gathered from selected insurance firms, websites of NSE and IRA. A research based on primary data is recommended which will involve the use of questionnaires from selected respondents.

The research study applied multiple regression analysis. Regressions relations tend to change over time i.e they suffer from parameter instability.

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