Determinants of

Performance: A Case of Life

Insurance Sector of Pakistan

NAVEED AHMED
Hailey College of Commerce,
University of the Punjab, Lahore
INTRODUCTION
The performance of any firm not only
plays the role to increase the market
value of that specific firm but also leads
toward the growth of the whole industry
which ultimately leads towards the
overall prosperity of the economy.
 Measuring the performance of
insurers has gained the importance in
the corporate finance literature
because as intermediaries, these
companies are not only providing the
mechanism of risk transfer but also
helps to channelizing the funds in an
appropriate way to support the
business activities in the economy.
• Insurance companies have importance
both for businesses and individuals as
they indemnify the losses and put them
in the same positions as they were
before the occurrence of the loss. In
addition, insurers provide economic
and social benefits in the society i.e.
prevention of losses, reduction in fear
and increasing employment.
Therefore, the current business world
without insurance companies is
unsustainable because risky businesses
have not a capacity to retain all types of
risk in current extremely uncertain
environment.
Financial statistics reported the
phenomenal growth of Pakistani life
insurance companies as these companies
comprise 52% and 69% share of entire (life
plus non-life) insurance market in terms of
net premiums and assets (Insurance Year
Book, 2007). In addition, the premium of
these life insurers increased by 36% in
2007 (Insurance Year Book, 2007) shows
the remarkable progress of life insurance
sector of Pakistan
Therefore, what determines the
performance of the life insurance
industry is an important discussion for
the regulators and policy makers to
support the sector in achieving the
excellence so that desirable economic
fruits could be reaped from the help of
the life insurance sector of Pakistan
LITERATURE REVIEW
• Wessels (1988)
• Chiarella et al. (1991)
• Kjellman and Hansen (1995)
• Rajan (1995)
• Wiwattanakantang (1999)
• Chen and Jiang (2001)
• Miguel and Pindado (2001)
• Nivorozhkin (2002)
• Frank and Goyal (2003)
• Cassar and Holmes (2003)
• Low and Chen (2004)
• Buferna et al. (2005)
• Huang and Song (2006)
• Daskalakis and Psillaki (2007)
• Cheng and Weiss (2008)
• Bhaird and Lucey (2008)
• Li et al. (2009)
• Chang et al. (2009)
RESEARCH
METHODOLOGY
 Sample and Data

Currently, there are five life insurance

companies operating in Pakistan and all these
five companies are selected to measuring their
performance over the period of seven years
from 2001 to 2007. For this purpose, financial
data has been collected from financial
statements (Balance Sheets and Profit and
Loss a/c) of insurance companies and
“Insurance Year Book” which is published by
Insurance Association of Pakistan.
 The following statistical analysis have
been used to deduce the results of present
study:

Descriptive Analysis
 Correlation Analysis
 Regression Analysis
Regression Model
PR = β0 + β1 (LG) + β2 (TA) + β3 (SZ) + β4 (LQ) +
β5 (AG) + β6 (RK) + β7 (GR) + ε
Where:
• PR = Performance (Net income before interest and tax divided by total
assets)
• LG = Leverage (Total debts divided by total assets)
• SZ = Size (Log of premiums)
• GR =Growth (Percentage change in premiums)
• TA = Tangibility of assets (Fixed assets divided by total assets)
• LQ = Liquidity (Current assets divided by current liabilities)
• AG = Age (Difference b/w observation year and establishment year)
• RK = Risk (standard deviation of ratio of total claims to total
premiums)
• ε = the error term
EMPIRICAL FINDINGS
Descriptive Statistics
Years Leverage Size

Mean SD Min Max Mean SD Min Max

2001
0.80 0.21 0.45 0.99 6.02 2.12 3.06 8.93
2002
0.81 0.20 0.47 0.99 6.21 2.11 3.29 9.07
2003
0.82 0.19 0.51 0.99 6.50 2.08 3.57 9.20
2004
0.79 0.24 0.38 0.99 6.68 2.09 3.56 9.31
2005
0.83 0.21 0.47 0.99 6.95 2.03 3.96 9.53
2006
0.84 0.20 0.49 0.99 7.21 2.02 4.24 9.68
2007
0.79 0.30 0.26 1.00 7.51 2.06 4.50 10.03
Years Growth Performance

Mean SD Min Max Mean SD Min Max

2001
11.53 11.90 3.22 32.39 0.02 0.01 0.00 0.03
2002
22.21 23.52 3.68 60.99 0.02 0.01 0.00 0.03
2003
37.18 32.62 8.30 90.71 0.02 0.01 0.00 0.03
2004
22.20 27.93 -1.78 61.16 0.03 0.02 0.00 0.05
2005
31.18 10.30 24.97 48.98 0.02 0.02 0.00 0.05
2006
31.79 26.14 3.74 72.78 0.03 0.02 0.00 0.06
2007
34.82 9.25 22.44 45.66 0.07 0.07 0.00 0.17
Years Tangibility Liquidity

Mean SD Min Max Mean SD Min Max

2001
0.03 0.02 0.00 0.06 1.70 0.76 1.07 2.65
2002
0.03 0.02 0.00 0.06 1.73 0.86 1.14 3.01
2003
0.03 0.02 0.00 0.05 2.18 1.11 1.22 3.72
2004
0.02 0.02 0.00 0.04 2.24 1.77 1.09 4.85
2005
0.02 0.02 0.00 0.04 3.02 2.26 1.15 5.94
2006
0.02 0.01 0.00 0.03 3.98 2.72 1.36 7.37
2007
0.02 0.02 0.00 0.05 6.36 8.63 1.33 16.33
Years Age Risk

Mean SD Min Max Mean SD Min Max

2001
16.60 20.40 6.00 53.00 1.92 1.33 0.70 3.94
2002
17.60 20.40 7.00 54.00 0.83 0.47 0.40 1.34
2003
18.60 20.40 8.00 55.00 0.58 0.45 0.18 1.34
2004
19.60 20.40 9.00 56.00 3.34 3.08 0.00 7.23
2005
20.60 20.40 10.00 57.00 4.70 2.15 1.23 6.36
2006
21.60 20.40 11.00 58.00 3.60 3.86 0.51 9.72
2007
22.60 20.40 12.00 59.00 6.35 6.51 1.78 16.00
CORRELATION ANALYSIS
 Leverage Size Growth Tangibility Liquidity Age
Leverage Pearson
Correlation
Sig. (2-tailed)
Size Pearson
Correlation .374**
Sig. (2-tailed) .000
Growth Pearson
Correlation .077 .072
Sig. (2-tailed) .661 .680
Tangibility Pearson
Correlation -.476** -.142** .051
Sig. (2-tailed) .000 .000 .771
Liquidity Pearson
Correlation -.225** -.429* .052 .229
Sig. (2-tailed) .000 .025 .796 .250
Age Pearson
Correlation .415* .401** -.153 -.356** .491**
Sig. (2-tailed) .013 .000 .379 .000 .009
Risk Pearson
Correlation -.427* -.200 -.060 .084 .364** -.071
Sig. (2-tailed) .012 .256 .334 .538 .000 .771
REGRESSION ANALYSIS
 Standard
ized
Unstandardized
Coefficie
Coefficients nts
Model B Std. Error Beta t Sig.
(Constant) .010 .051 .204 .841
Leverage -.265 .090 -1.579 -2.940 .008*
Size .038 .009 1.722 4.120 .001*
Growth -4.69 .000 -.032 -.245 .809
Tangibility .507 .367 .183 1.382 .183
Liquidity .001 .003 .058 .205 .840
Age -.003 .003 -.235 -1.169 .257
Risk -.004 .002 -.374 1.903 .072**
CONCLUSION
The results reveal that leverage, size
and risk are most important
determinant of performance of life
insurance sector whereas ROA has
statistically insignificant relationship
with age, growth, tangibility and
liquidity.
FUTURE RESEARCH
Thanks