Profitability Determinants of the Insurance Sector in Small Pacific Island States: A Study of Fiji’s Insurance Companies

Abstract

We examine the determinants of profitability of insurance companies in Fiji as a reference country. In Fiji, insurance companies and the services have grown over the years. The study uses a financial evaluation approach. Profitability is measured by the return on assets and the return on equity. Using the two measures and the data published in the key disclosure statements as a mandatory requirement by the Reserve Bank of Fiji, we develop regression models. The fixed-effects regression model and a balanced panel are considered for the analysis. The sample comprises eight insurance companies’ financial data over the period 2010-2015. First, a base model is estimated, followed by additional models which include interaction effects as part of the sensitivity analysis and further insights. The general outcome of the estimation is that premium income, underwriting expenses, administrative expenses, and volume of capital are positively associated with profitability, whereas leverage measured by total liability over equity, and contingent liability are negatively associated with profitability. Inclusion of interaction effects provides results consistent with the base model. The study is a first attempt to analyse Fiji’s insurance sectors and provides useful information in terms of financial management of the sector. The findings can assist the insurance sector and the policy makers to formulate strategies for revenue and cost management.