Effect of Reinsurance on Performance of General Insurance Companies: Evidence from Sri Lanka

Badal Widanelage Chithrani Madhusha Amarasena
Department of Accountancy and Finance, Faculty of Management Studies, Sabaragamuwa University of Sri Lanka P.O. Box. 02, Belihuloya, Sri Lanka
DOI – http://doi.org/10.37502/IJSMR.2021.4702

Abstract

The insurance companies tend to use a risk transferring mechanism to another capable insurer to get protection against their financial complications. Some insurance companies suspend and amalgamate with other companies due to unexpected catastrophes and growing their liability in the current scenario. By considering this situation, the researcher intended to examine the effect of reinsurance on the performance of the general insurance sector using the Sri Lankan evidence of 07 general insurance companies from 2010 to 2019. ROA and Underwriting profit/loss ratio was used as the proxies for the performance of the general insurance companies. The explanatory variable was reinsurance measured by retention ratio, net claims ratio, net commission ratio, and ceded reinsurance ratio. Findings were obtained through the panel data regression. It revealed that the net claims ratio has a significantly negative effect while the ceded reinsurance ratio has a significantly positive effect on the performance of general insurance companies. Further, the net commission ratio has a positive effect, while the retention ratio negatively affects general insurance companies’ performance. So, this study concludes that general insurance companies should effectively manage the quality of the underwriting procedures and claim costs 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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