Determinants of Insurance Firms’ Profitability

The insurance industry plays a vital role for households, companies, and economies. Among others, it provides risk transfer, indemnification services, and financial intermediation. While there has been a vast literature on factors affecting the profitability of insurance companies, limited attention has been paid to Saudi ones. This article fills this gap by examining the determinants of profitability in the Saudi insurance sector. The empirical analysis is based on data relative to a sample of 20 Saudi insurance companies between 2009 and 2017. For robustness checks, the empirical investigation employs a wide range of econometric techniques, including the fixed-effects model, random-effects model, Feasible Generalized Least Squares, Ordinary Least Squares with panel-corrected standard errors, Difference GMM and finally System GMM. The empirical findings suggest that the growth rate of written premium, the tangibility ratio and the fixed-assets ratio are the main factors affecting positively the profitability of Saudi insurance companies. Moreover, while the company size and the liquidity ratio are positively associated with profitability, their impacts are not statistically significant. On the contrary, the loss ratio, liabilities ratio, insurance leverage ratio, and to a less extent, the company age have negative effects on the profitability of Saudi insurance companies.