The Role of Risk and Diversification to Ensure Financial Soundness: Global Evidence

Purpose: This study investigates the relationship between various risk factors specifically, underwriting risk, re-insurance, diversification risk, and external risk and the financial soundness of insurance companies in selected countries. Design/methodology/approach: Using a comprehensive dataset of 400 insurance companies with 4,400 observations from 2012 to 2022, this research employs a linear regression model with Feasible Generalized Least Squares (FGLS) to address autocorrelation and heteroscedasticity in the data, ensuring robust results. Findings: The findings reveal that underwriting risk and diversification are positively correlated with financial soundness, while reinsurance shows a negative correlation. Additionally, external risk does not have a significant impact on financial soundness. Research limitations/implications: The study's findings are based on data from 71 countries, which may limit the generalizability to regions not covered in the sample. Future research could explore the role of governance and regulatory environments in moderating these risk factors. Originality/value: This paper provides new insights into the determinants of financial soundness in the global insurance industry, emphasizing the importance of risk management strategies that balance underwriting and re-insurance activities while promoting diversification.