The Effect of Liquidity Risk and Insurance Risk on the Profitability of General Insurance Companies in Indonesia

Abstract

Background: Indonesian general insurers face liquidity and underwriting risks, while the role of Minimum Risk-Based Capital (MMBR) in profitability remains underexplored. This study investigates the effects of liquidity risk and insurance risk on profitability within an MMBR framework using a composite index of ROA, ROE, and NPM. Objective: This study aims to evaluate how liquidity risk and insurance risk individually and jointly influence the profitability of general insurance companies in Indonesia. Methods: Secondary financial statement data from OJK-registered general insurers covering the period 2017–2024 were analyzed using a quantitative approach. Panel data regression was estimated using three competing models: the Common Effect Model (CEM), Fixed Effect Model (FEM), and Random Effect Model (REM). The optimal model was selected through sequential application of the Chow test, Hausman test, and Lagrange Multiplier test. Results: The empirical findings indicate that liquidity risk does not have a statistically significant effect on profitability, whereas insurance risk shows a significant positive relationship with profitability. When analyzed simultaneously, liquidity risk and insurance risk collectively explain a meaningful proportion of variation in profitability. Descriptive evidence further shows that the sampled insurers generally maintained adequate risk-based capital buffers under the MMBR regime throughout the observation period. Conclusion: The findings underscore the importance of MMBR-based risk governance in enhancing insurance sector performance. While insurance risk contributes positively to profitability through effective underwriting and reserve management, liquidity risk mainly serves as a solvency buffer. Strengthening compliance with MMBR standards can improve financial resilience and support long-term industry sustainability.