Effect of Underwriting Risk on Profitability of Listed Insurance Firms in Nigeria

Abstract

Given the pivotal role of underwriting risk in shaping the profitability of insurance firms, this study examines the effect of underwriting risk on the profitability of listed insurance firms in Nigeria over the period 2013 to 2023. The study operationalizes underwriting risk using claims expense ratio and loss ratio, while return on assets (ROA) is employed as a proxy for profitability. An ex post facto research design was adopted, utilizing secondary panel data obtained from the annual financial reports of selected firms. The population comprises twenty-one (21) insurance firms listed on the Nigerian Exchange (NGX), from which a sample of twenty (20) firms was selected based on data availability and consistency over the study period. Panel regression analysis was employed to estimate the relationship between underwriting risk and profitability. The empirical findings reveal that both claims expense ratio and loss ratio exert statistically significant negative effects on the profitability of listed insurance firms in Nigeria. These results imply that inefficiencies in claims management and poor underwriting discipline significantly erode firms’ earnings capacity. The study therefore concludes that high claims-related costs and elevated loss ratios are critical impediments to underwriting profitability and overall financial performance within the Nigerian insurance industry. In line with these findings, the study recommends that insurance firms should prioritize the adoption of advanced digital claims management systems driven by artificial intelligence and machine learning to enhance operational efficiency, reduce claims processing costs, and improve fraud detection mechanisms. Furthermore, the National Insurance Commission is advised to establish dynamic, sector-specific prudential benchmarks for loss ratio and claims expense ratio to strengthen regulatory oversight. Insurance firms exceeding these thresholds should be required to implement corrective risk management strategies, including improved underwriting policies and enhanced reinsurance arrangements, to ensure long-term financial stability.