MICRO AND MACROECONOMIC DETERMINANTS OF THE FINANCIAL PERFORMANCE OF LIFE INSURANCE FIRMS IN INDONESIA: AN EMPIRICAL EVIDENCE

Toto Sugiharto

doi:10.35760/eb.2022.v27i1.3921

MICRO AND MACROECONOMIC DETERMINANTS OF THE FINANCIAL PERFORMANCE OF LIFE INSURANCE FIRMS IN INDONESIA: AN EMPIRICAL EVIDENCE

Toto Sugiharto
Faculty of Economics Gunadarma University
Indonesia

DOI: http://dx.doi.org/10.35760/eb.2022.v27i1.3921

Abstract

Insurance sector is an integral part of financial system which offers an important contribution in the nation’s economy. It provides long terms fund for investment which leads to improving financial and non-financial infrastructural facilities. The financial performance of insurance firms, therefore, is an important aspect needing special attention. The paper’s objective is to investigate the impact of micro and macroeconomic indicators on the financial performance of life insurance firms. Based on the Indonesia Financial Service Authority (IFAS) database, a set sample of 30 life insurance firms for the periods of 2011-2018 was generated. Panel data regression analysis was performed to test the formulated hypotheses. Random effect model was identified as the appropriate model indicating that differences in the characteristics between the studied life insurance firms have an effect on the dependent variable, in this case the return on equity. Based on the resulted model, it is revealed that the financial performance i.e. return of equity is affected consecutively by economic growth, expense ratio and current ratio in different direction and magnitudes.

Keywords

Life Insurance Firms; Microeconomic Indicators; Macroeconomic Indicators; Financial Performance

References

Akotey, J. O., Sackey, F. G., Amoah, L., & Manso, R. F. (2013). The financial performance of life insurance companies in Ghana. Journal of Risk Finance, 14(3), 286–302. doi:10.1108/JRF-11-2012-0081

Alomari, M. W., & Azzam, I. A. (2017). Effect of the micro and macro factors on the performance of the Listed Jordanian Insurance Companies. International Journal of Business and Social Science, 8(2), 66–73. https://www.ijbssnet.com/journals/Vol_8_No_2_February_2017/9.pdf

Ayele, A. G. (2012). Factors affecting profitability of insurance companies in Ehtiopia: Panel evidence (Master's thesis). Retrieved from: http://etd.aau.edu.et/bitstream/123456789/2324/3/Factors Affecting Profitability of Insurance Companies in Ethiopia.pdf

Banerjee, R., & Majumdar, S. (2018). Impact of firm specific and macroeconomic factors on financial performance of the UAE insurance sector. Global Business and Economics Review, 20(2), 248-261. doi:10.1504/GBER.2018.090091

Batool, A., & Sahi, C.A.I. (2016). Determinants of financial performance of insurance companies of USA and UK during Global Financial Crisis (2007–2016). International Journal of Economics and Business Administration, 5(1), 23–33. doi:10.35248/2472-114X.19.7.194

Boadi, E. K., Antwi, S., & Lartey, V. C. (2013). Determinants of profitability of insurance firms in Ghana. International Journal of Business and Social Research, 3(3), 43–50. doi:10.18533/ijbsr.v3i3.231

Charumathi, B. (2012). On the determinants of profitability of Indian life insurers - An empirical study. Lecture Notes in Engineering and Computer Science, 2197(2003), 505–510. Retrieved from : https://www.researchgate.net/publication/282319928_On_the_Determinants_of_Profitability_of_Indian_Life_Insurers_-_An_Empirical_Study

Cudiamat, A. C., & Siy, J. S. (2017). Determinants of profitability in life insurance companies : Evidence from the Philippines. Essay in Economics and Business Studies, 2017, 165–175. doi:10.18427/iri-2017-0075

Ćurak, M., Dzaja, I., & Pepur, S. (2013). The effect of social and demographic factors on life insurance demand in Croatia. International Journal of Business and Social Sciences, 4(9), 65–72.

Devinta, C., Dachyar, M., & Nurchayo, R. (2018). Comprehensive performance measurement for life insurance company in Indonesia. International Conference on Multidisciplinary Academic (ICMA) 2018. Retrieved from: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3248136

Eroupean Central Bank. (2009). The importance of insurance companies for financial stability (Issue June 2002). Retrieved from: https://www.ecb.europa.eu/pub/pdf/fsr/art/ecb.fsrart200912en_05.pdf?d92c521966d4230d00f941821cb4e1cc#:~:text=Insurance companies can be important,firms by insuring their risks.

Finland Bank. (2021). Financial systems. https://www.suomenpankki.fi/en/financial-stability/the-financial-system-in-brief/

Firmansyah, A., Hasibuan, P., Sadalia, I., & Muda, I. (2020). The effect of claim ratio, operational ratio and retention ratio on profitability performance of insurance companies in Indonesia Stock Exchange. International Journal of Research and Review, 7(3), 223-231. Retrieved from: https://www.ijrrjournal.com/IJRR_Vol.7_Issue.3_March2020/IJRR0031.pdf

Hussain, I. (2015). Macro economy and profitability of insurance companies: A post crisis scenario in Pakistan. Pakistan Business Review, July(2015), 243–263. Retrieved from: https://www.mendeley.com/catalogue/baa35238-2b5c-3116-be28-c28eccfeef1e/?utm_source=desktop&utm_medium=1.19.8&utm_campaign=open_catalog&userDocumentId=%7B1f847df4-8dcc-475c-a85b-201016693ed0%7D

IFSA. (2015). Keynote speech Chief Executive Officer of Non-Bank Financial Institutions the Indonesia Financial Service Authority. Seminar on Insurance Outlook 2015. Retrieved from: https://www.ojk.go.id/Files/201511/KEYNOTESPEECHKepalaEksekutifdalamInsuranceOutlook2016MediaAsuransi_1448525706.pdf

IFSA. (2020). Statistik asuransi Indonesia Desember 2020/Indonesia Insurance Statistics December 2020. Retrieved from: https://www.ojk.go.id/id/kanal/iknb/data-dan-statistik/asuransi/Pages/Statistik-Asuransi-Desember-2020.aspx

IFSA. (2021). Asuransi/insurance. Retrieved from: https://www.ojk.go.id/id/kanal/iknb/pages/asuransi.aspx

IndraStra Global. (2016). Five basic functions of a financial system. Retrieved from: https://www.indrastra.com/2016/05/FEATURED-5-Basic-Functions-of-a-Financial-System-002-05-2016-0026.html

Kaya, E. O. (2015). The effects of firm-specific factors on the profitability of non-life insurance companies in Turkey. International Journal of Financial Studies, 3(4), 510–529. doi:10.3390/ijfs3040510

Koc, I. O. (2016). Determining factors in financial performance of publicly traded insurance companies at Istanbul Stock Exchange. International Journal of Business and Social Science, 7(11), 169–177. Retrieved from: https://ijbssnet.com/journals/Vol_7_No_11_November_2016/17.pdf

Kozak, S. (2011). Determinants of profitability of non-life insurance companies in Poland during integration with the European financial system. Electronic Journal of Polish Agricultural Universities Topic Economics, 14(1), 1-9. Retrieved from: http://www.ejpau.media.pl/articles/volume14/issue1/art-01.pdf

Malik, H. (2011). Determinants of insurance companies profitability : An analysis of insurance sector of Pakistan. Academic Research International, 1(3), 315–321. Retrieved from: http://www.savap.org.pk/journals/ARInt./Vol.1(3)/2011(1.3-32)stop.pdf

Media Asuransi News. (2020). 9 Indikator kesehatan perusahaan asuransi jiwa/nine indicators of life insurance financial health. Retrieved from: https://mediaasuransinews.co.id/news-in-brief/9-indikator-kesehatan-perusahaan-asuransi-jiwa/

Mehari, D., & Aemiro, T. (2013). Firm specific factors that determine insurance companies’ performance in Ethiopia. European Scientific Journal, 9(10), 245–255. Retrieved from: https://eujournal.org/index.php/esj/article/view/961

Meher, K. C., & Zewudu, T. (2020). Determinants of firm’s internals & macroeconomic factors on financial performance of Ethiopian Insurers. DLSU Business & Economics Review, 29(2), 71–80.

Mwangi, M., & Murigu, J. W. (2015). The determinant of financial performance in general insurance. European Scientific Journal January, 11(1), 288–297. Retrieved from: https://core.ac.uk/download/pdf/236408863.pdf

Pradhan, R. S., & Pokharel, G. (2020). Impact of firm specific and macroeconomic factors on the performance of Nepalese insurance companies (Issue April), 1-16. Retrieved from: https://www.researchgate.net/publication/340578764_Impact_of_firm_specific_and_macroeconomic_factors_on_the_performance_of_Nepalese_insurance_companies

Shawar, K., & Siddiqui, D. A. (2019). Factors affecting financial performance of insurance industry in Pakistan. Research Journal of Finance and Accounting, 10(5), 29–41. doi:10.7176/RJFA

Trainar, P. (2004). Insurance and financial stability. Financial Stability Review, 5, 73–90. Retrieved from: https://core.ac.uk/download/pdf/6612191.pdf

UNEP. (2015). Towards a Sustainable Financial System in Indonesia. https://documents1.worldbank.org/curated/en/819461487145062821/pdf/112817-WP-Indonesia-Towards-a-Sustainable-Financial-System-PUBLIC.pdf