Investigating the Impact of Premium Growth and Claims Ratio on the Profitability of Life Insurance Companies in Nigeria

The insurance sector is vital to any nation’s economy as it fosters economic expansion and disperses financial losses. However, they need to perform effectively and make profit in order to stay in business and satisfy all of its stakeholders. Anchored on ruin theory, which posits that an insurer’s financial sustainability depends on maintaining a balance between premium income, claims obligations, and available assets, this study investigated the impact of premium growth and claim ratio on the profitability (measured with return on asset) of life insurance companies in Nigeria. The research design used in this study was the ex-post facto design, twelve (12) years period (2012-2023) secondary panel data for 8 (eight) life insurance companies were obtained from the Nigeria Insurance Digest annual publication. Descriptive statistics (mean, standard deviation, skewness and kurtosis), preliminary investigations (correlation matrix, cross section dependence test, chow test and hausman test) and inferential statistics (random effect regression model) were applied on the extracted data using Eviews 9 application software. The result of the random effect model estimation revealed that both premium growth and claim ratio have a negative and significant impact on return on asset as shown by coefficient value and p-value of (-0.026490; 0.0115) and (-0.140288; 0.0000) respectively. The results of this study indicate that increase in premium income does not necessarily translate into improved financial performance for Nigerian life insurers. It also indicates that higher claims relative to premium income reduces insurers’ ability to generate profit. The study concludes that profitability in the Nigerian life insurance industry is highly sensitive to underwriting outcomes. It is recommended that life insurance companies should focus on strengthening their underwriting processes and reduce their underwriting risk by implementing risk management and improved risk differentiation strategies. Doing this will lower the amount of claims for each premium that is earned, thus enhancing their profitability. This research contributes to the existing body of knowledge by providing sector specific evidence from a developing insurance market and highlighting the nuanced relationship between underwriting outcome and profitability.