EFFECT OF CAPITAL ADEQUACY REGULATION ON THE FINANCIAL PERFORMANCE OF INSURANCE FIRMS IN NIGERIA.

Abstract

Given the higher risk environment within which Insurance firms operate, capital adequacy is critical in ensuring that Insurance firms have the capacity to withstand losses, underwrite risks and guarantee policyholders that all genuine claims will be adequately and promptly settled. Notably, the non- prompt payment of claims by some insurance companies in Nigeria has been attributed to the issue of low capitalization. Hence, insurance industry regulators have always placed great importance on monitoring the capital levels of insurance firms in order to set minimum capital requirements that would enhance the effectiveness of the industry. Therefore, this study examined the effect of capital adequacy regulation on the financial performance of insurance firms in Nigeria. The study adopted ex-post facto research design. The population of this study comprised all the 24 insurance companies listed on the Nigerian Exchange (NGX) from year 2013 to 2022. Out of this population, 15 insurance companies were sampled on the grounds that they have been listed on the Nigerian Exchange (NGX) throughout the period under consideration and also have complete data set for the periods of 2013-2022. Secondary data obtained from the annual financial reports and accounts of the 15 selected insurance companies was utilised and panel multiple regression was used to analyse the data. Based on the outcome of the Hausman specification test, the study adopted the Random effect regression and it revealed that core capital (tier 1 capital) has significant positive effect on financial performance of listed insurance firms in Nigeria while tier 2 capital has a negative insignificant effect on ROA. The study concluded that   an increase in capital adequacy regulation will result to an increase in the financial performance of insurance firms proxied by return on assets (ROA). In line with the findings, the study recommended that the National Insurance Commission (NAICOM) which is Nigeria’s insurance regulatory authority, should ensure that insurance firms adhere strictly to capital adequacy regulations by maintaining adequate capital to support their risk profiles.