An Assessment of Effect of Liquidity Management on the Return on Assets of Insurance Companies in Nigeria

Abstract

Fundamentally, the liquidity management in the insurance industry entails managing organizational funds in a way that the company is able to maintain sufficiently adequate (but not excessive) cash meet their financial commitment to their customers, shareholders and other stakeholders as when due. To this end, the purpose of this research work is to assess the effect of liquidity management on the return on assets of insurance companies in Nigeria.  The study is anchored on Shiftability and Liability Management Theory and ex-post facto research design is adopted. The Current ratio (CUR), Total Sales (TSL), and Leverage ratio (LER) were computed from nine years (2011- 2019) data sourced from the annual reports and accounts of various insurance companies quoted on the Nigerian Stock Exchange. The study employed panel regression analysis of ordinary least square (OLS) estimation technique in analysing the data obtained while return on assets (ROA) is used as dependent variable to measure financial performance.  Major findings from the study show that the total sales, degree of leverage, and liquidity ratio exert a significant positive effect on return on assets. This has demonstrated that total sales, leverage, and liquidity have a long-term goal. Therefore, it becomes important for insurance companies to avoid sales and profit fluctuations risks as well as any other form of liquidity risk by operating in excess of the break-even point. It is recommended therefore that the insurance industry should avail itself with maximum benefit of economies of scale and also bring to the barest minimum the cost associated with expansion. The industry should focus on improving the return on assets by considering other quantitatively and qualitatively.