The determinants of the profitability of micro-life insurers in Nigeria

Drawing a framework from the financial economics literature and utilising a dynamic panel data design covering 2004-2009, this study examines the profitability of micro-life insurers in Nigeria. The results indicate that the profitability of micro-life insurers is not influenced by factors such as the ownership structure, leverage and size of firms. However, profitability is found to be negatively related to the level of reinsurance suggesting that reinsurance in the micro-life insurance sector of the Nigerian market may be highly priced to reflect the increased risk associated with insuring the lives of low income groups. The link between profitability and the degree to which micro-life insurers have a diversified range of products suggests that multi-product firms are better able to reduce the cost of risk in-house through "natural diversification" as well as realise benefits from economies of scale and scope. Furthermore, the profitability of micro-life insurers operating in Nigeria is found to be positively influenced by the level of interest rates in the economy. This implies that the investment function and macroeconomic factors could be important in assessing the future financial performance of micro-insurance firms in developing countries. Finally, the results of the study could have potentially important commercial and public policy implications.