Effect of Liquidity Risk on Profitability of Listed Insurance Firms in Nigeria

Abstract

The persistent challenge of balancing adequate liquidity buffers to meet claims obligations while avoiding excessive idle cash that reduces investment returns a dilemma exacerbated by asset liability mismatches, delayed premium collections, and Nigeria's volatile macroeconomic environment necessitates an investigation into the effect of liquidity risk on the profitability of listed insurance firms in Nigeria. This study conceptualizes liquidity risk through the current ratio (CUR), claims liquidity ratio (CLR), and premium-to-asset ratio (PAR), while proxied profitability with Return on Assets (ROA). Grounded in the liquidity preference and shiftability theories, the study employed an ex-post facto research design to analyze secondary panel data spanning the period 2013 to 2023. The population comprises 21 insurance firms listed on the Nigerian Exchange (NGX), with a sample size of 20 firms selected through purposive sampling to ensure data consistency. Following a hausman test (x2 = 23.84, p < 0.05), a fixed effects panel regression model was adopted. The findings reveal that the current ratio has a significant positive effect on profitability, suggesting that general liquidity satisfies precautionary motives and bolsters firm performance. Conversely, the claims liquidity ratio and premium-to-asset ratio exert a significant negative effect on profitability, indicating that excessive idle cash for claims and aggressive underwriting without shiftable asset backing create substantial opportunity costs. The study concludes that profitability is optimized through "liquidity sophistication" rather than mere accumulation. It recommends that insurance firms transition from static cash holdings to "shiftable" interest-bearing instruments and implement disciplined, asset-backed underwriting practices to mitigate the drag of liquidity risk on returns.