Micro-specific Profitability Factors of the Serbian Insurance Industry: A Panel Data Estimation

Abstract

The paper investigates the main micro-specifi c profi tability determinants of the insurance industry in Serbia, covering the period 2008-2016. Data set includes accounting ratios for 19 universal insurers, offi cially reported by the National Bank of Serbia (NBS). We have estimated the fi xed effects model using the OLS and GLM estimation procedures, with return on asset (ROA), return on equity (ROE) and return on total premium (ROTP) as the response variables. The estimated results from different models are quite consistent, with some minor deviations related mainly to the magnitude of the effects. Specifi cally, there is a trade-off between liquidity and profi tability, and the insurance companies exploit economies of scale extensively. Loss and risk exposure have signifi cant adverse effect on profi tability, while productivity proved to be not signifi cant. In addition, the relative market power (market position) and size have signifi cant positive impact on profi tability, while business specialization favors insurance over reinsurance, particularly the life-insurance business, as well as the business specialization dummies (insurance vs. reinsurance, life vs. nonlife insurance). Consequently, an optimal profi tability strategy should be based on mergers and acquisitions, appropriate risk-taking and risk-management practices, and business sophistication through specialization. In addition, the companies should weight costs and benefi ts of keeping an excess of liquid reserves. The results also indicate further market concentration due to the size effects, and it could result in higher prices and lower quality of the services. This in turn imposes the new regulatory challenges in terms of the optimal antitrust strategy and appropriate quality control. The implications of these fi ndings are applicable to other Western Balkan countries, especially to Bosnia and Herzegovina and Macedonia.