Effect of Liquidity Management on Performance of Listed Insurance Companies in Nigeria

Background of the Study

The performance of insurance companies in Nigeria has received significant attention from researchers, especially in accounting management. The reason for this is not farfetched as the performance has implications for the companies’ health and long-term survival. Ibrahim (2019), viewed performance as the effective and efficient utilization of resources by an organization for the accomplishment of its objectives, resulting in the increase in sales market share, share price, profitability, cash flows and earnings and meeting with the various stakeholders’ expectations. Ali (2016) opined that there are several financial performance measures which include Return on Assets (ROA), Return on Equity (ROE), Earnings per Share (EPS), etc. In the context of this study, return on asset shall be focused on to measure the performance of insurance companies in Nigeria.

Basically, return on assets (ROA) is a financial performance measure for every organizations. Lee, Chang and Lee (2017) explained return on asset as a financial ratio that reveals the rate of profit a company earns in relation to its overall resources. It is an indicator of how profitable an organization is relative to its total assets. Famiyeh (2017) asserted that return on asset is commonly known as net income divided by total assets. Net income is derived from the income statement of a corporation. Thus, it is the profit after tax. Total assets of an corporations are obtainable from the balance sheet which include cash equivalent items such as inventories, receivables, capital equipment as depreciated, land, and the intellectual property’s value such as patents. The performance of organizations is a function of many explanatory variables, part of which is liquidity management.

Organizations’ liquidity is their ability to undertake operational activities without any stress. That is, there is a provision for adequate funds to pay for maturing responsibilities as and when due. According to Olowo (2019), liquidity management, therefore, involves the calculated supply or extraction from the circulation the amounts of liquidity consistent with the desired level of short-term reserve money without distorting the profitmaking ability and operations of the bank. Liquidity management is a means of holding cash in the right amounts to ensure higher performance and survival of organizations.

However, Liquidity management includes two aspects: the accumulation and the satisfaction of customers’ requirements of the sensitive level of the liquid asset for risk control and customer fees management. However, impulsive borrowing leads to crises if the financial institution’s trust of the borrowers is lacking. The liquidity mismanagement of the Nigerian insurance industry has impacted the financial performance of the sector. The concern is that the incentive to mismanage the amount of liquidity in insurance would lead to significant liquidity problems that may affect the stability and survival of this industry. (Alhassan and Anwarul, 2021) notes that the thriving insurance industry boosts the economy since saving is promoted and serves as a safety net for the company.

Liquidity management in the insurance industry is particularly important because of its reverse nature (Patrick, 2018). This means that insurance firms must anticipate future claims before risk may be accepted (Godwin and Comfort, 2015). (Otalu, 2018) explain that if too much risk is taken, the premium collected may not be enough to cover the payout needed, leading to a liquidity crisis. The likelihood of an insurer paying obligations which include operational costs or payments for claims or benefits under insurance policies thus constitutes liquidity within the framework of insurance businesses. Cash flow and liquidation of assets are the primary sources of fluidity for an insurer (mostly premiums and investment income) (Celestine & Clement, 2016).

The Nigerian insurance business is important for advancing income equality and lowering poverty levels in any country. Still, performance has lagged for several reasons, including poor underwriting capacity of players, customer distrust, poverty, and insufficiency of distribution infrastructure. These reasons contributed together to the dismal penetration of insurance – the share of insurance companies in the gross domestic product throughout the years (Daniel 2017).

Liquidity is the lifeblood of all organizations. Hence, its management is crucial to the performance level and the decisions of existing and prospective shareholders. Effective liquidity management guarantees the provision of funds needed to support the organization’s operations. Patrick (2018) observed that with the use of basic liquidity management tools and techniques, liquidity becomes an asset that contributes directly to the bottom line. Thus, whether an organization is flush with cash or experiencing a deficit of funds, liquidity management is critical to the performance of every organization.