Financial soundness of general insurance industry in Sri Lanka : a CARAMELS approach

Abstract

The study explores the impact of the general insurance industry’s financial soundness on Sri Lanka’s financial performance by using the CARAMELS approach for seven years (2011–2019) and using secondary data. The study utilised panel data regression analysis. Return on Asset was used as the proxy of financial performance while the 10 dimensions were employed. The best-fitted model is the fixed effect model (FEM), which indicates capital adequacy ratio (CAR) and profitability ratio has a positive impact and that the retention ratio (RR), claims ratio, and expenses ratio harm financial performance in the general insurance sector. The study concluded that capital adequacy, earnings and profitability, reinsurance, and actuaries are important predictors of financial performance for general insurers. The findings help the regulator and general insurers set better performance targets and enable insurance company managers to allocate capital more efficiently.