IMPACT OF FINANCIAL RISK ON PERFORMANCE OF INSURANCE SECTOR IN PAKISTAN

Abstract

The insurance sector operates in a dynamic and risk-intensive environment that demands continuous adaptation to changing economic conditions, regulatory pressures, and market expectations. This study examines the impact of financial risk management on the performance of insurance companies in Pakistan, with particular emphasis on credit risk, liquidity risk, reinsurance risk, solvency risk, underwriting risk, and technical provision risk. Guided by Risk Management Theory and related financial and contingency frameworks, the study adopts an explanatory research design and a quantitative research approach. Panel data were collected from 24 life and non-life insurance companies listed on the Pakistan Stock Exchange over a 16-year period, yielding 192 firm-year observations. Multiple regression techniques, including pooled ordinary least squares, fixed effects, and random effects models, were employed to analyze the relationship between financial risk indicators and firm performance, measured by return on assets (ROA). The empirical findings indicate that the fixed effects model provides the most appropriate specification for the data. Results reveal that credit risk and liquidity risk have a statistically significant influence on the financial performance of insurance companies, highlighting their critical role in shaping profitability and stability. Reinsurance risk, underwriting risk, and technical provision risk show mixed or insignificant effects across models, while solvency risk demonstrates varying influence depending on the estimation technique. Overall, the study concludes that effective risk management practices contribute significantly to the financial performance of insurance firms in Pakistan. The findings suggest that insurance companies should adopt a comprehensive and multifaceted risk management approach, supported by robust monitoring systems and continuous assessment, to enhance resilience and sustain long-term financial performance.