Chapter 2
Literature Review
2. Literature Review
It is not surprising that insurance industry is highly regulated and monitored because in
society insurance serves as essential purpose. In state insurance companies perform a
various activities to make sure that insurance consumers have access to insurance and
treated fairly by insurer and their agents, and that insurance companies are financially
practicable (McCarran Ferguson Act 1945).
Oyatoye & Arileserre in their paper ‘A non-linear programming model for insurance
company investment portfolio management in Nigeria’ (2012) have focused to the
importance of investment by insurance companies. Their study offers way out to portfolio
investment management by implementing best processes for minimizing the risk for a
given expected return, which was devised a means of asset allocation among a number of
investment opportunities in achieving the investment objectives of insurance companies.
They also stated that it is crucial for insurance industry to survive and develop; the
insurance investment enables insurance companies to offset their possible underwriting
losses and make a considerable profit.
An extensive literature has been developed regarding the investment portfolio of property
insurance companies. Marietta Janowicz-Lomott in her paper “Investment activity of non-
life insurance companies in Poland” which was based on main concepts of insurers
investment management stated that the investment activity is one of the basic elements
of the financial strategy of insurers. The investment activity has a significant influence
on the solvency of an insurance company. It should be considered from a perspective of an
additional income generated through running the investment activity.
Lambert & Hofflander (1967) argued that the most important single factor affecting the
investment portfolio decision of property liability insurance companies is liquidity i.e. the
readily available fund to make payment of the claims of the policyholders. They also
identified that income from investment is a requirement by the stockholders as they get
dividend from it.
There already so many research paper on impact of insurance company’s investment on
profitability. There are many ways to measure profitability, which are return on invested
4
Chapter 2
Literature Review
capital (ROIC), return on equity (ROE) and return on assets (ROA) (Nguyen 2006).Kashish
& Kashram (1998) conducted study on Jordan’s insurance industry and used profitability
as dependent variable, where profitability was proxied by return on investment(ROI).
Study of Vigaykumar and Kadirvelu (2004), age of firm is an important determinant of
profitability.
Bates, Murray, Jagger and Cowling (2008) found that both age and size of the firm had
positive and significant effect for enterprise investment scheme. A study by Malik (2011)
on the insurance sector of Pakistan found that there is no relationship between profitability
and age of the company and there is significantly positive association between size of the
company and profitability. But further now there is no analysis on identification of the
impacts of risky investment of general insurance companies on profitability of those
companies, whether investment in shares affects the overall profitability of the companies.
The focal point of this study is particularly profitability and risky investment’s cause and
effect relationship.
In Bangladesh different authors have analyzed different aspects of insurance industry of
the country. But work on insurance industry’s investment portfolio and other aspects are
very few. Tamjid, Rahman and Afza (2007) put light regarding the reasons behind non
popularity of insurance service in Bangladesh. Nurul Haq (2008) describes how the trend
of globalization may create new dimension of challenges for insurance industry. But the
structure of investment portfolio of these insurance companies was not analyzed under
those studies. Quazi (2012) in her paper discussed the structure of investment portfolio of
different general insurance companies of Bangladesh and tries to focus to the cause effect
relationship between the structure of investment portfolio and profitability of insurance
companies in Bangladesh. But this study was based on only 13 general insurance
companies operating in Bangladesh. This paper focused on this analysis of investment
portfolio structure of general insurance companies in Bangladesh.
