The Effect of Corporate Governance and Financial Performance on the Solvency of Insurance Companies

In recent decades, attention has been paid to the dimensions of corporate governance in theoretical research in the field of economic institutions, in particular insurance companies. The purpose of this study is to investigate the impact of corporate governance mechanisms on the solvency of listed insurance companies by using a more efficient model and it compliance with related theories.

This paper explains the impact of selected components of corporate governance (ownership concentration, non-executive members, managerial ownership, and post segregation) and four variables on financial performance (profitability, liquidity, size, and growth of firms) on financial solvency of insurance companies using panel regression, generalized method of moment and artificial neural networks during the period from 2011 to 2017.

The results of this study confirm the relations among solvency ratio and the components of ownership concentration and the existence of a non-executive member of the board of directors in the corporate governance domain, as well as the variables of profitability and size in the field of financial performance of insurance companies in all three models. The results also provide implicit confirmation of agency theory and also it show that nonlinear models are more efficient than linear models in explaining the relationship between financial empowerment and corporate governance and financial components of the company.

Large shareholders have more incentives for management monitoring because the costs associated with management monitoring are less than the expected benefits of large shareholders in the company. In central-owned companies, major shareholders can act as supervisors capable of enhancing the quality of management as well as enhancing the level of performance of the company. Profitability (return on assets) derived from non-operating earnings in insurance companies can lead to overall improvement in corporate fortunes. Larger insurers also tend to offer more information to smaller investors than do smaller companies, which increase the use of equity-based financing.