Abstract:

Based on the risk-return tradeoff theory, this quantitative study examined the effect of financial risk on the sustainability of insurance companies in Nigeria. Insurance is a pool of risk. Information was taken from the 2012–2021 annual reports of ten selected companies. Liquidity risk, solvency risk, and leverage risk are the three proxies for financial risk, which is the independent variable. Return on equity serves as a proxy for sustainability, which is the dependent variable. Firm size, tangibility, contingency fund, and industry intrinsic factor are the control variables. The study found that, during the studied period, solvency risk significantly increased the sustainability of the sampled insurance companies, while liquidity and leverage risks significantly decreased their sustainability. While the intrinsic value of the insurance industry has a significant negative impact on sustainability, the size and tangible nature of insurance companies have a significant positive impact. The sustainability of the examined insurance companies is not significantly improved by contingency funds. Given that the three financial risk proxies have a substantial impact on return on equity (a measure of sustainability), the applicability of risk-return tradeoff theory in this study is evident. Operationally, insurance companies should monitor their liquidity and leverage risks as because they reduce sustainability. The study recommends (among others) that Insurance firms should continue to optimally increase their size and tangibility in order to increase their sustainability.