1. Introduction

2. Determinants of Sustainable Profitability of the Insurance Industry

The first impression regarding implemented methodologies is related to the nature of the profitability determinants. Namely, some researchers paid particular attention to the macro-specific factors, although most of them deal with the micro-related profitability drivers. To start with, it is worthwhile to mention that some authors found interest rate, income, unemployment, and stock market movement to be important profitability determinants in the US insurance sector ^[2]. In addition, a mixed-factor-based investigation emphasized that unexpected inflation and interest rate, apart from liquidity and underwriting profit, are the main profitability drivers in the UK ^[3]. More recently, Ortyński has revealed that that the profitability of insurers in Poland is positively associated with firm size and GDP, while there is a negative relationship between underwriting risk and operating expenses ^[4].

Many other empirical studies consider other internal forces, such as portfolio diversification and operational performances important for financial strength of insurance companies. For example, a very extensive study by Browne, Carson, and Hoyt ^[5] highlights adverse financial effects of portfolio diversification on the US insurance market ^[5]. On the other hand, the insurance market rewards a significant discount to diversified insurers, offsetting these negative financial repercussions. However, comparable studies that focus on the EU insurance sector are rather controversial on this topic. Namely, some authors did find a positive and significant relationship between portfolio restructuring and profitability; moreover, these effects are accelerated by the cost-cutting strategy and the premium growth strategy ^[6]. In addition, the insurance sector largely benefits from internationalization of the non-life insurance market segment and accelerated economic growth as a consequence of FDI net inflows.

There are some very interesting empirically oriented studies that tackle insurance markets in developing countries of Asia and Eastern Europe. Namely, Chen and Wong ^[7] had investigated the selected insurance industries in Asia, and found that portfolio performances, size, asset, and product mix play an important role in generating profit. At a country level, Almajali, Sameer, and Al-Soub ^[8] investigated the publicly listed insurance companies in Jordan, revealing a positive and significant relationship between firm size, management skills, leverage, and profitability. In three independent studies, Bawa and Chattha ^[9] and Mulchandani, Sitlani, and Mulchandani ^[10] investigated the profitability determinants of life insurers in India. Overall, with an increase in capital, leverage, and commission fees, one would expect profitability to be decreasing. At the same time, firm size, liquidity, solvency, and underwriting risk are positively associated with profitability. In addition, Charumathi ^[11] scrutinizes the Indian insurance market regarding what firm-specific factors might contribute to greater profitability. The author emphasizes that firm size and liquidity are positively associated with profitability, whereas leverage, premium growth, and equity are negatively associated with profitability. In the end, Jerene ^[12] finds a positive relationship between capital adequacy, GDP, and profitability, and a negative relationship between liquidity, inflation, and profitability.

There are a couple of profitability studies related to some other Asian countries, including the insurance industry in Pakistan (see ^[1][13][14]). According to these studies, profitability is negatively related to loss ratio, leverage, and earnings volatility. On the other hand, it is positively related to firm size, risk, age, and capital, whereas liquidity is not statistically significant. In addition, Dogan ^[15] and Öner Kaya ^[16] investigate profitability trends of the Turkish insurance companies. The first study reveals a positive relationship between ROE and size, and a negative relationship between ROE, age, liquidity, loss, and leverage. The second paper finds that profitability is negatively associated with age and loss ratio, and that liquidity has negative effects. Finally, Lee ^[17] finds that leverage is negatively related to ROA, while market share is negatively related to the operating ratio of the insurance companies in Taiwan. In addition, significant profitability determinants are underwriting risk, reinsurance, input costs, and holding-group membership.

More importantly, there are some European empirical studies that are worth noting, especially the ones dealing with Eastern European countries. For example, Hrechaniuk et al. ^[18] examine the firm-specific profitability factors of the insurance sectors in Spain, Lithuania, and Ukraine. They revealed a positive association between the premium growth rate and profitability, although the relevance of the study is questionable to some extent. Namely, the Spanish and Lithuanian companies operate on the single EU market. On the other hand, the insurance companies in Ukraine serve a significantly different market segment, including a much different economic and political setting they are faced with. In addition, Pervan and Pavic-Kramaric ^[19] focus on the non-life insurance companies in Croatia, investigating both internal and external profitability determinants. They confirm that ownership structure, operative efficiency, and inflation are positively related to profitability, whereas past profitability significantly contributes to current profitability. In addition, Curak, Pepur, and Poposki ^[20] investigate the main profitability drivers of the composite insurers in Croatia. They conclude that firm size, risk-exposure, and inflation are among the most important profitability determinants, though the market itself is dynamic and underdeveloped. Finally, Curak, Utrobicic, and Kovac ^[21] suggest that leverage, size, ROI, ownership, and the non-life insurance market share are the most important determinants of reinsurance profitability in Croatia.

People have been enduring the pandemic since March 2019, and there are some novel studies dealing with financial conditions of the insurance companies in different regions. For example, Babuna et al. ^[22] deal with the impact of COVID-19 on insurance using survey data of 55 life and non-life insurance companies in Ghana. They conclude that the crisis had detrimental effects on the insurance sector, followed by a significant drop in profitability (−16.6%) and total premium (17.01%). In addition, Shevchuk et al. ^[23] explore how this new economic reality caused by COVID-19 is related to financial performances of the insurance companies in Ukraine. It seems that the new market landscape is based on a new CRM, which could be the catalyst for innovation in the insurance business. In addition, Goodell ^[24] outlines that the financial markets, including the global insurance industry, suffer from an exogenous shock caused by the pandemic-induced events. Another event-based study, by Farooq et al. ^[25], is slightly more market-oriented since it deals with the impact of COVID-19 on stock market returns of selected insurance firms operating in developing countries. It is found that firm size, systematic risk, price-earnings ratio, profitability, and dividend yield all affect the intensity of abnormal returns in response to COVID-19 but in different event windows ^[25].