Risk Based Capital and Performance of Insurance Companies in Nigeria

Abstract

The stability and financial performance of insurance companies are critical to economic development, one of the key regulatory tools used to ensure the soundness and solvency of insurance firms is Risk-Based Capital (RBC), which require insurers to hold capital proportionate to the specific risks they face. This study investigates the impact of RBC on the financial performance of insurance companies in Nigeria, with a focus on three core performance indicators: Return on Equity (ROE), Return on Assets (ROA), and Earnings per Share (EPS). The study adopted an ex-post facto research design and applied judgmental sampling to select five insurance companies operating in Nigeria. Panel data were extracted from the audited financial statements of these companies over a 14-year period (2010–2023). Using panel data regression techniques, the Random Effects Model was employed to estimate the relationship between RBC and firm performance across the selected indicators. The empirical results revealed that RBC has a positive and statistically significant effect on EPS at the 5% level of significance (β = 5.5803; p = 0.0210), implying that increased capital adequacy, when aligned with risk exposures, enhances shareholder value through improved earnings per share. However, the effect of RBC on ROE (β = 0.2411; p = 0.6250) and ROA (β = 0.6003; p = 0.4411) was found to be negative and statistically insignificant, suggesting that while RBC may contribute to capital stability, it does not necessarily lead to higher profitability or better asset utilization in the short term. The study concludes that RBC has differentiated effects across financial performance metrics and should not be viewed merely as a compliance requirement. Rather, insurance firms should strategically align capital adequacy practices with broader financial performance goals. The study recommends that insurance companies adopt risk-sensitive capital management practices as a tool for strengthening long-term value creation and investor confidence.