Leverage, product diversity and performance of general insurers in Malaysia

Abstract

Purpose

The purpose of this paper is to examine the effect of leverage on the financial performance of general insurance companies in Malaysia, and investigate whether the leverage‐performance relationship is a function of or contingent on the extent of product diversification.

Design/methodology/approach

The sample consisted of the entire population of authorized general insurance companies operating during the period from 2006 to 2009 in Malaysia. A total of 94 observations were analysed. All the data used were sourced from the Malaysian Central Bank's (BNM) database.

Findings

It is found that leverage is negatively associated with firm performance. However, there is a significant interaction effect between leverage and product diversity on firm performance. The finding indicates that leverage could be beneficial or detrimental to the financial performance of general insurance firms, contingent on the extent of product diversity of the firm.

Research limitations/implications

As the scope of study is limited to the general insurance industry and the sample size is small, the findings of the study must be interpreted with caution and the results may not be generalizable to the life insurance sector or other industry.

Originality/value

Findings of prior empirical studies on leverage‐performance relationship and effect of insurance product diversification are rather mixed and inconclusive. Based on analysis of a single insurance (general) sector that is highly regulated, the paper provides empirical evidence that the benefits of product diversification strategy are contingent on level of the firm's leverage. The paper hence, enhances understanding and contributes to the existing literature on impact of leverage, product diversification on performance of the highly regulated general insurance firms in a developing country.

Citation

Foong, S. and Idris, R. (2012), "Leverage, product diversity and performance of general insurers in Malaysia", Journal of Risk Finance, Vol. 13 No. 4, pp. 347-361. https://doi.org/10.1108/15265941211254462