Re-examining the microeconomic and macroeconomic determinants of nonlife insurers profitability in South Africa: insights from linear and threshold analysis

Abstract This study contributes significantly to the literature by exploring the linearity, nonlinearity and threshold levels necessary for the micro- and macrodeterminants to stimulate insurance profitability (thus, return on assets and return on total premiums). The study employs the system generalized method of moments and the dynamic panel threshold techniques based on 71 nonlife companies in South Africa between 2013 and 2019. The findings from the linear analysis show that solvency, investment yield, premium growth, gross domestic products and urbanization are important channels for nonlife insurance profitability. Contrarily, inflation and unemployment present adverse effects. Furthermore, the results from the threshold analysis reveal nonlinearities in the relationship, which nonlife insurers must consider to achieve higher profitability. The findings highlight that solvency, insurance size and investment income stimulate profitability beyond their threshold levels, but premium growth and reinsurance reveal otherwise. The results suggest that excessive premium growth and over-reliance on reinsurance can hurt the profitability of nonlife insurers. Regarding the macroeconomic factors, the study finds that economic growth enhances profitability when it surpasses a certain threshold, while inflation hinders profitability when it exceeds a specific threshold. The study suggests that a stable economic environment is vital to the growth of the nonlife industry. In addition, insurers must employ sound underwriting and risk management practices to avoid financial distress.