Effects Of Working Capital Management on the Financial Performance of Life Insurance Companies in Lusaka Province

Abstract

This study investigates the effects of working capital management (WCM) on the financial performance of life insurance companies in Zambia, addressing critical issues such as low insurance penetration and insolvency risks faced by the sector. The study highlights the Insurance Penetration Ratio (IPR), which was 1.26% in 2021, indicating a significant gap in the contribution of insurance to Zambia's gross domestic product and the economic implications of low insurance uptake among the population. The study was guided by three specific objectives: to establish the challenges in working capital management experienced by life insurance companies in Zambia, to identify the reasons life insurance companies in Zambia experience short-term and long-term insolvency, and to formulate strategies that can enhance working capital management of life insurance companies in Zambia. The study employs a mixed-method approach, combining quantitative analysis of financial data from five insurance companies with qualitative insights gathered from structured questionnaires with key informants, including CFOs and finance managers. A total of 37 respondents were selected using random sampling, and secondary data was collected from audited financial statements spanning 2018 to 2022. The data were analyzed using descriptive statistics and regression analysis to assess relationships between WCM components and financial performance indicators. The findings reveal that life insurance companies face considerable challenges in WCM, primarily influenced by macroeconomic conditions, regulatory frameworks, and competitive dynamics. A significant portion of respondents (78.3%) indicated that macroeconomic factors negatively affect premium collections, corroborating existing literature on the vulnerability of insurance firms in unstable economic climates. The study further identifies misalignments in premium pricing strategies, operational inefficiencies, and delayed premium remittances as systemic issues impacting liquidity and overall financial performance. The analysis underscores that both profitability and liquidity are crucial determinants of short-term and long-term insolvency risks, with over half of the respondents reporting inconsistent profitability over the past five years. Key factors contributing to insolvency include delayed claims settlements and ineffective accounts receivables management, underscoring the need for robust credit control mechanisms and effective asset-liability matching. To enhance WCM, the study advocates for improved receivables management, periodic cash flow forecasting, and strategic negotiations with vendors, all aimed at bolstering liquidity and operational efficiency. Interestingly, while respondents expressed skepticism toward restricting investments to liquid assets, there was a strong ethical stance against delaying claims payments, emphasizing the importance of maintaining customer trust and operational integrity. The regression analysis further reveals a statistically significant negative relationship between receivable days and premium growth, highlighting the adverse impact of prolonged receivables on revenue generation. Overall, this study contributes to the understanding of the complexities surrounding WCM in the Zambian life insurance sector, providing valuable insights for stakeholders to develop effective strategies that enhance financial performance and sustainability in the face of ongoing economic challenges. Future research could explore the long-term effects of these strategies and examine other sectors within Zambia for broader applicability.