MICRO-SPECIFIC PROFITABILITY FACTORS OF THE SERBIAN INSURANCE INDUSTRY: A PANEL DATA ESTIMATION

The paper investigates the main micro-specific profitability determinants of the insurance industry in Serbia, covering the period 2008-2016. Data set includes accounting ratios for 19 universal insurers, officially reported by the National Bank of Serbia (NBS). We have estimated the fixed effects model using the OLS and GLM estimation procedures, with return on asset (ROA), return on equity (ROE) and return on total premium (ROTP) as the response variables. The estimated results from different models are quite consistent, with some minor deviations related mainly to the magnitude of the effects. Specifically, there is a trade-off between liquidity and profitability, and the insurance companies exploit economies of scale extensively. Loss and risk exposure have significant adverse effect on profitability, while productivity proved to be not significant. In addition, the relative market power (market position) and size have significant positive impact on profitability, while business specialization favors insurance over reinsurance, particularly the life-insurance business, as well as the business specialization dummies (insurance vs. reinsurance, life vs. nonlife insurance). Consequently, an optimal profitability strategy should be based on mergers and acquisitions, appropriate risk-taking and risk-management practices, and business sophistication through specialization. In addition, the companies should weight costs and benefits of keeping an excess of liquid reserves. The results also indicate further market concentration due to the size effects, and it could result in higher prices and lower quality of the services. This in turn imposes the new regulatory challenges in terms of the optimal antitrust strategy and appropriate quality control. The implications of these findings are applicable to other Western Balkan countries, especially to Bosnia and Herzegovina and Macedonia.