How does Altmann’s revised z-score model impact the insurance companies in Sri Lanka

Abstract

Introduction: The insurance industry is a major part of the country's economy. The revised Altman's z-score model measures financial distress among companies. Today, financial distress can be a huge problem that leads to company bankruptcy. Hence, this research tests the factors that may influence such financial distress among insurance companies incorporated in Sri Lanka using the revised Altman's z-score model.

Methodology: This study collected data on insurance companies incorporated in Sri Lanka from 2016 to 2021. Distressed insurance companies are the sample measured using the Revised Altman's z-score model. Using quantitative approaches, this study collected data from annual reports and industry handbooks. Profitability (ROA), leverage, capital adequacy, and inflation rate are used as independent variables to reflect the impact of the revised Altman's z-score model on the Sri Lankan insurance industry. A random effect model was used in this study to analyze the data.

Findings: The result of this study revealed that there is no significant impact of any of the independent variables on the dependent variable. Therefore, all the hypotheses are rejected.

Conclusion: In line with the findings of this study, the impact of profitability, leverage, capital adequacy, and inflation rate is not significant. However, it is very important to conduct further research to find the determinants that may lead the insurance companies to financial distress, as there has been no research done on this issue, despite the existence of financial distress within the insurance companies incorporated in Sri Lanka.