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1.1 Background to The Study
Liquidity is a financial institution’s capacity to meet it cash and collateral responsibilities without incurring unacceptable
losses. Adequate liquidity is reliant upon the institution’s capacity to efficiently meet both expected and unexpected
cash flows and collateral needs without negatively affecting either day to day operations or the financial state of the
institution. So, liquidity management entails the supply/withdrawal from the market the amount of liquidity consistent
with the desired level of short-term interest rates or reserve money. It is the capacity of an organization to meet
demands for funds thereby ensuring that such organization maintain adequate cash and liquid assets to satisfy the
demand of client for loans and savings withdrawals and then meet its expected expenses, (Owolabi, & Obida, 2012).
According to Panigrahi (2013), it is frequently observed that on every occasion a financial analysis of firms is done;
more emphasis is given on the financial performance (profitability) of the business rather than on its liquidity. This is
quite evident, as the most important financial aim of any business entity is to earn profit. Therefore, the managers lay
more emphasis towards financial performance of the business. However, another significant variable is liquidity which
means the ability of an organization to honor its short term financial obligations. If the organization isn’t able to honor its
short-term financial obligations, it moves a step forward towards its bankruptcy. Liquidity management, therefore,
entails the amount of investments in liquid assets to meet the short-term maturing obligation of creditors and others.
Basically, the liquidity management role is to prospectively evaluate the needs for funds to meet obligation and ensure
the availability of cash or collateral to fulfill those need at the right time by coordinating the different sources of funds
accessible to the organization under normal and stressed conditions. It depends on the day to day assessment of the
liquidity conditions in the insurance companies, so as to measure its liquidity needs and thus the volume of liquidity to
allot or withdraw from the market. Management of liquidity involves a day to day evaluation and detailed estimation of
the size and timing of cash inflows and outflows over the coming days and weeks to lessen the risk that savers will be
unable to access their deposits in the moment they demand them. Thus, liquidity is lifeblood of a business organization.
Ebhodaghe (2002), Biety (2003), and Anyanwu (1993), assert that the objective of liquidity management is to gear
organizations towards a financial position that enables them meet their financial obligations as they occur.
Shortage of adequate liquidity in a business organization is often characterized by the inability to meet day to day
financial obligations. At times it may have the risk of losing clients which erodes its supply of cash and thus forces the
institution into disposal of its more liquid assets. As opined by (Pandy, 2005), managing monies of a business organization in order to maximized cash availability and interest income on any idle cash is a function of liquidity
Current assets are liquid so holding more current assets refers to high liquidity however on the other hand; current
assets include such items which reduce firm’s financial performance. It must be remembered that different items of
current assets have different degree of liquidity. Cash is the most liquid asset. For another types of current assets,
liquidity concept has two dimensions of time and risk. The speed with which current assets other than cash can be
converted into cash is regarded as time dimension of liquidity consideration, (Falope & Ajilore, 2009). More quickly and
rapidly current assets are converted into cash, more liquid those current assets shall be. The greater the relative
proportion of liquid assets, the lesser the risk of running out of cash, all other things being equal. All individual
components of working capital including cash, marketable securities, account receivables and inventory management
play a significant role in the financial performance of any organization.
For owners of business, one of the most vital tasks is to estimate and assess cash flows of the business, to well identify
the long-run and short-run cash inflows and outflows to timely sort out the cash shortages and excess to formulate
financing and investing strategies respectively. It also helps in planning the payments to creditors on time to avoid
losing reputation and trust of the customers and to avoid potential bankruptcy, (Bardia, 2004).
If all the current responsibilities are met without any delay as and when these become due, creditors or clients and all
others will have a feeling of confidence in the financial strength of the organization and this will sustain the credit
standing of the organization, (Chen & Wong, 2004). However, failure to meet such responsibilities on regular basis
would cause a negative effect on the credit standing and market reputation resulting in more difficult to finance the level
of current assets from the short-term sources. Keeping liquidity is usually costly, although helps avert negative effects
of unexpected cash-flow shocks.
According to Bhunia (2010), liquidity plays a crucial role in the successful functioning of an organization. A company
should ensure that it doesn’t suffer from lack-of or excess liquidity to meet its short-term obligations. A study of liquidity
is of major significance to both the internal and the external analysts simply because of its close relationship with daily
operations of a business. Liquidity requirement of an organization relies on the peculiar nature of the organization and
there is no particular rule on measuring the optimal level of liquidity that an organization can maintain so as to ensure
positive impact on its profitability, (ibid).
However, one should try neither to maximize nor minimize the liquidity ratios; one should try to optimize them in relation
to the objective, which in case of a commercial company is probably the maximization of profit on capital employed.
The lower the liquidity ratios are, the more vulnerable the company is to pressure from creditors or clients which it
unable to meet and vice versa. So, one should seek to have as little working capital as is consistent with not being
unduly vulnerable to pressure from creditors.
According to Brealey (2012), liquidity is expressed in terms of liquidity ratios such as current ratio, quick (acid test) ratio
and cash ratio. Current ratio is the ratio of the current assets to the current liabilities and it measures the margin of
liquidity. Rapid fall in the current ratio sometimes signify trouble. But, they can also be misleading. For instance,
suppose that a firm borrows a huge sum from the bank and invests it in short-term securities. If nothing else happens,
net working capital is unaffected, but the current ratio changes. For this reason, it might be preferable to net off the
short-term investments and the short-term debt when calculating the current ratio.
According to Brealey (2012), quick (acid test) is a sign of firm’s short term liquidity and is calculated as current assets
net of inventories divided by current liabilities. It measures a firm’s ability to meet its short-term obligations with its most
liquid assets thereby excluding inventories. The quick ratio measures the naira amount of liquid assets available for
each naira of current liabilities. Thus, a quick ratio of 1.5 implies that a company has N1.50 of liquid assets available to
cover each N1 of current liabilities. The higher the quick ratio the better the firm’s liquidity position and vice versa According to Brealey (2012), cash ratio is the ratio of a firm’s total cash and cash equivalents to its current liabilities.
The cash ratio is most generally used as a measure of firm liquidity. A firm’s most liquid assets are its holdings of cash
and marketable securities and that is why analysts also look at the cash ratio. It can therefore determine if, and how
quickly, the company can repay its short-term debt. A strong cash ratio is useful to creditors when deciding how much
debt, if any, they would be willing to extend to the asking party.
One of the most severe liquidity stress scenarios faced by an insurer is a mass surrender of policies owing to a loss of
confidence in its financial strength. This happened to Equitable Life following the House of Lords ruling on its
guaranteed annuity liabilities in 2000. Risk is a natural element of business and community life. It is a condition that
raises the chance of losses/gains and the uncertain potential events which could manipulate the success of financial
institutions (Crowe, 2009). As a result, well establish risk management practices (RMPs) can assist insurance to reduce
their exposure to risks. Effective risk management is accepted as a major cornerstone of insurance firm’s management
by academics, practitioners and regulators and acknowledging this reality and the need for a comprehensive approach
to deal with insurance risk management (Sensarma & Jayadev, 2009).
Moreover, liquidity management is found to be one of the determinants of returns of insurance s’ stocks. Indeed, as
Holland (2010) observed, liquidity management failure is considered one of the main causes of the crisis. The inability
of insurance firms to raise liquidity can be attributed to a funding liquidity risk that is caused either by the maturity
mismatch between inflows and outflows and/or the sudden and unexpected liquidity needs arising from contingency
conditions (Duttweiler, 2009). Insurers will typically hold cash in the form of bank deposits, Treasury Bills, commercial
paper, and other money market instruments to meet outflows. Liquidity losses on realizing listed securities depend not
only on the amount sold, but also on quoted maximum deal sizes and spreads, which are in turn affected by market
conditions (Kumar, 2015).
Liquidity Risk is a risk of insufficient liquid assets to meet payouts from policies (surrender, expenses, maturities, etc.),
forcing the sale of assets at lower prices, leading to losses, despite company being solvent. Loss from meeting liquidity
comes either from fire sale or by paying interest on borrowing to meet payouts. Liquidity risk arises due to two reasons,
one on the liability side and other on the asset side (Sonjai, 2008). Hence, insurance companies in Nigeria are
statutorily required to increase their Statutory Deposit with the Central Bank of Nigeria to an amount equal to 10% of
the New Minimum Capital Requirement for their respective classes of insurance operations.
1.2 Statement of The Problem
The problem of insufficient studies of the assessment of the relationship between liquidity management and the
performance of Insurance companies in Nigeria calls for more work under the subject matter. The assessment of
liquidity management in relation to performance becomes imperative as a result of Insurance Market Review in 2009.
The National Insurance Commission (NAICOM) makes it important to examine the management of liquidity in
Insurance companies in Nigeria. Theoretical studies and empirical evidence have shown that countries with better
developed financial system enjoy faster and more stable long-run growth of which insurance companies contribute to.
Well-developed financial markets have a significant positive impact on total factor productivity, which translates into
higher long-run development. Based on Solow’s (1956) work, Merton (2004) noted that due to the absence of a
financial system that can provide the means of transforming technical innovation into broad implementation,
technological progress will not have significant and substantial impact on the economic development and growth.
Liquidity risk in an insurance company is considered as less threatening than in bank because of higher frequency of
money exchange takes place in banking industry compared to insurance industry. However, liquidity risk management
is equally important in insurance as in banking sector because of interconnection of financial system leading to cash
crisis and secondly liquidity risk may prove very expensive to insurer due to meeting the cost of liquidity and also
impacting the Assets and Liability mismatch.

There is a trade-off between liquidity and financial performance; gaining more of one ordinarily means giving up some
of the other, (Eljelly, 2004). For instance, if a company’s balance sheet is listed in order of liquidity with five items
namely cash, marketable securities, accounts receivables, inventory and fixed assets it can be observed that moving
from cash to fixed assets decreases liquidity. However, as you move from fixed assets to cash financial performance
increase. In other words, profitable investment for a company is normally its fixed assets and the least profitable
investment is cash, (Boadi, Antwi, & Lartey, 2013).
Mathuva (2009) found a highly significant positive relationship between the time it takes the firm to pay its creditors
(average payment period) and financial performance. Maina (2011) found the relationship between liquidity and
financial performance was weak and also that all the independent variables had a significant relationship with Return
on assets except the quick ratio and cash conversion cycle. The results further revealed that, there was a strong
negative relationship between a firm’s leverage and quick ratio with its Return on assets. Owolabi & Obida (2012) found
causative relationships between financial performance expressed in terms return on assets (ROA), return on equity
(ROE) and return on investment (ROI) and liquidity management of companies was measured in terms of its Debtors
Collection Period (DCP), Creditors Payment Period (CPP) and Cash Conversion Cycle (CCC).
Wambu (2013) found out that there was a positive relationship between profitability and liquidity however, the
coefficients from the study were not significant. Lartey, Antwi & Boadi (2013) found that there was a very weak positive
relationship between the liquidity and the financial performance of the listed banks in Ghana.
Based on earlier researches, the studies did not center on the liquidity management especially in the insurance
industry, also the empirical evidence revealed mixed results with some showing negative relationship and others
showing positive or no relationship, finally, from the above reviews, it was found that out that, most of the studies were
not conducted in Nigeria. Therefore, there was a yawning gap in existence since there was no comprehensive study on
the effect of liquidity management on financial performance of insurance companies listed at the Nigeria Securities
Exchange. Earlier studies broadly concentrated on effect of liquidity and relationship of liquidity and profitability of
commercial banks. This study therefore concentrated on what effect liquidity management has on financial performance
of insurance companies in Nigeria.
1.3 Objectives of The Study
The main objective of the study is to examine liquidity management and financial performance of listed insurance
companies in Nigeria with a view to providing solutions to the problem.
The specific objectives to:
Identify the extent to which liquidity management affects revenue per policyholder of listed insurance companies
in Nigeria
Examine the use of liquidity management an average cost per claim of listed insurance companies in Nigeria
Determine the application of liquidity management on return on surplus of listed insurance companies in Nigeria.
Establish the impact of liquidity management on policy sales growth of listed insurance companies in Nigeria.
1.4 Research Question
To what extent ca liquidity management affect revenue per policyholder of listed insurance companies in Nigeria?
How can the use of liquidity management be applied to average cost per claim of listed insurance companies in
To what extent does the application of liquidity management affect return on surplus of listed insurance
companies in Nigeria?

How can use of liquidity management affect policy sales growth of listed insurance companies in Nigeria?
1.5 Research Hypothesis
H0 There is no relationship between liquidity management and revenue per policyholder
H1 There is a relationship between liquidity management and revenue per policyholder
H0 There is no relationship between liquidity management and average cost per claim.
H1 There is a relationship between liquidity management and average cost per claim.
H0 There is no relationship between liquidity management and return on surplus
H1 There is a relationship between liquidity management and return on surplus
H0 There is no relationship between liquidity management and policy sales growth
H1 There is a relationship between liquidity management and policy sales growth
1.6 Justification of The Study
The motivation behind the research was brought about when the researcher came across an article titled ‘liquidity risk
and profitability of Nigerian banks’ where the researcher analyzed Nigerian banks and their liquidity risk, liquidity
management and the processes used to maintain an adequate level of liquidity and also performing well financially. It
was on this premise that the researcher decides to also research into liquidity but of a different financial institution, the
researcher picked the insurance sector as it is similar to the banking sector in that liquidity is very essential to their
operations. This made the researcher to investigate liquidity management and financial performance of listed insurance
companies in Nigeria.
1.7 Significance of The Study
The study would contribute immensely to knowledge and total understanding of liquidity management in insurance
companies especially in Nigeria where insurance is not considered as Important to success of businesses as it is in
Europe and USA This study will also provide future insurance seekers the information needed to make a good decision
about what insurance company to use.
The results of this study could also help in insurance managers know the adequate liquidity needed to more effectively
run an insurance company and keep its long term stability.
Regulators in Nigeria would also benefit from findings of this study by recognizing important liquidity management
measures that promote financial stability.
Students, researchers and other scholars who wish to undertake further research on liquidity management and
financial performance would find the literature arising from this study to be of great value, as it would be added to
existing literature and also widen the scope 1.8 Scope of The Study
The study examined the extent to which liquidity management has impacted on the financial performance of listed
insurance companies; using the financial performance indicators such as revenue per policyholder, average cost per
claim, return on surplus and policy sales growth. This study is however, delimited to selected insurance companies that
are listed on the Nigerian stock exchange. The geographical location for this study is Nigeria. Data used for this study
data which was sourced from the published annual reports of listed insurance companies.
1.9 Definition of Terms
Liquidity Management: This is a concept broadly describing a company’s ability to meet financial obligations through
cash flow, funding activities and capital management.
Financial Performance: this is subjective measure of how well a firm can use assets from its primary mode of business
and generate revenue
Listed insurance company: Thus is a business that provides coverage, in the form of compensation resulting from loss
damage, injury treatment or hardship in exchange for premium and also listed on the Nigeria stock Exchange.
Revenue per policyholder: This is a simple key performance indicator (KPI) that measures the amount of revenue
generated by the insurance company, per policyholder serviced.
Average cost per claim: This measures how much the insurance company pays out for each claim filed by their
Return on surplus: This shows how much profit an insurance company can bring in relative to the amount of revenue it
generates from underwriting insurance proceeds and investing proceeds, with policyholder surplus representing how
much an insurer’s assets exceed its liabilities.
Policy sales growth: This measures how many new policies your organization has sold over a set period of time and
compares that to a target value.
Current Ratio: This is a liquidity ratio that measures a company’s ability to pay short-term obligations or those due
within one year.
Liquidity buffer: This refers to the proportion of highly liquid assets held by financial institutions, to ensure their ongoing
ability to meet short-term obligations.

Risk monitoring and reporting: This is a process of actively monitoring and reporting any risk exposures or funding
Acid test ratio: This is a liquidity ratio that measures the ability of a company to pay its current liabilities when they come
due with only quick assets; quick assets being assets that can be converted into cash within 90 days or in the short
1.10 Operationalization of Variables
Y= Financial performance
X= Liquidity Management
Y= Dependent variable
X= Independent variable
Y= Financial Performance (FPM)
X= Liquidity Management (LMT)
Y= (y1, y2, y3, y,4)
y1= Revenue per policyholder(RPP)
y2= Average cost per claim(ACC)
y3= Return on surplus(ROS)
y4= Policy sales growth(PSG)
X= (x1, x2, x3, x4)
x1= current ratio(CRT)
x2=liquidity buffer(LQB)
x3= Risk monitoring and reporting(RMR)
x4= Acid test ratio(ATR)
Functional Relationship





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