Corporate social responsibility (CSR) and financial results of insurance companies

Slawomir Bukowski and Marzanna Lament Introduction

Analysing measures of social responsibility performance and its links with financial results seems important from the viewpoint of financial effectiveness, the foundation of virtually any business. Therefore, exploring the impact of Corporate Social Responsibility (CSR) on financial results must be considered essential to both CSR - evaluating its usefulness - and finance management - evaluating usefulness of socially responsible actions. The possibility of effectively combining economic, social, and environmental objectives, demonstrated by the positive influence of CSR performance on financial results, would corroborate effectiveness of socially responsible actions. Reporting of non-financial information is a measure of socially responsible efforts as the information supplied improves or strengthens relations with the internal and external environments, on the one hand, and affects reputation and risk levels, and thus financial results, on the other hand. It is the authors’ belief that choice of such a variable is reasonable due to the great importance of publishing non-financial information, which reaffirms socially responsible actions. Transparency and openness of actions are key to building appropriate relations with any stakeholder groups. According to Global Reporting Initiative (GRI) Second G4 Public Comment (Second, G. R. I., 2019), the essential function of the non-financial reporting process is to present an organisation’s results in their economic, social, and environmental dimensions to any interested parties. In this way, an enterprise supplies evidence of effectiveness of social responsibility management.

Impact of socially responsible actions on financial results remains elusive. It should be noted, on the one hand, firms are not merely economic but also social institutions whose goal is to maximise both economic and social value. Socially responsible actions have considerable effect on a firm’s public value and contribute to enhancing economic value with image considerations. It means solid financial performance alone is not sufficient to achieve success and remain in the market as image must also be taken care of by means of socially responsible actions. On the other hand, principles of the market economy stipulate it is the objective of each and every firm to generate and maximise profits in the short term and to maximise owners’ financial gain as expressed in improving goodwill in the long run. Therefore, CSR actions are only reasonable where they contribute to improved financial results. In the authors’ opinion, CSR actions are an important area of firms’ activities, yet they do not exert any substantial influence on their financial results.

Non-financial reporting by insurance companies is a poorly explored area of research. The review of specialist literature shows the research into non-financial reporting by insurers can be divided into two principal groups (Lament 2019):

  • a) Qualitative - with analysis of non-financial reports’ contents and surveys as the methods; the studies address scope and principles of non-financial reporting with regard to information policies of insurance companies and effects of socially responsible actions on image of an insurance company (Scholtens 2011; Lock and Seele 2013; Yadav et al. 2016; Kavitha and Anuradha 2016; Lament 2017).
  • b) Quantitative - concerning impact of socially responsible actions and their presentation as non-financial reports on financial performance of insurance companies (Olowokudejo et al. 2011; Yadav et al. 2016; Ngatia 2014). Effects of non-financial reporting on financial results of insurance companies cannot be determined unambiguously on their basis, though.

The author’s publication is part of the quantitative research.

Analysis of dependences between Corporate Social Responsibility performance and financial results and evaluation of impact of non-financial reporting on financial performance of insurers in the Polish market are the prime objectives of the research presented in this chapter.

These objectives required answers to the following research questions:

  • a) What relations are there between Corporate Social Responsibility performance and financial results?
  • b) What factors determine financial results of an insurance company?
  • c) Does non-financial reporting influence effectiveness of insurance companies?

The following research hypothesis has been advanced: non-financial reporting has no statistically significant effect on return on equity (ROE) in the case of enterprises operating in the Polish insurance market.

In search of an answer to the query and in order to verify the research hypothesis, a critical review of literature and prevailing regulations was undertaken, contents of non-financial reports and financial statements were analysed, and econometric methods were applied. A panel model was constructed and results of its estimation have been analysed.

This study will contribute to development of theories presuming effects of CSR performance on financial results of firms.

Literature review

CSR is a rapidly developing trend in finance and accounting studies. It refers to the agency problems, examined in the field of finance economics, according to which additional information disclosures reduce costs of supervision and monitoring, and the theory of information asymmetry, according to which provision of more information (narrower information asymmetry) lowers the risk of information and improves transparency of operations. Exploration of mutual relations between social responsibility performance and financial results seems important from the viewpoint of both CSR and of financial effectiveness. The issue of measuring social responsibility performance and its links to financial performance remains open, though, as research fails to identify any clear relations between these performances. Results that affirm a positive relationship between non-finan- cial reporting (CSR reporting) and financial results concern, among other issues, impact of non-financial reporting on:

  • a) Variability of financial performance (Prior et al. 2008; Brammer and Millington 2008; Peloza 2009; Ballestero et al. 2015).
  • b) Variability of sale revenue (Ruf et al. 2001).
  • c) Goodwill (Webley and More 2003).

Orlitzky et al. (2003), Margolis and Walsh (2003), Margolis et al. (2007) have in turn undertaken a meta-analysis and synthesis of primaiy results upholding the positive effect of non-financial reporting on financial results.

Results that indicate lack of a dependence between non-financial reporting and financial performance, in turn, relate to influence of non-financial reporting inter alia:

  • a) Variability of financial performance (Seifert et al. 2003; Mittal et al. 2008; Surroca et al. 2010).
  • b) Developments of sales revenue (Brine et al. 2006).

Margolis and Walsh (2003) have carried out a meta-analysis and synthesis of the primary results in this case as well.

Results that indicate adverse relations between non-financial reporting and financial performance concern influence of non-financial reporting inter alia:

  • a) Variability of financial performance: (Moore 2001).
  • b) Developments of P/BV: (Braimner et al. 2006).

Yet another meta-analysis and synthesis were conducted (cf. Margolis and Walsh 2003).

Financial performance of an insurance company depends on a number of factors characteristic for this type of firm. This arises from the specific nature of their finance administration. Key determinants of insurers' financial result encompass technical provisions, investments and their profitability, loss ratios, reinsurance, and costs of insurance operations. The literature review shows profitability of insurance is influenced by a variety of factors and measured in a variety of ways. As a rule, it is measured with return on assets (ROA) (Lee 2014; Malik 2011) or return on equity (ROE) (Born 2001; Lee 2014). Fiegenbaum and Thomas (1990) believe financial peiformance of insurance companies is affected by their market shares and combined ratios. According to Wright (1992), profitability is affected by factors including the scale of the policyholder's dividend capital gains and losses, and taxes. Hardwick and Adams (2002) demonstrated asset dynamics affect financial results of insurers. Desheng et al. (2007) indicate loss and cost ratios. Olowokudejo et al. (2011) claim revenue growth and technical results determine the profits. Hifza (2011) proves size and capital volume of an insurer are positive, and loss and liability ratios adverse factors influencing profitability of insurance companies. Amal et al. (2012) show loss ratio, financial liquidity, size, and management of an insurance company have statistically significant impacts on financial performance. Doumpos et al. (2012) believe loss ratio, operational ratio, and policyholder’s income influence financial peiformance of insurers. Olajumoke (2012) points out structure of capital and liabilities, and size of an insurer have no effect, while levels of reinsurance have adverse effects on financial results. The role of reinsurance and its impact on effective risk management of an insurer is also stressed by Adams (1996). John et al. (2013) point to working capital and liabilities having a positive effect on profits of insurance companies. Daare (2016) believes financial performance of insurance companies is improved by capital adequacy. Berhe and Kaur (2017) have proven impact of company size, growth ratios, capital adequacy, and financial liquidity on financial results of insurers. These authors have found no significant effect of liabilities, loss ratio, and market share or inflation levels.

In view of the available results, these authors propose the following metrics as affecting financial performance of insurance companies:

  • a) Those characterising business development as measured with dynamics of policyholders’ income, technical provisions, and investments.
  • b) Level of reinsurance as measured with the retention rate.
  • c) Those concerning costs as measured with loss ratio, ratio of acquisition costs, and combined ratio.
  • d) Those concerning efficiency of operations as measured with the technical result and profitability of investments.

Studies are also indicated that affirm effects of non-financial reporting on insurance companies’ financial results. This subject matter is not examined in depth, however.

Impact of non-financial reporting on financial results of insurance companies has been studied by Olowokudejo et al. (2011), Ngatia (2014), and Yadav et al. (2016). Analysis of their conclusions fails to point to a clear-cut influence of socially responsible actions presented in non-financial reports on insurance companies’ financial results. Two publications detect a positive correlation between financial results and socially responsible actions taken (Olowokudejo et al. 2011; Yadav et al. 2016). These are surveys, though, that is, qualitative research with certain subjective features. Their results do indicate, however, positive effects of socially responsible actions and their presentation as non-financial reports on financial results of insurance companies. The third study (Ngatia 2014) points to a negative correlation between financial results measured with ROA and socially responsible actions. The studied followed statistical methods of comparing financial results by two groups of entities studied - those compiling non-financial reports and those not. Thus, non-financial reporting seems a tool affecting market image of an insurance company and may determine its financial results. Research into impact of non-financial reporting on insurance companies’ financial results is poorly developed and more studies are required, mainly by means of quantitative, econometric methods.

Following the critical review of specialist literature, in conclusion, the factors determining financial results of insurance companies are chiefly associated with their broadly defined finance management and non-financial reporting helps to build and strengthen relations with stakeholders, manage reputation risk, and build competitive edge more than influences on financial results of insurance companies. The following research hypothesis has been advanced: non-financial reporting has no statistically significant effect on remrn on equity (ROE) in the case of enterprises operating in the Polish insurance market.

 
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