Impact of Firm-Specific Factors on Financial Stability: An Analysis Using the CARAMEL Framework in the Life Insurance Industry of Bangladesh.

Abstract

The study uses the CARAMELS framework to find the impact of firm-specific factors on the financial stability of life insurance companies in Bangladesh. This research addresses a notable gap in the existing literature by focusing on the life insurance sector, an essential but under-researched part of Bangladesh’s financial soundness and financial stability. The model consists of capital adequacy, asset quality, management soundness, liquidity, reinsurance & actuarial issues, and earnings & profitability as independent variables, where financial stability was measured through Return on Assets (ROA) as a dependent variable. The secondary data was extracted from annual financial reports and statements from 2014 to 2023, including 13 life insurance firms. Descriptive statistics and regression models, including fixed and random effects tests, were used to evaluate the performance of life insurance companies. The results show that a significant impact exists from asset quality (AQ1), earnings & profitability (EP1), earnings & profitability (EP3), liquidity(L) on return on assets. These findings highlight the need for strategic asset management and operational efficiency to enhance financial soundness in the life insurance industry. They point out strong linkages that should control for effectiveness in strategic asset management and prudent financial management for stability. The research makes essential recommendations for regulatory authorities and insurance companies, emphasising the importance of implementing sound financial practices and policies to maintain stability and promote growth in the sector.