Analysing the Degree of Profit Persistence in Tanzania’s Insurance Companies: A Markov Chain Approach

Abstract

Although extensive research has explored profit persistence in financial services, relatively little focus has been on insurance companies. This study addresses this gap by analysing the degree of profit persistence among insurance companies in Tanzania. The empirical analysis utilised data from a sample of 20 insurance companies in Tanzania from 2010 to 2020. It applied Markov chain stochastic processes to analyse profitability categories, which are based on the changes in insurers’ return on assets (ROA). The empirical findings revealed a relatively low degree of profit persistence in Tanzania’s insurance companies, both in the short and long term. The results also support the hypothesis that low-profit persistence exists in developing countries. The model predicted that the profit level of insurance companies in Tanzania would be in low-profit, medium-profit, and high-profit states, with probabilities of approximately 0.22, 0.31, and 0.46, respectively. The relatively high probability of remaining in a high-profit state suggests that insurance companies with higher profit levels will likely experience profit persistence in the long run.