Liquidity is critical to the successful running of all organizations, especially financial institutions. Financial institutions are the backbone of a nation’s economy. Like other financial institutions such as banking and the stock market, the insurance sector is also vital for the sustainable economic growth of any country by ensuring the wellbeing of individuals, groups, businesses, organizations, and the country as a whole. However, insurance sector in Ethiopia did not contribute to the development of the nation’s economy as expected. The basic obstacle behind this was financial instability, which occurred due to the illiquidity of the companies. As a result, the primary objective of this study was to empirically investigate the effect of liquidity management on the performance of insurance companies in Ethiopia. As regards this study, it used positivist philosophy, a quantitative research approach, an explanatory research design, and a descriptive research design. This study used secondary data types that audited financial statements used. The data required for the variables was collected from the national bank of Ethiopia and the World Bank, which purposively selected 10 sample insurance companies in Ethiopia. The analysis of the study was conducted using multiple leaner regressions based on descriptive and inferential statistics on insurance companies over the study period of 2013–2022 G.C. In the same manner, the study used a random-effects regression model. The major finding of the study was that defensive interval ratio, cash ratio, current ratio, debtor’s turnover ratio, and age variables are positively and statistically significant determinates of performance. Among these, the outstanding claims ratio is negative and statistically significant at a 5% level. Conversely, gross domestic product and the size of the firms have a positive and statistically insignificant relationship with performance, and inflation has a negative relationship with performance. However, the strength of the variables, gross domestic product, inflation, and size, is insignificant at a 5% significance level. The study recommends that, in carrying out their financial decisions, insurance companies in Ethiopia should carefully ascertain and properly measure the effect of those significant variables in order to maximize their value.