Insurance Risks and Financial Performance of Insurance Companies in Kenya
DOI:
https://doi.org/10.53819/81018102t5151Abstract
The insurance industry is instrumental in economic growth through enabling protection, capital creation and promoting commerce. However, there has been a decline in the insurance industry's profitability in Kenya. Hence, the study assessed the effect of insurance risks on the financial performance of insurance companies in Kenya. Specifically, the study examined the effects of credit risk, liquidity risk, solvency risk, reinsurance risk and underwriting risk on financial performance of insurance companies in Kenya. GDP was used as a moderating variable. The study was anchored on agency theory, credit risk theory, liquidity preference theory and collective risk theory. The target population included all the 53 licensed insurance companies operating in Kenya since 2015. A census approach was used. Explanatory research design and positivism research philosophy were utilized. Secondary data was gathered from audited financial statements submitted to Insurance Regulatory Authority for the period between 2015 and 2020. With the aid of STATA, panel data was analysed through descriptive statistics, correlation and regression analyses. The multiple regression results revealed that credit risk had a negative significant effect on financial performance, liquidity risk had a negative significant effect on financial performance, solvency risk had a negative significant effect on financial performance and underwriting risk had a negative significant effect on financial performance. But reinsurance risk had a positive insignificant effect on financial performance. GDP growth rate significantly moderates the relationship between the insurance risks and the financial performance of insurance companies in Kenya. The study recommended that insurance companies should have good credit risk management frameworks to minimize credit risks, implement proper investment portfolio management to guard against liquidity risks, in cases of negative asset base, increase the share capital, cover most of their claims themselves but ensure they have adequate reinsurance where high risk investment is involved and put in place proper policy estimation and valuation techniques.
Keywords: Credit risk, liquidity risk, solvency risk, reinsurance risk, underwriting risk, GDP, financial performance, insurance companies, Kenya
References
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Aduda, J. (2011). The relationship between executive compensation and firm performance in the Kenyan banking sector. Journal of Accounting and Taxation, 3(6), 130-139.
Andoh, C., & Yamoah, S. A. (2021). Reinsurance and Financial Performance of Non-life Insurance Companies in Ghana. Management and Labour Studies, 46(2), 161-174. https://doi.org/10.1177/0258042X21989942
Anginer, D., Demirguc-Kunt, A., Huizinga, H., & Ma, K. (2018). Corporate governance of banks and financial stability. Journal of Financial Economics, 130(2), 327-346.https://doi.org/10.1016/j.jfineco.2018.06.011
Anthony, M. & David, F. (1997). Financial Risk Management by Insurers: An Analysis of the Process. The Journal of Risk and Insurance, 64(2), 231-270.https://doi.org/10.2307/253730
Baluch, F., Mutenga, S., & Parsons, C. (2011). Insurance, systemic risk and the financial crisis. The Geneva Papers on Risk and Insurance-Issues and Practice, 36(1), 26-163.https://doi.org/10.1057/gpp.2010.40
Bouriaux, S., & Scott, W. L. (2004). Capital market solutions to terrorism risk coverage: a feasibility study. Journal of Risk Finance, 5(4), 34.
Brown, K., & Moles, P. (2014). Credit risk management. K. Brown & P. Moles, Credit Risk Management, 16.https://doi.org/10.1108/eb023012
Caporale, G. M., Cerrato, M., & Zhang, X. (2017). Analysing the determinants of insolvency risk for general insurance firms in the UK. Journal of Banking & Finance, 84, 107-122.https://doi.org/10.1016/j.jbankfin.2017.07.011
Chen, R & Wong, K.A (2004). The determinants of financial health of Asian insurance companies’, The Journal of Risk and Insurance, 71(3), 469 - 499.https://doi.org/10.1111/j.0022-4367.2004.00099.x
Cooper, D & Schindler, P. (2003). Business Research Methods. 8th edn, McGraw-Hill, Countries. Journal of Risk and Insurance, 67, 489-506.
Cummins, J., Dionne, G., Gagne, R. & Nouira, A. (2008). The costs and benefits of reinsurance. https://doi.org/10.2139/ssrn.1142954
Dabo, Z., Andow, H., and James, K., (2018). Solvency risk and financial performance: evidences from listed insurance firm in Nigeria. Crawford journal of business & social sciences. Vol. 3 Issue. 2: 125-133.
Datu, N. (2016). How do Insurer Specific Indicators and Macroeconomic Factors affect the Profitability of Insurance Business? A Panel Data Analysis on the Philippine non-life Insurance Market. A paper presented at the DLSU Research Congress 4(1), 2449-3309.
Erick, T. K., Kefah, B. A., & Nyaoga, R. B. (2014). The relationship between executive compensation and Kenyan insurance companies’ financial performance. Research Journal of Finance and Accounting, 5(1), 113-122.
Fatemi, A., & Fooladi, I. (2006). Credit risk management: a survey of practices. Managerial Finance Vol. 32 Iss: 3, pp.227-233.https://doi.org/10.1108/03074350610646735
Feyen, E., Lester, R., & Rocha, R. (2011, February). What Drives the Development of the for Monetary and Economic Studies (IMES), 1-45.
Gathu, T. G. (2018). Effects of fraud risk management practices on net incurred medical claims in Kenyan insurance industry (Thesis). Strathmore University.
Hamal, (2020). Impact of firm specific factors on financial performance of life insurance companies in Nepal. European Journal of Economic and Financial Research, 3(1), 14-28.https://doi.org/10.3126/ijmss.v1i1.34510
He, Z., & Xiong, W. (2012). Rollover risk and credit risk. The Journal of Finance, 67(2), 391-430.https://doi.org/10.1111/j.1540-6261.2012.01721.x
Holton, G. A. 2004. Defining risk. Financial Analysts Journal 60: 19–25. https://doi.org/10.2469/faj.v60.n6.2669
Hong, H., Huang, J.Z., Wu, D. (2014), the information content of basel III liquidity risk. https://doi.org/10.2139/ssrn.2344944
Hoskisson, R., Hitt, M., Wan, W., &Yiu, D. (1999). Theory and research in strategic How Technology is Changing the Industry. Innovations and Insurance, 7(3); 51-66
Ibrahim M., F., Terzungwe, N., Lateef, O. Mustapha (2020). Insurance Specific Risk and Profitability: Evidence from Nigerian Insurance Firms, International Journal of Accounting, Finance and Risk Management. Vol. 5, No. 3, , pp. 141-148.https://doi.org/10.11648/j.ijafrm.20200503.13
Imbierowicz, B., & Rauch, C. (2014). The relationship between liquidity risk and credit risk in banks. Journal of Banking & Finance, 40, 242-256.
Isanzu, J. S. (2017). The Impact of Credit Risk on Financial Performance of Chinese Banks. Journal of International Business Research and Marketing, 2(3).
Ismail, M. (2013). Determinants of financial performance: The case of general takaful and insurance companies in Malaysia. International Review of Business Research Papers, 9(6), 111-130.
Jarrow, R. A., Lando, D., & Yu, F. (2005). Default risk and diversification: Theory and empirical implications. Mathematical Finance: An International Journal of Mathematics, Statistics and Financial Economics, 15(1), 1-26.
Kamau, A. M., Olweny, T., & Muturi, W. M. (2021). Financial Performance of Insurance Firms. Does Leverage and Liquidity Matter? Evidence from Kenya. Eastern Journal of Economics and Finance, 6(1), 1-14.
Kamau, F., & Njeru, A. (2016). Effect of Liquidity Risk on Financial Performance of Insurance Companies Listed at the Nairobi Securities Exchange. International Journal of Science and Research, 5(10), 867-872.
Kamanda, M., & Sibindi, A.B. (2021). Assessing the solvency, underwriting Risk and Profitability of the Kenyan Insurance Sector. AUDOE, Vol. 17, No. 5/2021, pp. 226-240
Keynes, J. M. (1989). The Collected Writings of John Maynard Keynes [JMK] 30 vols, London: Macmillan for the Royal Economic Society
Kiptoo, I. K., Kariuki, S. N., & Ocharo, K. N. (2021). Risk management and financial performance of insurance firms in Kenya. Cogent Business & Management, 8(1), 1997246.
Liargovas, P., & Skandalis, K. (2008). Factor affecting firm’s financial performance: The Case of Greece. Athens: University of Peloponnese Press.
Magezi, J.K. (2003). A New Framework for Measuring the Credit Risk of a Portfolio. Institute For, Monetary and Economic Studies (IMES), 1-45
Makau, L., & Okeyo, W. (2021). Risk Underwriting, Crisis Management, Regulatory
Framework and Performance of Insurance Companies in Kenya: A Case of Sanlam General Insurance Company. Journal of Human Resource & Leadership, 5(3).
Maseki, T. T., Kung’u, J. N., & Nderitu, J. W. (2019). Analysis of Selected Factors Influencing Kenyan insurance companies’ financial performance Listed at the NSE, Kenya. European Journal of Economic and Financial Research Vol 3, No 5, 48-65.
Maug, E. (1998). Large shareholders as monitors: Is there a trade‐off between liquidity and control? The journal of finance, 53(1), 65-98.
Mehari, D., & Aemiro, T. (2013). Firm Specific Factors that determine Insurance companies’ performance in Ethiopia. European scientific journal, 9(10).
Meher,K., & Zewudu, T., (2020). Determinants of Firm’s Internals & Macroeconomic Factors on financial Performance of Ethiopian Insurers. DLSU Business & Economics Review 29(2) 2020, p. 71-80
Merton, R. C. (1974). On the pricing of corporate debt: The risk structure of interest rates. The Journal of finance, 29(2), 449-470.
Muinde, A. M (2018) The Effect of financial risks on the Financial Performance of insurance companies listed at the Nairobi securities exchange in Kenya. International Journal of Economics, 3(2), 168-177.
Mulwa, G. K (2015) The Effect of Monetary Policy on the Financial Performance of Commercial Banks in Kenya
Mwangi, & Iraya, (2014). The determinants of financial performance in general insurance companies in Kenya. European Scientific Journal, 2(1), 288-297.
Ndunda, A. (2016). Effect of macro-economic factors on the performance of the equity market of Nairobi securities exchange (Doctoral dissertation, University of Nairobi).
Obonyo, S. (2016). The effect of reinsurance programmes on financial performance of general insurance companies in Kenya. MBA project, University of Nairobi, Kenya.
Ogada, A., Achoki, G., & Njuguna, A., (2016). moderating effect of economic growth on financial performance of merged institutions in Kenya. International Journal of Finance Vol.1, Issue 1 No.1, pp38 - 52, 2016
Ogilo, F. (2013). The impact of credit risk management on financial performance of commercial banks in Kenya. DBA Africa Management Review, 3(1).
Okotha, H. (2003). Corporate risk management: Costs and benefits. Global Finance Journal,
Omasete, (2014). The effect of risk management on financial performance of insurance companies in Kenya MBA project, University of Nairobi, Kenya.
Rejda, G. E. (2008). Principles of Risk Management and Insurance, Prentice Hall, 10 th Ed.
Saleh, Afifa, Murray (2020). The effect of credit risk, liquidity risk and bank capital on bank profitability: Evidence from an emerging market. Cogent Economics & Finance. Volume 8, 2020 - Issue 1.
Sangmi, M. and Nazir, T. (2010). Analyzing financial performance of commercial banks in India: Pak.Commer. Soc. Sci. 4(1), 40-55
Saunders A. & Cornett M. M (2008). Financial Institutions Management: A Risk Management
Sisay, Daniel. 2017. The Effect of Financial Risk on Performance of Insurance Companies in Ethiopia. Msc. Thesis. Addis Ababa University, Ethiopia
Stulz, T. (2010). An empirical investigation on the effect of growth on short term changes in loss ratios. Journal of Risk and Insurance, 76(4), 867-885.
Walde, I, G., Makori, D. (2022). Macroeconomic variables and financial performance of deposit taking microfinance institutions in Kenya. International Academic Journal of Economics and Finance, 3(7), 447-487.
Wang, S., & Faber, R. (2012). Enterprise risk management for property-casualty insurance companies. CAS and SOA Jointly Sponsored Research Project.
Ward, D. Z. (2000). Does Insurance Promote Economic Growth? Evidence from OECD
Whisman, M. A., & McClelland, G. H. (2005). Designing, testing, and interpreting interactions and moderator effects in family research. Journal of family psychology, 19(1), 111
Wilson, T. A. (2012). Supporting social enterprises to support vulnerable consumers: the example of community development finance institutions and financial exclusion. Journal of consumer policy, 35(2), 197-213.https://doi.org/10.1007/s10603-011-9182-5
Yatama, Ali, and Shamali, (2019). The effects of credit risk, operational risk and liquidity risk on the financial performance of insurance companies listed at Kuwait stock exchange. MDPI, Open Access Journal, Volume 3, Issue 6. York.
Aduda, J. (2011). The relationship between executive compensation and firm performance in the Kenyan banking sector. Journal of Accounting and Taxation, 3(6), 130-139.
Andoh, C., & Yamoah, S. A. (2021). Reinsurance and Financial Performance of Non-life Insurance Companies in Ghana. Management and Labour Studies, 46(2), 161-174. https://doi.org/10.1177/0258042X21989942
Anginer, D., Demirguc-Kunt, A., Huizinga, H., & Ma, K. (2018). Corporate governance of banks and financial stability. Journal of Financial Economics, 130(2), 327-346.https://doi.org/10.1016/j.jfineco.2018.06.011
Anthony, M. & David, F. (1997). Financial Risk Management by Insurers: An Analysis of the Process. The Journal of Risk and Insurance, 64(2), 231-270.https://doi.org/10.2307/253730
Baluch, F., Mutenga, S., & Parsons, C. (2011). Insurance, systemic risk and the financial crisis. The Geneva Papers on Risk and Insurance-Issues and Practice, 36(1), 26-163.https://doi.org/10.1057/gpp.2010.40
Bouriaux, S., & Scott, W. L. (2004). Capital market solutions to terrorism risk coverage: a feasibility study. Journal of Risk Finance, 5(4), 34.
Brown, K., & Moles, P. (2014). Credit risk management. K. Brown & P. Moles, Credit Risk Management, 16.https://doi.org/10.1108/eb023012
Caporale, G. M., Cerrato, M., & Zhang, X. (2017). Analysing the determinants of insolvency risk for general insurance firms in the UK. Journal of Banking & Finance, 84, 107-122.https://doi.org/10.1016/j.jbankfin.2017.07.011
Chen, R & Wong, K.A (2004). The determinants of financial health of Asian insurance companies’, The Journal of Risk and Insurance, 71(3), 469 - 499.https://doi.org/10.1111/j.0022-4367.2004.00099.x
Cooper, D & Schindler, P. (2003). Business Research Methods. 8th edn, McGraw-Hill, Countries. Journal of Risk and Insurance, 67, 489-506.
Cummins, J., Dionne, G., Gagne, R. & Nouira, A. (2008). The costs and benefits of reinsurance. https://doi.org/10.2139/ssrn.1142954
Dabo, Z., Andow, H., and James, K., (2018). Solvency risk and financial performance: evidences from listed insurance firm in Nigeria. Crawford journal of business & social sciences. Vol. 3 Issue. 2: 125-133.
Datu, N. (2016). How do Insurer Specific Indicators and Macroeconomic Factors affect the Profitability of Insurance Business? A Panel Data Analysis on the Philippine non-life Insurance Market. A paper presented at the DLSU Research Congress 4(1), 2449-3309.
Erick, T. K., Kefah, B. A., & Nyaoga, R. B. (2014). The relationship between executive compensation and Kenyan insurance companies’ financial performance. Research Journal of Finance and Accounting, 5(1), 113-122.
Fatemi, A., & Fooladi, I. (2006). Credit risk management: a survey of practices. Managerial Finance Vol. 32 Iss: 3, pp.227-233.https://doi.org/10.1108/03074350610646735
Feyen, E., Lester, R., & Rocha, R. (2011, February). What Drives the Development of the for Monetary and Economic Studies (IMES), 1-45.
Gathu, T. G. (2018). Effects of fraud risk management practices on net incurred medical claims in Kenyan insurance industry (Thesis). Strathmore University.
Hamal, (2020). Impact of firm specific factors on financial performance of life insurance companies in Nepal. European Journal of Economic and Financial Research, 3(1), 14-28.https://doi.org/10.3126/ijmss.v1i1.34510
He, Z., & Xiong, W. (2012). Rollover risk and credit risk. The Journal of Finance, 67(2), 391-430.https://doi.org/10.1111/j.1540-6261.2012.01721.x
Holton, G. A. 2004. Defining risk. Financial Analysts Journal 60: 19–25. https://doi.org/10.2469/faj.v60.n6.2669
Hong, H., Huang, J.Z., Wu, D. (2014), the information content of basel III liquidity risk. https://doi.org/10.2139/ssrn.2344944
Hoskisson, R., Hitt, M., Wan, W., &Yiu, D. (1999). Theory and research in strategic How Technology is Changing the Industry. Innovations and Insurance, 7(3); 51-66
Ibrahim M., F., Terzungwe, N., Lateef, O. Mustapha (2020). Insurance Specific Risk and Profitability: Evidence from Nigerian Insurance Firms, International Journal of Accounting, Finance and Risk Management. Vol. 5, No. 3, , pp. 141-148.https://doi.org/10.11648/j.ijafrm.20200503.13
Imbierowicz, B., & Rauch, C. (2014). The relationship between liquidity risk and credit risk in banks. Journal of Banking & Finance, 40, 242-256.
Isanzu, J. S. (2017). The Impact of Credit Risk on Financial Performance of Chinese Banks. Journal of International Business Research and Marketing, 2(3).
Ismail, M. (2013). Determinants of financial performance: The case of general takaful and insurance companies in Malaysia. International Review of Business Research Papers, 9(6), 111-130.
Jarrow, R. A., Lando, D., & Yu, F. (2005). Default risk and diversification: Theory and empirical implications. Mathematical Finance: An International Journal of Mathematics, Statistics and Financial Economics, 15(1), 1-26.
Kamau, A. M., Olweny, T., & Muturi, W. M. (2021). Financial Performance of Insurance Firms. Does Leverage and Liquidity Matter? Evidence from Kenya. Eastern Journal of Economics and Finance, 6(1), 1-14.
Kamau, F., & Njeru, A. (2016). Effect of Liquidity Risk on Financial Performance of Insurance Companies Listed at the Nairobi Securities Exchange. International Journal of Science and Research, 5(10), 867-872.
Kamanda, M., & Sibindi, A.B. (2021). Assessing the solvency, underwriting Risk and Profitability of the Kenyan Insurance Sector. AUDOE, Vol. 17, No. 5/2021, pp. 226-240
Keynes, J. M. (1989). The Collected Writings of John Maynard Keynes [JMK] 30 vols, London: Macmillan for the Royal Economic Society
Kiptoo, I. K., Kariuki, S. N., & Ocharo, K. N. (2021). Risk management and financial performance of insurance firms in Kenya. Cogent Business & Management, 8(1), 1997246.
Liargovas, P., & Skandalis, K. (2008). Factor affecting firm’s financial performance: The Case of Greece. Athens: University of Peloponnese Press.
Magezi, J.K. (2003). A New Framework for Measuring the Credit Risk of a Portfolio. Institute For, Monetary and Economic Studies (IMES), 1-45
Makau, L., & Okeyo, W. (2021). Risk Underwriting, Crisis Management, Regulatory
Framework and Performance of Insurance Companies in Kenya: A Case of Sanlam General Insurance Company. Journal of Human Resource & Leadership, 5(3).
Maseki, T. T., Kung’u, J. N., & Nderitu, J. W. (2019). Analysis of Selected Factors Influencing Kenyan insurance companies’ financial performance Listed at the NSE, Kenya. European Journal of Economic and Financial Research Vol 3, No 5, 48-65.
Maug, E. (1998). Large shareholders as monitors: Is there a trade‐off between liquidity and control? The journal of finance, 53(1), 65-98.
Mehari, D., & Aemiro, T. (2013). Firm Specific Factors that determine Insurance companies’ performance in Ethiopia. European scientific journal, 9(10).
Meher,K., & Zewudu, T., (2020). Determinants of Firm’s Internals & Macroeconomic Factors on financial Performance of Ethiopian Insurers. DLSU Business & Economics Review 29(2) 2020, p. 71-80
Merton, R. C. (1974). On the pricing of corporate debt: The risk structure of interest rates. The Journal of finance, 29(2), 449-470.
Muinde, A. M (2018) The Effect of financial risks on the Financial Performance of insurance companies listed at the Nairobi securities exchange in Kenya. International Journal of Economics, 3(2), 168-177.
Mulwa, G. K (2015) The Effect of Monetary Policy on the Financial Performance of Commercial Banks in Kenya
Mwangi, & Iraya, (2014). The determinants of financial performance in general insurance companies in Kenya. European Scientific Journal, 2(1), 288-297.
Ndunda, A. (2016). Effect of macro-economic factors on the performance of the equity market of Nairobi securities exchange (Doctoral dissertation, University of Nairobi).
Obonyo, S. (2016). The effect of reinsurance programmes on financial performance of general insurance companies in Kenya. MBA project, University of Nairobi, Kenya.
Ogada, A., Achoki, G., & Njuguna, A., (2016). moderating effect of economic growth on financial performance of merged institutions in Kenya. International Journal of Finance Vol.1, Issue 1 No.1, pp38 - 52, 2016
Ogilo, F. (2013). The impact of credit risk management on financial performance of commercial banks in Kenya. DBA Africa Management Review, 3(1).
Okotha, H. (2003). Corporate risk management: Costs and benefits. Global Finance Journal,
Omasete, (2014). The effect of risk management on financial performance of insurance companies in Kenya MBA project, University of Nairobi, Kenya.
Rejda, G. E. (2008). Principles of Risk Management and Insurance, Prentice Hall, 10 th Ed.
Saleh, Afifa, Murray (2020). The effect of credit risk, liquidity risk and bank capital on bank profitability: Evidence from an emerging market. Cogent Economics & Finance. Volume 8, 2020 - Issue 1.
Sangmi, M. and Nazir, T. (2010). Analyzing financial performance of commercial banks in India: Pak.Commer. Soc. Sci. 4(1), 40-55
Saunders A. & Cornett M. M (2008). Financial Institutions Management: A Risk Management
Sisay, Daniel. 2017. The Effect of Financial Risk on Performance of Insurance Companies in Ethiopia. Msc. Thesis. Addis Ababa University, Ethiopia
Stulz, T. (2010). An empirical investigation on the effect of growth on short term changes in loss ratios. Journal of Risk and Insurance, 76(4), 867-885.
Walde, I, G., Makori, D. (2022). Macroeconomic variables and financial performance of deposit taking microfinance institutions in Kenya. International Academic Journal of Economics and Finance, 3(7), 447-487.
Wang, S., & Faber, R. (2012). Enterprise risk management for property-casualty insurance companies. CAS and SOA Jointly Sponsored Research Project.
Ward, D. Z. (2000). Does Insurance Promote Economic Growth? Evidence from OECD
Whisman, M. A., & McClelland, G. H. (2005). Designing, testing, and interpreting interactions and moderator effects in family research. Journal of family psychology, 19(1), 111
Wilson, T. A. (2012). Supporting social enterprises to support vulnerable consumers: the example of community development finance institutions and financial exclusion. Journal of consumer policy, 35(2), 197-213.https://doi.org/10.1007/s10603-011-9182-5
Yatama, Ali, and Shamali, (2019). The effects of credit risk, operational risk and liquidity risk on the financial performance of insurance companies listed at Kuwait stock exchange. MDPI, Open Access Journal, Volume 3, Issue 6. York.
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Published
2023-04-18
How to Cite
Mutua, B. M. ., Wamugo, L. . ., & Theuri, J. . (2023). Insurance Risks and Financial Performance of Insurance Companies in Kenya. Journal of Finance and Accounting, 7(2), 43–68. https://doi.org/10.53819/81018102t5151
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