The Impact of Loss Ratio on the Financial Stability of Insurance Firms in Kenya
DOI:
https://doi.org/10.53819/81018102t4161Abstract
The insurance sector is an essential component for the continued expansion and prosperity of the economy. It is the responsibility of the insurance industry to secure the continued existence of enterprises, to disperse the risk that is caused by financial losses, and to work toward eradicating uncertainty in the minds of investors. Despite the important role of the insurance sector in the economy, firms operating in this sector have been having trouble maintaining their financial stability. The insurance sector has faced considerable volatility in profitability, resulting in some firms being placed under receivership or even going out of firm. The purpose of this study was to analyse the effect of loss ratio on financial stability of insurance firms in Kenya. The study was anchored on the Theory of Distress by Wreckers. The research was conducted using an explanatory research design, and the positivist philosophical approach was utilized. The target population for this study consisted of the 46 insurance firms that held IRA licenses and were operating during the time period under consideration (2014-2021). The census method was utilized for the research thesis, which focused on all 46 insurance firms in Kenya. The study used secondary data obtained from audited financial statements, which were publicly available on the websites of individual insurance firms. To gather panel data for the study, a secondary data collection template was employed. In order to draw conclusions from the data that was gathered, this study employed both descriptive and inferential statistical methods. The study employed a generalized method of moments modelling guided by static panel regression. The data processing was done using the Stata software. The research findings were presented through the use of tables and trend line graphs. The study adhered to research ethics guidelines. The findings of this study showed that loss ratio had a significant negative influence on the financial stability of Kenyan insurance companies (β = -0.5795373, p = 0.002 < .05).The study concludes that loss ratios and capital adequacy plays a significant role in the financial stability of insurance firms. A lower loss ratio indicates a more efficient underwriting process and risk management, contributing to better financial performance and stability. As a result, the study recommends that to enhance their financial stability, general insurers in Kenya should manage their loss ratio. It's also recommended that Kenya should adhere to the principles of the Solvency II framework.
Keywords: Loss Ratio, Insurance Firms, Claims Management, Financial Stability, Kenya
References
Agung, R., Atiti, F., & Kimani, S. (2019). Competition and Banking Sector Stability in Kenya. Kenya Bankers Working Paper Series.
Al-Fayoumi, N. A., & Al-Smadi, A. M. (2019). The effect of loss ratio on financial stability: evidence from Jordanian insurance sector. International Journal of Economics, Commerce and Management, 7(8), 13-28.
Alhassan, A. L., Addisson, G. K., & Asamoah, M. E. (2015). Market structure, efficiency and profitability of insurance firms in Ghana. International Journal of Emerging Markets. 7(4), 982-1000. https://doi.org/10.1108/IJoEM-06-2014-0173
Altman EI, Iwanicz-Drozdowska M, Laitinen EK, (2017) Financial Distress Prediction in an International Context: A Review and Empirical Analysis of Altman's Z-Score Model. J Int Financ Manage Account 28: 131–171. doi: 10.1111/jifm.12053
Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The review of economic studies, 58(2), 277-297. https://doi.org/10.2307/2297968
Arrow, K. J. (1962). Economic welfare and the allocation of resources for invention. In The rate and direction of inventive activity: Economic and social factors (pp. 609-626). Princeton University Press. https://doi.org/10.1515/9781400879762-024
Bai, J., &Perron, P. (1998). Estimating and testing linear models with multiple structural changes. Econometrica, 47-78. https://doi.org/10.2307/2998540
Barakat, F. S., Hussein, J., Mahmoud, O. A., &Bayyoud, M. (2022). Analysis of the Factors Affecting the Financial Performance of Insurance firms Listedlisted on Theon the Palestine Stock Exchange. Indian Journal of Finance and Banking, 9(1), 213-229. https://doi.org/10.46281/ijfb.v9i1.1679
Batool, A., &Sahi, A. (2019). Determinants of financial performance of insurance firms of USA and UK during global financial crisis (2007–2016). International Journal of Accounting Research, 7(1), 1-9. https://doi.org/10.35248/2472-114X.19.7.194
Ben-Dhiab, L. (2021). Determinants of Insurance Firms' Profitability: An Empirical Study of Saudi Insurance Market. The Journal of Asian Finance, Economics and Firm, 8(6), 235-243.
Boloupremo, T., &Ogege, S. (2021). Effects of Supervision on Financial Stability and Performance of Insurance Firms in Nigeria. Acta Universitatis Danubius. Œconomica, 17(4).
Bushman, R. M. (2014). Thoughts on financial accounting and the banking industry. Journal of Accounting and Economics, 58(2-3), 384-395. https://doi.org/10.1016/j.jacceco.2014.09.004
Casu, B., Girardone, C., & Molyneux, P. (2016). Introduction to banking (Vol. 10). Pearson education.
Chan, W. H., & Wong, K. L. (2019). Inflation and financial stability in Hong Kong. Journal of Asian Economics, 63, 1-14.
Chen, L., &Zhai, W. (2018). The effect of loss ratio on financial stability: evidence from Chinese property and casualty insurance firms. The Geneva Papers on Risk and Insurance - Issues and Practice, 43(2), 301-325. https://doi.org/10.1007/978-3-030-33416-1_14
Chen, Y., &Markatou, M. (2020). Kernel tests for one, two, and k-sample goodness-of-fit: state of the art and implementation considerations. Statistical Modeling in Biomedical Research, 309-337.
Cutler, D. R., & Ellis, P. M. (2005). A simple model to predict loss ratios in the domestic stock property-liability insurance industry. Quarterly Journal of Firm and Economics, 129-139.
D’Arcy, S. P., Au, A., & Zhang, L. (2018, June). Property-liability insurance loss reserve ranges based on economic value. In Casualty Actuarial Society E-Forum, Fall 2008 (p. 98).
Dungey, M. H., Luciani, M., &Veredas, D. (2014). The emergence of systemically important insurers. CIFR Paper No. WP038, FIRN Research Paper, (2494030). https://doi.org/10.2139/ssrn.2494030
Emerson, R. W. (2015). Causation and Pearson's correlation coefficient. Journal of visual impairment & blindness, 109(3), 242-244. https://doi.org/10.1177/0145482X1510900311
Field, M., &Golubitsky, M. (2009). Symmetry in chaos: a search for pattern in mathematics, art, and nature. Society for Industrial and Applied Mathematics. https://doi.org/10.1137/1.9780898717709
Friedman, M. (1962). Capitalism and Freedom. University of Chicago Press.
Grace, M. F., & Hotchkiss, J. L. (2015). External impacts on the property-liability insurance cycle. Journal of Risk and Insurance, 738-754. https://doi.org/10.2307/253593
Gravetter, F. J. W., & Larry, B. (2016). Forzano, Lori-Ann B. Essentials of Statistics for The Behavioral Sciences.
Gujarati, D. N. (2021). Essentials of econometrics. SAGE Publications.
Haiss, P. &Šumi, R. (2008). The relationship between insurance and economic growth in Europe: a theoretical and empirical analysis. Empirica, 35(4), 405-431. https://doi.org/10.1007/s10663-008-9075-2
Hale, A. (1984). A discourse pecking order. Theory and Application in processing texts in non-Indoeuropean languages, Papers in Textlinguistics, 43, 1-24.
Hsiao, C. (2007). Panel data analysis—advantages and challenges. Test, 16(1), 1-22. https://doi.org/10.1007/s11749-007-0046-x
Jordan, T. J. (2018). How money is created by the central bank and the banking system. Speech at the ZürcherVolkswirtschaftliche Gesellschaft, Zurich, 16.
Kaya, E. Ö. (2015). The effects of firm-specific factors on the profitability of non-life insurance firms in Turkey. International Journal of Financial Studies, 3(4), 510-529. https://doi.org/10.3390/ijfs3040510
Khodayari, M., Razeghi, F., &Rostamy-Malkhalifeh, M. (2020). The impact of loss ratio on financial stability: evidence from Iranian insurance firms. Asia-Pacific Journal of Risk and Insurance, 14(1), 1-19.Kigen, W. K. (2014). The effect of firm size on profitability of insurance firms in Kenya (Doctoral dissertation, University of Nairobi).
Kim, D., Paggi, J. M., Park, C., Bennett, C., &Salzberg, S. L. (2019). Graph-based genome alignment and genotyping with HISAT2 and HISAT-genotype. Nature biotechnology, 37(8), 907-915. https://doi.org/10.1038/s41587-019-0201-4
Kiragu, S. M. (2014). Assessment of challenges facing insurance firms in building competitive advantage in Kenya: A survey of insurance firms. International journal of social sciences and entrepreneurship, 1(11), 467-490.
Kor, Y. Y., Mahoney, J. T., & Michael, S. C. (2007). Resources, capabilities and entrepreneurial perceptions. Journal of management studies, 44(7), 1187-1212. https://doi.org/10.1111/j.1467-6486.2007.00727.x
Lee, D. W., & Park, H. (2019). Inflation and financial stability: evidence from Korean insurance firms. Journal of Insurance Issues, 42(1), 1-21.
Lee, S. H., & Kim, H. J. (2013). Analysis of financial distress in the insurance industry using the Altman Z-score and firm risk factors. Journal of Risk and Insurance, 80(3), 701-723.
Maina, J. N., Muriithi, M. J., Meeme, M. M., &Kinyariro, D. K. (2016). Implications of Basel iii accord adherence on financial distress status of commercial banks in Kenya.
Maina, M. W. (2018). Effects of Revenue Diversification on Financial Performance of Commercial Banks in Kenya (Doctoral dissertation, University of Nairobi).
Manaseer, S., & Al-Oshaibat, S. D. (2018). Validity of Altman Z-score model to predict financial failure: Evidence from Jordan. International Journal of Economics and Finance, 10(8). https://doi.org/10.5539/ijef.v10n8p181
Muduli, A., &Raval, D. (2018). Examining the role of work context, transfer design and transfer motivation on training transfer: Perspective from an Indian insurance industry. European Journal of Training and Development. https://doi.org/10.1108/EJTD-09-2017-0078
Murigu, J. W. (2014). The determinants of financial performance in general insurance firms in Kenya (Doctoral dissertation, University of Nairobi).
Muriuki, W. R., &Mutugi, M. T. (2017). The Effect of IRA Regulation on Insurance Penetration in Kenya.
Murtagh, F., & Heck, A. (2012). Multivariate data analysis (Vol. 131). Springer Science &Firm Media.
Mwangi, G. (2017). Effects of Macroeconomic Variables on Financial Perfomance of Insurance Firms in Kenya (Doctoral dissertation, United States International University-Africa).
Mwangi, P. W. (2019). Factors Affecting Financial Performance in the Kenyan Non-Life Insurance Sector (Doctoral dissertation, University of Nairobi).
Nwosa, P. I., & Mustapha, Z. B. (2017). The dynamics of insurance development and economic growth in Nigeria. The Indian Economic Journal, 65(1-4), 37-44.
Outreville, J. F. (2013). The relationship between insurance and economic development: 85 empirical papers for a review of the literature. Risk Management and Insurance Review, 16(1), 71-122. https://doi.org/10.1111/j.1540-6296.2012.01219.x
Oyekale, A. S., Omobitan, O. M., & Afolabi, M. O. (2018). Loss ratio and financial stability: evidence from Nigerian insurance firms. Journal of Risk and Financial Management, 11(1), 1-19.
Pesaran, M. H., & Zhou, Q. (2018). Estimation of time-invariant effects in static panel data models. Econometric Reviews, 37(10), 1137-1171. https://doi.org/10.1080/07474938.2016.1222225
Pfeifer, D., &Langen, V. (2021). Insurance firm and Sustainable Development. arXiv preprint arXiv:2102.02612. https://doi.org/10.5772/intechopen.96389
Pindado, J., &Requejo, I. (2015). Panel data: A methodology for model specification and testing. Wiley encyclopedia of management, 1-8. https://doi.org/10.1002/9781118785317.weom040013
Rahman, S. M. K., Chowdhury, M. A. F., & Tania, T. C. (2021). Nexus among Bank Competition, Efficiency and Financial Stability: A Comprehensive Study in Bangladesh. The Journal of Asian Finance, Economics, and Firm, 8(2), 317-328.
Ridwan, M., Ulupui, I. G. K. A., & Ahmad, G. N. (2022). The impact of total equity, risk-based capital ratio, adequacy investment ratio, direct premium receivable ratio, liquidity ratio, and loss ratio toward the early warning system of general insurance. The International Journal of Social Sciences World (TIJOSSW), 4(1), 11-27.
Sasidharan, S., Ranjith, V. K., &Prabhuram, S. (2023). What determines the financial performance micro or macro antecedents: A case of Indian general insurance. Journal of Corporate Accounting & Finance, 34(2), 11-22. https://doi.org/10.1002/jcaf.22592
Smith, M. P. (2019). Shareholder activism by institutional investors: Evidence from CalPERS. The journal of finance, 51(1), 227-252. https://doi.org/10.1111/j.1540-6261.1996.tb05208.x
Soye, Y. A., Adeyemo, D. L., & Ayo, J. (2017). Evaluation of impact of loss ratio mechanism on insurance firms’ sustainability in Nigeria. International Journal of Research, Innovations and Sustainable Development, 7(1), 1-14.
Stojkoski, V., Jolakoski, P., &Ivanovski, I. (2021). The short‐run impact of COVID‐19 on the activity in the insurance industry in the Republic of North Macedonia. Risk Management and Insurance Review, 24(3), 221-242. https://doi.org/10.1111/rmir.12187
Thompson, E. K., & Kim, S. Y. (2022). An Investigation of the Korean General Insurance Industry: Evidence of Structural Changes and Impact of Macro-economic Factors on Loss Ratios. East Asian Mathematical Journal, 38(5), 617-641.
Turgaeva, A. A., Kashirskaya, L. V., Zurnadzhyants, Y. A., Latysheva, O. A., Pustokhina, I. V., &Sevbitov, A. V. (2020). Assessment of the financial stability of insurance firms in the organization of internal control. Entrepreneurship and Sustainability Issues, 7(3), 2243. https://doi.org/10.9770/jesi.2020.7.3(52)
Ulate, M. (2019, September). Going negative at the zero lower bound: The effects of negative nominal interest rates. Federal Reserve Bank of San Francisco. https://doi.org/10.24148/wp2019-21
Valckx, N., Chan-Lau, J. A., Feng, A., Huston, B., Impavido, G., Jobst, A. A., & Yan, K. (2016). The Insurance Sector-Trends and Systemic Risk Implications. Global Financial Stability Report, IMF. https://doi.org/10.2139/ssrn.2795694
Varenik, V. N., Рestovskaya, Z. S., &Opaliichuk, A. V. (2016). Modern approaches to development of motor insurance as a means of protection against financial losses. Економічнийнобелівськийвісник, (1), 48-55.
Vera, O. M. (2020). The moderating effect of inflation on the relationship between foreign direct investment, financial market development and economic growth in Kenya. A research project submitted to the school of firm in partial fulfilment of the requirement for the award of the degree of master of firm administration (finance) of Kenyatta University.
Wahome, M. N. (2018). The influence of firm-specific factors on capital structure of insurance firms in Kenya (Doctoral dissertation).
Walela, E., Omagwa, J., &Muathe, S.(2022). Financial Risk and Financial Distress: What we learn from firms listed at the Nairobi Securities Exchange, Kenya. https://doi.org/10.21467/ajss.10.1.88-102
Wang, C., Du, B., Yang, J., & Zhang, Y. (2021). Inflation and financial stability: evidence from Chinese banks. Journal of Asian Economics, 77, 1-14.
Wathudura, S. M., & Weerasinghe, W. D. J. D. (2021). Impact of Claim Management on Profitability of Listed Insurance firms in Sri Lanka.
Xie, J., Park, S. K., Chung, K., & Chung, J. M. (2021). The effect of lumbar sympathectomy in the spinal nerve ligation model of neuropathic pain. The Journal of Pain, 2(5), 270-278. https://doi.org/10.1054/jpai.2001.24559
Yan, Y., & Faure, M. (2021). Government interventions in microinsurance: evidence from China. The Geneva Papers on Risk and Insurance-Issues and Practice, 46(3), 440-467. https://doi.org/10.1057/s41288-020-00202-6
