Firm Characteristics and Financial Performance of Insurance Companies in Kenya
Mukami, Ireri Lilian
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The insurance industry in Kenya has been experiencing an overall decline in its financial performance as indicated in the reducing trend in the total industry’s ROA since 2015. The sector has also been posting underwriting losses with several classes of insurance business registering overall losses from 2015 to 2020. The classes are: aviation, fire domestic, motor private, motor commercial and medical. As a result, some underwriters such as Invesco Assurance and Amaco Limited have undergone liquidation bids due to their inability to settle claims on time. The insurance sector’s level of input to the country’s Gross Domestic Product has ultimately continued to remain low as it gradually diminishes. Insurance underwriters are thus faced with the dilemma of maintaining a strong financial performance which is critical to their health, survival and ability to sustain a competitive advantage. This study hence purposed to “determine the effect of firm characteristics on the financial performance of insurance companies in Kenya.” The research was guided by the following specific objectives: “to determine the effect of incurred claims on the financial performance of insurance companies in Kenya; to establish the effect of leverage on the financial performance of insurance companies in Kenya; to determine the effect of premium growth on the financial performance of insurance companies in Kenya; to establish the effect of liquidity on the financial performance of insurance companies in Kenya and to determine the effect of firm age on the financial performance of insurance companies in Kenya. The study reviewed the transaction theory of the firm, the trade-off theory, the agency theory, liquidity preference theory and the resource-based theory. A descriptive research design was employed. All the 56 Kenyan insurers were the population of the study. A census of all the insurers that were in operation from 2015 to 2020 was conducted. Collection of secondary panel data from insurers’ audited and published annual financial statements from the year 2015 to 2020 took place. All the data was extracted from the Insurance Regulatory Authority website. A data collection guide was the main data collection instrument. The study employed the STATA 14 software to run both the descriptive and inferential statistics; findings were presented via tables and graphs. Variables were analyzed using a panel regression model; a Hausman Specification test revealed that the ideal model for analysis was the Random Effects Model. Findings indicated that incurred claims had a negative and statistically significant effect on insurers’ financial performance. On the other hand, a positive and statistically significant association was found between leverage, premium growth, liquidity, firm age and insurer’s financial performance. The study recommends embracing of innovations and new technology such as smart assurance applications and insure techs so as to minimize the cost of policyholder enrolment, claims settlement and even encourage access to tailor made policies which will result in a surge in premium growth, cost minimization, improved customer satisfaction and ultimately improve how insurers’ perform financially.
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