Risk Based Supervision and Profitability of Insurance Companies in Kenya
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Date
2025-03
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Publisher
Kenyatta University
Abstract
This research aimed to examine the effect of Risk-Based Supervision (RBS) standards on the financial performance of insurance companies in Kenya. The primary aim was to analyze how different RBS components—capital adequacy, actuarial valuations, investment assessments, and risk management—affected the financial performance of these companies. Additionally, the research explored the moderating effect of firm size on the relationship between RBS guidelines and profitability. A correlational research design was employed, utilizing a census approach to cover all 54 licensed insurance companies in Nairobi County. Data were collected through structured questionnaires and secondary financial records spanning a decade (2012-2022). The study used both descriptive and inferential statistical methods, including correlation and regression analyses, to examine the relationships between RBS guidelines and profitability. The model's significance was assessed using R-squared values, F-statistics, and p-values. To determine the moderating effect of firm size, a two-step linear regression analysis was conducted. The research anticipated that adherence to RBS guidelines would positively influence profitability, with firm size potentially amplifying or mitigating these effects. Findings offered insights into how regulatory frameworks impacted financial performance in the insurance sector and provided recommendations for enhancing regulatory practices to support industry profitability. As per the study, the profitability of insurance businesses in Kenya is significantly impacted negatively by capital adequacy (β = -1.07283, p<0.05), actuarial values (β = -0.75836, p<0.05), and investment assessment (β = -3.64890, p<0.05). There was a positive but statistically insignificant effect (β=0.097872, p>0.05) for risk management. No substantial moderating effect of firm size on the connection between Risk-Based Supervision guidelines and profitability was seen (β=0.0248, p>0.05). The model explained 47.85% of profitability variation (R-squared=0.4785). The study concluded that while regulatory measures and risk management practices are crucial for financial stability, they can have unintended negative impacts on short-term profitability. The negative effects of capital adequacy, actuarial valuations, and investment assessments suggest a need for more balanced approaches. The lack of significant moderation by firm size indicates that the impacts of Risk-Based Supervision guidelines are consistent across different company sizes, emphasizing the need for sector-wide strategies to manage these effects. The study recommended that regulators and insurance companies should collaboratively review capital adequacy requirements to balance stability and profitability. Develop more efficient actuarial and investment assessment processes to mitigate short-term negative impacts. Companies should enhance their investment strategies to better align with profitability goals while maintaining robust risk management practices
Description
A Research Thesis submitted to the School of Business, Economics and Tourism in Partial Fulfilment of the Requirement for the Award of Degree of Masters of Science (Finance Option) of Kenyatta University, March 2025.
Supervisor
Farida Abdul