From Solvency to Success: How Liquidity Risk Shapes Profitability in Kenyan Insurers
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2026-01
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IJARKE
Abstract
Despite the Kenya insurance industry recording consistent growth in premium income, over the period 2014 to 2022, performance data documented by the Insurance Regulatory Authority and the Association of Kenya Insurers indicates that profitability, quantified by Return on Assets and Return on Equity, has been on the decline over the period, though experiencing a spike in 2019. In June 2013 the Insurance Regulatory Authority established a comprehensive set of prudential risk management guidelines for the insurance industry in response to the failure and eventual liquidation of at least 9 insurance firms prior to 2013, primarily due to poor profitability. Nevertheless, despite insurance organizations adopting these regulatory measures, profitability continues demonstrating a downward trajectory throughout the specified period. Consequently, the empirical relationship between Liquidity risk exposure and insurance firm profitability remains theoretically un-established. This investigation aimed to ascertain the effect of liquidity risk on the profitability of insurance companies operating in Kenya. The theoretical framework incorporated modern portfolio theory, extreme value theory, agency theory, institutional theory and stakeholder theory. The study employed positivist philosophical approach and explanatory research methodology. The research encompassed a comprehensive examination of all 55 insurance entities registered with the Insurance Regulatory Authority in Kenya through 31st December 2022. Audited financial reports accessible through the Insurance Regulatory Authority and Association of Kenya Insurers digital platforms provided secondary data spanning 2014 through 2022. The Central Bank of Kenya and Kenya National Bureau of Standards supplied supplementary information. Analytical procedures encompassed descriptive statistics, panel regression methodology and Pearson's Product-Moment Correlation technique. The study found that liquidity risk exhibits positive and statistically significant effect on profitability. Consequently, the study recommends that since higher liquidity risk is associated with higher profitability, insurance firms can explore more aggressive investment strategies, such as investing in long-term, higher-return assets so as to leverage liquidity risk enhancing returns, while ensuring adequate risk buffers. Insurance Regulatory bodies in Kenya should also create policies that allow insurance firms to optimize their liquidity management strategies while ensuring financial stability.
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Gitau, K., Wamugo, L., & Omagwa, J. (2026). From solvency to success: How liquidity risk shapes profitability in Kenyan insurers. International Journal of Academics Research in Economics and Knowledge Engineering (IJARKE), 8(2). https://doi.org/10.32898/ibmj.01/8.2article07