Financial Factors and Financial Performance in Insurance Companies in Kenya

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Gachibi, Gakinya Fredrick
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Kenyatta University
lot of efforts have been put in to hasten the uptake of the insurance industry including high level of advertisements, but the penetration rate remains very low, currently at 3%. The sector is faced with many challenges/constraints that inhibit its growth, and restrict the ability to attain the desired level of performance. This partly is attributed to financial factors in the insurance sector. The cost of premiums is one of the factors that may be affecting penetration alongside, industry competition with many companies offering similar products. Level of trust among the potential clients is another factor which continues to diminish as a result of the bureaucratic process of a claim. This study aimed at investigating the financial factors that lead to financial performance in several insurance firms in Kenya, within the confines of four specific objectives: to assess the influence of fluctuating interest rates on deposits on financial performance of insurance companies in Kenya, to determine the influence of premium management on financial performance of insurance companies in Kenya, to determine the influence of leverage on financial performance of insurance companies in Kenya and to establish the influence of liquidity on financial performance of insurance companies in Kenya. The study was anchored on four theories which included liquidity preference theory, Expectations theory, Capital asset pricing model and Gordon model. This study used descriptive survey design to evaluate the financial factors. The target population comprised of the 55 Insurance companies in Kenya as listed by the IRA in 2017. The study used secondary data. Data was analyzed using SPSS. Statistical techniques used in analysis were descriptive and inferential statistics. Results were presented using the measures of central tendencies. The research findings revealed that liquidity and profitability had positive and significant relations with financial performance of insurance companies in Kenya. There was a one percent increase in liquidity which lead to an increase in profitability by 4.34%. Regression analysis showed that leverage had a coefficient of 3.36 and a p-value of 0.00033, indicating a positive statistical significance. Regression results also revealed that interest rate on deposits and profitability were positively and significantly related, where a one percent increase in interest rate on deposits, leads to an increase in profitability by 0.3%. Regression analysis indicated that insurance premium had a coefficient of -15.96 and a p-value of 0.00014 dictating that poor management of premiums by insurance companies has a reverse effect on profitability and financial prudence of insurance companies. The study concluded that it is essential that insurance companies have a comprehensive risk management system put in place that effectively measures, identifies, controls and monitors exposures of the interest rate risk, subject to proper senior management and board supervision, and that insurance companies should have a sound process for measuring, identifying, controlling and monitoring liquidity. Insurance companies should strive to enforce best management practices that enhance profitability and ensure that it is sustained.
A Research Project Submitted to the School of Business in Partial Fulfilment of the Requirements for the Award of the Degree of Master of Business Administration (Finance) of Kenyatta University, May, 2021
Financial Factors, Financial Performance, Insurance Companies, Kenya