Fundamental Risk Factors and Financial Performance of Insurance Firms in Kenya
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Date
2024-09
Journal Title
Journal ISSN
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Publisher
Research Publish Journals
Abstract
The financial performance of Insurance firms plays a vital role in increasing the sector's market value
and leads to the economy's overall growth. There exists substantial empirical literature on fundamental risk
factors and the financial performance of commercial banks and microfinance institutions. However, few studies
have delved much into the relationship between fundamental risk factors and the financial performance of
Insurance firms. The downward financial performance trend of the Insurance firms in Kenya is a cause for
concerns among various stakeholders. The financial performance has shown a downward trend from 2011 to 2018
before a little bullish movement in 2019. The study investigates the effect of fundamental risk factors on the
financial performance of Insurance firms in Kenya. Operating ratio measured financial performance for the
Insurance firms as applied by the Insurance regulatory authority. The study's specific objectives are to determine
the effect of inflation, exchange rates, and interest rates on the financial performance of Kenya's insurance firms.
The study further establishes the moderating effect of capital adequacy on the relationship between fundamental
risk factors and the financial performance of the Insurance firms in Kenya. This study adopts Positivism
philosophy and an Explanatory research design. The study the Modern portfolio theory, expectations, and the
Liquidity preference theory. The study uses quarterly data obtained from the insurance firms in Kenya and uses
STATA software to analyze. Data analysis through Descriptive statistics, Pearson's simple correlation, Time-series
regression analysis over a time scope of 10 years, Interest rates have a positive but not statistically significant effect
on operating ratio as indicated by the p value (P = 0.081 < 0.05). Furthermore, Inflation rates has positive but
statistically insignificant effect on Fundamental risk factors with p value (P = 0.863 < 0.05), exchange rate has a
positive statistically significant effect on operating ratio (P = 0.000 < 0.05). rom 2014-2021. The hypothesis was
tested at the 0.05 level of significance; findings reveal that Interest rates have a positive but statistically
insignificant effect on operating ratio at p value of 0.081. Furthermore, Inflation rates has positive but statistically
insignificant effect on Financial performance with p value (P=0.863), exchange rate has a positive statistically
significant effect on operating ratio (P = 0.000). Therefore, the research suggests the insurance firms should be
keen to quantify and control the effect of foreign exchange gain or loss on their financial performance The firms
should also take into account the impact of interest and exchange rates to mitigate the impact of their volatility on
financial performance
Description
Research Article
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Citation
Sifuna, D., Omagwa, J., & Mutswenje, V. (2024). Fundamental risk factors and financial performance of insurance firms in Kenya. International Journal of Management and Commerce Innovations, 12(1), 210–228. Research Publish Journals. https://www.researchpublish.com