Firm Specific Factors and the Profitability of Listed Non-Life Insurance Firms in Kenya
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Date
2024-07
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Publisher
Kenyatta University
Abstract
Insurance as a subset of the financial industry plays a critical function in economic growth of countries across the globe inclusive of Kenya. The subsector drives economic sustainability by ensuring the indemnification of the stakeholders and clients covered in the various policies. This is achieved mainly through recompense of parties with insurable interest thus insulating them against economic losses. While the insurance sector’s contribution to gross domestic product (also referred to as insurance penetration) in Kenya is relatively low (2.24% in 2021) compared to other major sectors such as agriculture, the sector can be considered as one of the key economic performance enablers. Despite the roles played by the insurance sectors especially non-life insurance which accounted for 55.2 percent of the total Kenya underwritten insurance premium as of 2021, the sector has witnessed performance hurdles especially in the recent past with occurrence of a persistence underwriting loss. A similar trend is also witnessed among the listed non-life insurance firms who recorded mostly negative before profit tax albeit. This continued negative performance forms the crux of the problem as to the dire implication of a flailing insurance industry on economic growth. The cost of premiums rise, insufficient economic loss/financial protection is provided to industries, and destabilization of the financial sector are some of the aftereffects of a poorly performing insurance industry. Thus, the study aimed at estimating the effect of firm specific factors on profitability for listed non-life insurance firms in Kenya to inure the industry, stakeholders and policymakers with further knowledge to improve the sector. Against this backdrop, balanced panel data for the four listed non-life insurance firms in Kenya covering 2015- 2022 period obtained from annual financial statements of these firms was analyzed to achieve the objective of this study which was to estimate the effect of firm specific factors on profitability of listed non-life insurance firms in Kenya. The estimation of the econometric model used the endogenous variables, return on assets (ROA) and return on equity (ROE) as measures of profitability based on the profit maximization concept as envisaged by theory of the firm with a linearity assumption between inputs and profit. The rationale is through the consideration of the insurance firms as profit maximizing agents. Subsequently, the firm specific factors included in the model were firm size, leverage, firm growth, liquidity, underwriting risks, and age of the firm. There was also inclusion of macroeconomics factors such as gross domestic product growth rate, inflation rate, and interest rate as control variables. The study found leverage level, liquidity, firm size, premium growth rate and age of the firm significantly affect both ROA and ROE as measures of profitability. This leads to a recommendation on policy implications by firms and the insurance regulator on clear leverage management strategies, minimum liquidity requirements review and a robust policy to further improve insurance penetration to improve premium growth rate.
Description
A Research Project Submitted to the Department of Econometrics and Statistics, School of Business, Economics & Tourism in Partial Fulfillment of the Requirements for the Award of the Degree of Master of Economics (Econometrics) of Kenyatta University, July 2024.
Supervisor
Jennifer Njaramba