Determinants Of Financial Performance of General Insurance Companies in Kenya

Abstract

Stability and good performance of insurance companies is paramount. Kenyan insurance companies have, for the last decade, faced a turbulent business environment. This study evaluated determinants of financial performance for the insurers. It focused on five specific objectives namely: to establish the effect of underwriting risk on financial performance of general insurance companies in Kenya, to evaluate the effect of liquidity on financial performance of general insurance companies in Kenya, to find out the effect of solvency on financial performance of general insurance companies in Kenya, to assess the effect of firm size on financial performance of general insurance companies in Kenya to establish the effect of capital adequacy on financial performance of general insurance companies in Kenya. The basic theory for this study is theory of asymmetrical information while others for specific variables were liquidity preference theory, resource-based view and pecking order theory. The study targeted thirty one general underwriters. Data was sourced for a period of seven years from 2014 to 2020. A panel data set was collated from the seven-year observations. Data analysis was done using panel estimation method. The study concluded that the most significant determinants of financial performance of insurance companies in Kenya are underwriting risk and solvency. Underwriting risk had a negative and significant influence on return on assets. Also, solvency was found to better financial performance of insurance companies significantly. Moreover, the study concluded that liquidity and capital adequacy negatively and insignificantly affected financial performance of insurance companies in Kenya. Lastly, firm size positively and insignificantly affected financial performance of insurance companies in Kenya. It is recommended that insurance companies in Kenya need to diversify underwriting business in order to mitigate risks associated with underwriting risk as it hampers financial performance. Also, insurance firms should maintain high solvency ratios as solvency was found to boost financial performance. This study is valuable because it provides empirical evidence that can be used by regulators to form policies that may stabilise the sector. At the same time, it contributes to firm performance literature in Kenya and beyond. The study too is useful to scholars in the field of insurance as it adds to insurance literature from Sub-Saharan Africa.