Relationship Between Investment and Solvency Margins of Insurance Companies in Kenya

Abstract

Investment is the commitment of a person’s fund to derive future income in the form of income, dividend premium, pension benefit, or appreciation, in the value of their capital. Most institutional investors around the globe such as insurance companies invest the money they receive in various sectors in order to receive returns. The most common investment opportunities that are pursued by most of these institutions world over include investment in real estate, equities, treasury bills and bonds, deposits with banks, and certificates of deposits. The objective of the study was to establish the relationship between investment and solvency margins of insurance companies in Kenya. The study was anchored on resource dependency theory, the agency theory, and slack resources theory. This study utilized a descriptive research design to gather and analyse data. In this study, the population consisted 51 insurance companies licensed by Insurance Regulatory Authority (IRA) and that have been in operation during the period 2012 to 2016. The study was facilitated by use of secondary data that was extracted from published financial reports of the insurances, articles and papers. The diagnostic tests for the regression assumptions in this study included test for Normality, Heteroscedasticity, Multicollinearity, Sampling Adequacy and Tests of Independence (Autocorrelation). The data collected was therefore cleaned, coded and systematically organized in a manner that facilitates analysis using the Statistical Package for Social Sciences (SPSS). Quantitative analysis was used through descriptive statistics such as measure of central tendency to generate relevant percentages, frequency counts, mode, and median and mean where possible. Regression analysis was used to determine the relationship between between investment and solvency margins of insurance companies. The study found that firm size, government securities, real estate investments, investments in stocks, investment in corporate bonds, investments in certificate of deposits and liquidity are positively and significantly related to solvency margins of insurance companies. The study concluded that firm size was more related to solvency margins of insurance companies followed by government securities then real estate investments then investments in stocks then investment in corporate bonds then investments in certificate of deposits while liquidity had the least relationship with solvency margins of insurance companies. the study recommends that there is need for insurance companies to exercise caution in real estate investments since this may lead to huge losses in case of a global financial crisis that may lead to devaluation of property, that there is need for insurance companies in Kenya to maintain an adequate level of liquidity depends on the institution’s ability to efficiently meet both expected and unexpected cash flows and collateral needs without adversely affecting either daily operations or the solvency condition of the institution and that there is need to increase investments into these sectors since they seem to contribute more to the financial performance of the insurance firms.