Effect of underwriting results on profitability of General Insurance Industry in Kenya

Abstract

General Insurance sector plays a very significant role in Kenyan and global economy, over the few years however, the sector has experienced decline in profitability in Kenya despite indicating growth year on year according to IRA statistical industrial analysis. In this context the main objective of this study was to establish relationship between components of underwriting results and profitability of the short-term insurance firms in Kenya. Different metric to evaluate financial performance of property and casualty companies has been used by scholars but this study focused on underwriting results whose components are claim cost, commission expense and management expenses were used as independent variable, profitability margin as dependent variable and risk retention as control variable. The study was guided by Agency theory. Population of all licensed Short-term insurance business as at 2019 were selected for five years from 2015 to 2019. The data was analyzed using version 10 of the EViews statistical software and because of the quantitative nature of the data descriptive design was used to establish the relationship between the variables. Correlation analysis highlighted inverse relationship between commission expense (-0.3053), management expense (-0.3497), risk retention (-0.1700), and claims cost (-0.4567) and profitability. Findings from regression analysis was that there was no significant relationship between risk retention (which had p-value of 0.5966 exceeded the alpha level 0.05) and profitability. The regression analysis further highlighted that underwriting results affected profitability by a proportion of 30.52% giving an indication that there are other factors which influenced profitability. Management should instill effective initiatives to manage underwriting results in order to maximize shareholder wealth.