Firm size moderation on earnings volatility and income retention of general Insurers in East Africa

Abstract

To hedge against the prospect of financial distress and stabilize results, insurance firms with volatile earnings have incentive to purchase more reinsurance, thereby reducing their income retention. With the benefit of diversification, large firms may not need as much reinsurance as small firms. This study aimed to determine the moderating effect of firm size on the relationship between earnings volatility and income retention of general insurers in East Africa. The study targeted 87 general insurance companies in existence throughout the period of study from 2015 to 2019 across five countries in East Africa comprising of Kenya, Uganda, Tanzania, Rwanda and Burundi. Thestudy adopted explanatory sequential mixed methods research design. For secondary data, a census was conducted on the total population of 87 general insurance companies in existence during the period of study. Data were obtained from insurance regulatory reports, company annual reports and through data collection sheets where reports were not available. The primary data phase consisted of in-depth interviews carried out on a stratified sample of 25 key informants across the five countries. Both descriptiveand inferential analysis methods were employed in the analysis. The study found a significant negative relationship between earnings volatility and income retention. On the hypothesis testing, the study found that firm size exerts a negative significant effect on the relationship between earnings volatility and income retention, hence rejecting the null hypothesis. Therefore, general insurers should strive to reduce volatility through sound underwriting practices to minimize the cost of reinsurance and maximize income retention.