Effect of Inflation on Financial Performance of Insurance Companies in Kenya

Abstract

Inflation has affected most economies in the 21st Century. With increase in fiscal stimulus packages and better accommodating monetary policies across the globe, there has been a major concern of increase in inflation. This can affect the profitability of insurance companies since their future claims could be higher than projected. The study aimed to determine the effect of inflation on the financial performance of insurance companies in Kenya. This study population comprised all the 56 insurance companies in operation in Kenya as at 2020 year end. The data was acquired for only 49 insurance companies which was equivalent to an 87.5% response rate. The independent variable for the study was inflation. The control variables were liquidity, capital adequacy, firm size, management efficiency and underwriting risk. In measuring the financial performance return on assets was used and it was the dependent variable. Annual data was obtained from secondary sources for a 5 years’ period, 2016- 2020. A descriptive research design was used whereas association between variables was determined by a multiple linear regression model. SPSS version 28 aided was used to analyse the data. An R- square value of 0.093 was revealed implying that around 9.3% of the changes in financial performance can be related to the six chosen independent variables whereas 90.7% in the changes of financial performance was related to other variables that did not form part of this study. From the study findings it was additionally uncovered that the independent variables weakly correlated with financial performance (R=0.305). The ANOVA results exhibited that the F statistic was significant at 5% level with p value of 0.001. Henceforth the model was appropriate in explaining the association amongst the chosen variables. Additional results demonstrated that the inflation had a positive insignificant relationship with financial performance while management efficiency and capital adequacy had negative and statistically significant values for this study. The study discovered that firm size, underwriting risk and liquidity are statistically insignificant determinants of financial performance of insurance companies in Kenya. This gives recommendation that measures ought to be set up to manage inflation in insurance companies while at the same time ensuring that capital adequacy and management efficiency are enhanced as the two have a significant influence on financial performanc