Effect of Enterprise Risk Management on the Value of Insurance Companies Listed at the Nairobi Securities Exchange

Abstract

Over the recent period, risk management has become an acute feature of business operations across the globe. There have been many businesses in various industries that have closed shop due to the incapacity to manage risks and the insurance industry is no exception. Internationally, companies such as Comet Group, an electrical retail chain store failed due to the inability to manage its capacity as a takeover for Woolworths. The current study therefore sought to examine the Enterprise risk management and its effect on the value of listed insurance companies in Kenya. Specifically, the study sought to evaluate the effect of risk identification, risk assessment, risk control and risk monitoring on the value of listed insurance companies in Kenya. The study was premised on the Modigliani and Miller theories, Modern portfolio theory and the moral hazard theory. The study examined six listed insurance companies covering the period 2011 to 2020. Since the population was small, a census technique was used hence all the listed insurance companies were examined. The study further relied on both the primary and secondary data. Primary data was collected using questionnaires and were aimed at getting information on various aspects of Enterprise Risk Management practices while the secondary data was obtained from the published financial reports and aimed at getting information on firm’s value which was measured using Tobin’s Q. The response rate from the questionnaire was 100%. The study applied regression analysis and correlation analysis to establish the relationship between the variables. From the results a unit increase in the application of risk identification practices results in a significant increase in the firms value by 0.295 times. The p value is 0.016 which indicates that the effect of risk identification on firm’s value was significant. Risk assessment has a significant and positive effect on firm value with a p value of 0.022. Risk control and mitigation was also found to have a positive and significant effect on the firm’s value with a p value of 0.014. Risk monitoring has a positive effect on the firm’s value of insurance companies in Kenya with p value of 0.038. With respect to the intervening variables, firms’ size has a nonsignificant effect on firms’ value based on the p value of 0.966. The effect of leverage on firm’s value was also not significant based on the p value of 0.928. The study recommends that the management of insurance companies listed at the NSE need to allocate adequate resources to support ERM initiatives. More specifically, risk identification is lagging behind risk control. To support risk identification, there needs to be risk ownership and clear responsibilities assigned to all risk owners. Additionally, implementation of information technology systems can be deployed to support risk departments in their ERM work. The systems will enable documenting of identified risks, automation of risk assessment, documenting controls and mitigation measures as well as aid in risk reporting across the company.