Relationship Between Macroeconomic Variables and Financial Performance of the Insurance Industry in Kenya

Abstract

The aim of this research project was to establish the relationship between macroeconomic variables and the financial performance of the insurance industry in Kenya. Return on capital employed was used as the financial performance indicator. The financial performance was regressed against the macroeconomic indicators; average interest rates as computed by Central Bank rate, GDP growth rate, real exchange rate (Ksh/USD), inflation rate as computed by CPI and unemployment rate. Both the dependent and predictor variables were measured quarter yearly. A descriptive research design was employed in the research study. The study population comprised 49 insurance firms that are registered in Kenya by the year 2015. The study utilized secondary data that was collected quarter yearly. The data was collected from various sources; the World Bank, Central Bank of Kenya, Kenya National Bureau of Statistics and the industry financial statements as reported by IRA. The study was carried out in a ten year period from 2006 to 2015. The data was analyzed using multiple regression analysis, correlation analysis and descriptive analysis, using STATA software. The analyzed data was presented using tables and line graphs. The study found that GDP growth rate had a probability of (0.006<0.05) which is statistically significant while interest rates (0.4483>0.05), exchange rate (0.276>0.05), and un-employment rate (0.117>0.05) are statistically insignificant. Therefore interest rates, exchange rates and unemployment rates are not suitable predictors of the insurance industry’s financial performance. It is crucial that other factors both micro-economic and industry specific are considered while undertaking another study in order to determine the drivers of performance of the insurance industry. The research study recommends that the CBK should keep inflation, exchange rates and interest rates in check. These variables have profound effect on the performance of the insurance industry. For instance high exchange rates, translates to devaluation of the local currency and will cause a decrease in the performance of the industry. The study also recommends that the government initiate policies and measures that increase the GDP which will lead to a positive effect on the industry and the economy as a whole.