Relationship Between Risk Management and the Financial Performance of the Insurance Companies in Kenya

Abstract

Risk if not well overseen by organizations could lead to prompt collapse for most of organizations especially those whose core business deals with risks. Risk management should, therefore, be at the center of organization‟s operations by integrating risk management practices into procedures, frameworks and culture of the whole association. This involves processes such as identifying and analyzing those risks, as well as coming up with risk handling techniques, procedures and monitoring those identified risks in order to reduce the impact of risk on the financial performance of the organization. The objective of the study was to establish the effect of risk management practices adopted by Kenyan insurance companies on the financial performance. An explanatory research outline was used for the study, with the target population being the 51 registered insurance companies in Kenya. The study used both primary and secondary data for the analysis. The Primary data was collected by use of questionnaires whereby 30 insurance companies gave a response. The Secondary data was collected by use of published reports as audited financial statements from the insurance companies. The research also obtained some secondary data from IRA. The data covered a period of 3 years (2013- 2015). The researcher employed research analysis tool SPSS. Regression analysis was also used in the study. The results for the study were presented using tables, pie charts and graphs. The study established that risk management has been adopted as part of the practices in most of the insurance firms in Kenya. This is seen in the number of facets of various risk management adopted by the institutions. Thus, firms have better internal controls and risk environment to sustain better performance in the organizations. The study further concludes that while risk management may have an influence on the performance of insurance firms, the relationship has been questioned by the study since some of the practices have negative relationship while others have weak positive beta coefficients. This calls into question whether risk management is well engineered within the institutions surveyed to transmit benefits to the bottom-line of these organizations. The study recommends that insurance companies in Kenya should adopt a multifaceted approach to risk management in order to derive greater benefits from their risk management efforts. Further, Kenyan insurance companies should follow current international leading practice by adopting Enterprise Risk Management (ERM) which incorporates other insurance risk quantification models. This will ensure that the companies remain afloat during such times of strict regulatory regimes such as solvency (ii) and increase in capital requirements for insurance companies.