The Effect of Reinsurance Programs on Financial Performance of General Insurance Companies in Kenya

Abstract

Reinsurance has long been identified as the most used risk management tool by insurance companies. Insurers frequently purchase reinsurance because it reduces bankruptcy risk, expanding capacity, Stabilization of loss experience and catastrophe protection. This study examined the effects of reinsurance arrangements on financial performance of general insurance companies. In particular, the study assessed the relationship between reinsurance and financial performance indicators for insurance companies such as net premiums, claim ratios and underwriting profitability. Analytical survey as well as correlation study research design methods in establishing the associations between variables were employed. The population comprised of the total number of general insurance firms that existed from 2013 to 2015. Published secondary data on gross and net premiums, underwriting profits and management expenses which are readily available from the insurance industry annual reports and insurer’s annual financial statements was used. Both descriptive and inferential statistics were employed in analysing the data. Analysis was done with the help of Statistical packages for social sciences (SPSS version 21).There existed a positive but insignificant relationship between reinsurance and financial performance. Retention levels were negatively related to underwriting profit ratio. However the effect of retention levels on underwriting profits was insignificant. The effect of net claims ratio on underwriting profit ratio was negative and significant. Net commissions earned had a positive effect on underwriting profit ratio. This study recommends that insurance companies should effectively manage their claim costs and underwriting quality in order to increase their underwriting profits.