The Effect of Macroeconomic Factors on Financial Performance of Insurance Firms in Kenya

Abstract

The insurance industry in particular is part of immune and repair system of an economy and successful operation of the industry can set energy for other industries and development of an economy. However, insurance companies are always caught in a dilemma of crunching profit coming from underwriting and investment when the investment environment is changing and adversely pressing the interests of shareholders and might be having trouble in off-setting the obligations. The aim of this study was to investigate the effect of macroeconomic factors on financial performance of insurance firms in Kenya. This study employed a descriptive research design and the population of the study comprised of the 50 Insurance firms in Kenya as at 31.12.2015. The study used secondary data. Secondary data on macro economic factors was obtained from the Central Bank of Kenya and the Kenya National Bureau of Statistics. Secondary data on financial performance was obtained from the firm’s annual financial reports i.e. statement of income and the statement of financial positions. The data covered a period of 10 years from 2006 to 2015. The multiple linear regression and correlation was used to analyze data for the study using the Statistical Package for Social Sciences. The study found that an insignificant positive relationship between financial performance of insurance firms and GDP growth rate and inflation and an insignificant negative relationship between financial performance of insurance firms and lending rates, exchange rates and money supply. The study concluded that there is direct relationship between economic growth, inflation and an inverse relationship between lending rates, exchange rates and money supply and financial performance of insurance firms in Kenya. The study recommended that the government and through line ministries of finance and planning should undertake measures to ensure good performance of the economy. The study also recommended that the central banks should undertaken effective mechanisms to ensure that inflations rate, lending rates, exchange rates and money supply do not have adverse effects on financial performance of firms.