Effect of Financial Risks on Growth of Firms: a Case of Insurance Companies Listed at Nairobi Securities Exchange

Abstract

Local insurance firms listed at the Nairobi Securities Exchange (NSE) encounters myriad of challenges in their attempt to improve their business growth. One of the challenges that have affected growth of these firms exposure to various financial risks. The study intends to investigate the effect of financial risks on growth of insurance firms listed at NSE. The research used descriptive design while the target population was all the 6 insurance firms. Secondary time series data was gathered from annual financial reports obtained from specific companies’ websites. Data was collected for a period of 5 years, 2016-2020. The study used Statistical Packages for Social Sciences (SPSS) version 20.0 software for data analysis. The study analyzed data using descriptive statistics and regression analysis tests. Various diagnostic tests were used to determine the reliability of the regression model. The study also test for the statistical significance using ANOVA. It was found that financial risks had negative significant relationship with the firm growth. Specifically, it concludes that solvency risk had negative but significant relationship with the growth of listed insurance firms hence it inhibits their growth. The research concludes that, liquidity risk was negatively but significantly related to the growth of insurance firms hence, a decrease in liquidity risk could result to increased firm growth. It concludes that reinsurance risk had a positive and statistical significant relationship with the growth of insurance firms listed at the NSE. Thus, decreased exposure to reinsurance risk by any percentage definitely led to increased firm growth. The study concludes that firm size had positive statistical significant relationship with the growth of insurance firms listed at the NSE hence, an increase in total assets could lead to increased firm growth. It recommends that, insurance firms should ensure that they hold adequate provision for outstanding claims by conducting sufficient analysis on liabilities and also by considering previous experiences so as to come up with comprehensive mechanism to efficiently and effectively control and monitor outstanding claims. The study recommends that the firms should endeavor to improve customer base to increase their net income by providing effective estimation procedures on policy premium price that will eventually help in the maximization of the firms’ net premium earnings to ultimately promote growth. The research recommend that the firms should resort to diversification of their investment portfolio by investing in idle cash. Such measures will help cushion these firms from adverse financial risks such as liquidity risk exposures.