Effect Of Fraud Risk On Profitability Of Motor Vehicle Insurance Firms In Kenya

Abstract

The motor vehicle insurance subsector in Kenya has been experiencing reduction in their profitability levels. The sector has also experienced increased fraud cases that have led to the increased claims with the subsector contributing to more than 50% of the fraud cases in the insurance sector. The studies show research gaps in fraud risk and profitability of motor vehicle insurance firms in Kenya. This study sought to determine the effect of fraud risk on the profitability of motor vehicle insurance firms in Kenya. To meet the objective, the researcher adopted descriptive research design for 36 motor vehicle insurance firms in Kenya between 2017 and 2021. The study was based on secondary annual data, from annual reports of IRA between 2017 and 202, collected using data collection sheet. Analysis was done using descriptive and regression statistics. The research undertook normality, heteroscedasticity and Multicollinearity. The model significance was tested using F-statistics. This study was guided by collective risk theory and the fraud triangle theory. The outcomes exhibited that fraud risk possessed a negative effect on the profits of motor vehicle insurers. This leads to the conclusion that fraud risk has a negative effect on the profits of motor vehicle insurers in Kenya. The firms that have a high fraud risk ought to have low levels of profitability. Outcomes further show that liquidity possessed a positive effect on firm profits. This study concludes that liquidity possess a positive effect on firm profits of motor vehicle insurers in Kenya. Further, firm leverage possessed a positive effect on profitability of motor vehicle insurers. This study concludes that firm leverage possesses a positive effect on profitability of motor vehicle insurers in Kenya. The study recommends that motor vehicle insurers in Kenya reduce their fraud risk by reducing the claims and increasing the premiums earned by the firms; come up with controls that would reduce fraudulent claims; increase their liquidity levels; and increase their level of leverage.