Effect of Corporate Governance on the Financial Perfomance of Insurance Companies in Kenya

Abstract

Corporate governance is critical in the operation of the insurance companies. Since time immemorial, corporate governance has remained afloat as the yardstick towards holistic development of firms. The corporate governance and performance have intertwining association. However, researcher findings have demonstrated inconclusive studies that need further scrutiny. Others have provided mixed findings and demand for eye-opener research. It is therefore supreme to comprehend the association amid the corporate management and insurance's financial performance. The performance of insurance firms may be impacted by corporate governance, according to this study's theory. Six indicators—Board composition, Board size, Board committee, Board independence, CEO duality, and board diversity—were utilized in the study to gauge corporate governance. In addition, to ensure that the model did not suffer from variable omission and hence a best fit two control variables were included that is, age of company and size of the company. Financial performance was proxied using returns on asset. The study used a census approach and studied 49 insurance firms in Kenya. Cross-sectional data for the financial year 2020-2021 was obtained from the respective companies’ website. In the analysis section the study adopted a mix of descriptive statistics and empirical analysis namely correlation and regression analysis. Further post estimations tests namely autocorrelation and multicollinearity were tested. The study indicated a strong positive link with a correlation value of 0.359 and a correlation coefficient of 0.300 between the independence and board composition of insurance companies and their financial success. These coefficients denoted a weak correlation between the board composition and board independence with ROA. On further investigation using regression analysis, the research yielded significant and positive results coefficients for the two explanatory variables that is 24.878 and 5.115 respectively. The findings imply that a well-balanced board that operates largely independent from internal/external interference is anticipated to have a positive impact on the business's financial performance and guarantee sustained growth in market share. Data analysed also shows that on an insurance company's financial performance, the size of the board has a comparatively small effect.