Risk Management and Financial Performance of General Insurers in Kenya

Abstract

A significant contributor to financial turmoil and collapse in insurers was already identified as poor risk management. The insurance industry is required to follow a risk management framework set by Insurance Regulatory Authority in order to manage and mitigate the risks facing the insurers. The general insurance industry in Kenya is experiencing performance challenges. The objective of this research was to determine the relationship between risk management and the financial performance of general insurers in Kenya. This paper was based on agency and stakeholder theoretical foundations. It assumed a descriptive research design. The researcher involved 37 general insurers that existed between 2016 and 2021. The investigation made use of data from secondary annual panel data collected using data collection schedule. All information was gathered through individual general insurers' public filings sourced from the Insurance Regulatory Authority between 2016 and 2021. Diagnostic tests of normality, model specification test, heteroscedasticity, and Multicollinearity were done. STATA 14 for analysis. Describing, correlation, and regression analyses were used by the scholar through STATA 14. From the descriptive statistics, financial performance had an average return on assets of 1.649% in the period between 2016 and 2021. The general insurers had a mean underwriting loss ratio of 59.329%. From the correlation analysis, the findings exhibited that risk management exhibited a weak negative correlation coefficient with financial performance. Liquidity had a mean current ratio of 9.66 with a significant positive correlation coefficient with financial performance. Firm size had a mean log of 14.794 and had an insignificant positive correlation coefficient with financial performance. From the regression analysis, risk management exhibited a negative significant effect upon financial performance. However, liquidity had positive but not significant influences upon financial performance. Firm size had a positive significant influence upon financial performance. Hence, this paper concludes that the general insurers in Kenya have a low return on assets, performing poorly financially. The researcher concluded that there is effective risk management among general insurers in Kenya with risk management having a negative linkage around financial performance. This study concludes that general insurers in Kenya have high liquidity levels with liquidity having a positive linkage with financial performance of general insurers in Kenya. However, the paper concludes that firm size has no significant linkage with financial performance of general insurers in Kenya. The study recommends that general insurers in Kenya work towards increasing their net income by reducing costs and increasing the level of gross income; reduce the level of insurance claims incurred and adjustment expenses; increase the level of premiums earned; adopt an optimal level of liquidity; and dispose unproductive assets. The study recommends a similar study focusing on long-term insurance and other firms other than to widen the scope. The study also recommends similar research based on other factors influencing financial performance; other measures of risk management and financial performance; monthly, quarterly or semiannual data; and different period of study