Effect of Portfolio Framework on the Financial Performance of General Insurance Firms in Kenya

Abstract

With the advent of the COVID-19 pandemic, general insurance companies face the risk of ultimate closure or acquisition if they fail to generate an adequate rate of return to their shareholders, hence a need for strategy development and implementation. Among the viable investment strategies, asset allocation is significant. The portfolio framework of the insurance firm evolves as assets are allocated. The study’s objective entailed examining how Kenyan general insurance companies’ portfolio framework impacts their performance from a financial perspective. The theory anchored in the current study was Modern Portfolio Theory by Harry Markowitz, which holds that investors could achieve maximum diversification benefits, hence better financial performance, with a proper asset mix in their portfolio framework. By spreading out the risk linked with a particular asset over a collection of assets like government securities, term deposits, stocks, and real estate, such that the mean portfolio risk value is inferior to total risk per asset, investors can reduce unsystematic risk and the financial impact of macroeconomic variables. This spreads the risk per asset over the investor’s asset selection, as supported by CAPM and APT. The study adopted descriptive and correlational research designs because they helped enhance the prediction and explanation of relationships among the selected variables. 49 Kenyan registered insurance entities made up population targeted by the study. The sample size comprised 31 general insurance firms that operated between 2016 and 2021. The research sought to determine whether investments in government securities, stocks, term deposits, and real estate had a favorable as well as significant influence on performance financially. A positive and considerable influence was established between financial performance and government securities, stocks, and term deposit investments. A negative and insignificant impact was established between financial performance and investment in real estate. The study hypothesized whether there was a positively significant outcome between leverage and performance financially. Leverage were found to have an immaterial and adverse association with how the firms perfomed financially. The study hypothesized whether there was a positive effect between liquidity and performance financially. The findings indicated that liquidity had an association that was positive with performance financially. The established recommendation was that general insurance companies should be regulated and encouraged to diversify their asset classes in their portfolio framework by the Insurance Regulatory Authority, by increasing investments in government securities, stocks, and term deposits. However, due to the negative association of performance financially with real estate, it recommends increased due diligence and close performance monitoring of real estate investments. The report suggests that the Insurance Regulatory Authority reassess the leverage restrictions of insurance firms in order to reduce excessive borrowing and the inability to repay debt due to the negative link between leverage and how the firms perfomed financially. Additionally, the study provided a recommendation that the The Insurance Regulatory Authority should also implement policies governing the liquidity positions that all general insurance organizations must have in order to reduce the risk of liquidity and eventual closure because liquidity had a positive correlation with how the firms perfomed financially.