Determinants of Solvency Margins of Insurance Companies in Kenya

Abstract

The objective of this study was to establish the determinants of solvency margins of insurance companies in Kenya. The research design was a census survey of all insurance companies in Kenya. The target population was defined as all insurance companies, which operated in the insurance industry from January 2001 to December 2010. Multiple regression analysis was carried out in order to see their impact on the solvency margin of insurance companies. The multivariate regression for the insurers has generated statistically significant results consistent with majority of the hypotheses formulated on firm-specific factors. The study revealed that four of the seven studied variables were of the predicted sign. Liquidity ratio, operating margin, combined ratio (expense and claims ratio) and premium growth were of the predicted sign while growth in surplus, Investment performance and firm size were contrary to the predicted results. The results of the study have some important policy implications for regulating and monitoring insurers’ solvency. Since liquidity ratio is one of the most direct measures of insurer’s financial health, regulators may consider using it as a first line indicator of possible financial difficulties. It is also important to have different regulations for life and general insurance companies as each operates under different constraints and requires more specific management and regulatory structure