Determinants of financial performance of insurance companies: empirical evidence from Kenya

Abstract

The drivers of financial success of the insurance industry are of interest to several players in any economy including the government, policymakers, policyholders, and investors. In Kenya, there have been relatively few studies on this topic, most of which look at narrow elements that determine insurance companies’ performance. This paper sought to explore the components contributing to the financial performance of insurance firms. We sourced secondary data from the Insurance Regulatory Authority Annual Reports. The sample consisted of 37 General Insurers and 16 Life Insurers for the stipulated period of 2009 to 2018. For the analysis, a panel data method was employed. While most global studies have used generalized methods of moments and Pooled OLS models, this study explored the use of fixed and random effects model. On the basis of empirical findings, insurer size, combined ratios of an insurer and solvency margin were found to hold significant positive roles in determining the financial performance of insurance companies in Kenya. Solvency margin was established to hold weight, particularly on life insurers. The impact of underwriting risks on the overall insurance industry was found to be sizeable. It is suggested that small sized insurers pay close attention to ways of mitigating themselves against underwriting risk to avoid underwriting losses. The size and investment decisions of an insurer had a moderate positive impact. This suggests that large insurance companies, in terms of total assets, are well placed to outperform and that investment decision making is an important business tool for both general and life insurers. For reinsurance ratio, the analysis showed a moderated positive impact, which was dependent on the size of the company. The study recommends that a small sized insurer needs to understand the risks it insures against since on matters of reinsurance, they generally cede lower proportions of their premiums. Lastly, insurers need to cushion against a reliance on huge debts, since excessive leverage was found to a negative effect on finance performance. This study provides broad analyses of the various drivers of financial performance of the insurance industry in Kenya. The study contributes to the academic literature on the insurance sector in Kenya and Africa as a whole. Furthermore, it provides pointers to the management and directors of insurance companies on the aspects of their business that would need greater attention to drive and sustain superior financial performance.