Effects of Risk Management Practices on Financial Perfomance of Non-Life Insurance Firms Operating in Kisii County, Kenya

Abstract

Insurance services offered by non- life insurance firms do cushion against risks faced by people and non- insurance firm industries. Transfer of uncertainties to insurance firms by people and non- insurance firm industries is important because risk management is a difficult thing to do by any person as it involves identification of source of risk and then coming up with methodology of quantifying the risk using mathematical models which helps understand risk profile of the person which assists in handling the risk. Unfortunately, some insurance firms still face numerous challenges like having difficulties in growth of their profitability and some end up closing doors; probably poor risk management policies are the major causes of failures and poor performance of firms. The purpose of this study was to examine effects of risk management practices on financial performance of non- life insurance firms operating in Kisii County, Kenya with the following specific objectives: To find out the extent to which risk identification practice affects financial performance of non-life insurance firms in Kisii County, to find out the extent to which risk mitigation practice affects financial performance of non-life insurance firms in Kisii County, to establish the extent to which risk monitoring practice affects financial performance of non-life insurance firms in Kisii County and to establish the relationship between effects of risk management practices and financial performance of non-life insurance firms in Kisii County. Descriptive survey research design was used to collect data. Target population was 237 respondents comprising of 116 directors and 121 senior managers involved in risk management of ten selected insurance firms. Sample size was forty eight respondents which represent 20 % of target population where stratified random sampling method was used to get the sample. Primary data was collected using a structured questionnaire. Secondary data was collected from published reports and financial statements presented to IRA for the five years period between 2010 and 2014 then analyzed using descriptive and inferential statistics and presented using frequency tables, percentages, charts and regression analysis. Findings on the extent to which effects of risk identification practice affect financial performance of non-life insurance firms were beneficial to management since managers knew premiums should be set commensurate to their getting high profits once they have identified frequency and severity of a given risk; findings on the extent to which effects of risk mitigation practice affect financial performance of non-life insurance firms were beneficial to organizations since they were cautioned to transfer risks through re-insurance and seek help from re-insurance companies when their risk control techniques are overwhelmed by claims received from clients; findings on the extent to which effects of risk monitoring practice affects financial performance of non-life insurance firms were beneficial to management since managers would discover problems which have occurred in systems early in time when appropriate product pricing in line with estimated risk is adopted with aim of achieving required profitability. Based on findings on the extent to which effects of risk identification practice affect financial performance, the study concludes that increased number of people understand importance of insurance; based on findings on the extent to which effects of risk mitigation practice affect financial performance, the study concludes that risk can never be eliminated completely. The study recommends insurance companies to structure their products or set competitive premiums to curb competition faced from rivalries hence avoid losing customers to the competitors; the study further recommends insurance companies to adopt appropriate product pricing in line with estimated risk which will eventually increase profitability.