Effect of Financial Management Practices on Financial Performance of Insurance Companies in Kenya

Abstract

Insurance companies provide unique financial services to the growth and development of every economy. Such specialized financial services range from the underwriting of risks inherent in economic entities and the mobilization of large amount of funds through premiums for long term investments. The study sought to establish the effect of financial management practices on financial performance of insurance companies in Kenya. The study was guided by five specific objectives which were: to establish the effect of working capital, capital budgeting techniques, capital structure decisions, claims management policies and corporate governance on financial performance of insurance companies in Kenya. The population of the research consisted of the 49 licensed insurance companies in Kenya from 2011-2015 which constituted the units of analysis. The study used both secondary and primary data. Data on gross premium, return on assets and return on equity were obtained from secondary sources while primary data was obtained from responses for the information on the financial management practices used by insurance companies in Kenya. The study adopted correlational research design. The data was analyzed by use of descriptive and inferential statistics. Reliability and validity tests were conducted to determine the internal consistencies of the variables under investigation. Descriptive statistics produced frequencies, trends, means and percentages while inferential statistics produced regression and correlation results which show the relationship among the variables. Analysis of Variance (ANOVA), multiple regression and correlation analysis was carried out to test the hypothesis. Pearson’s product-moment correlation coefficient (r) was used to explore relationships between the variables, specifically to assess both the direction and strength. Statistical Package for Social Sciences (SPSS) was used in the analysis of data and results were presented on frequency tables to show how the responses for the various variables and indicators posed to the respondents. The study found that working capital management, capital budgeting techniques, capital structure decisions, claims management policies and corporate governance had positive and statistical significant effect on financial performance of insurance companies in Kenya. It also established that firm characteristics had a moderating effect on the relationship between working capital management, capital budgeting techniques, capital structure decisions, claims management policies, corporate governance and financial performance of insurance companies in Kenya. The study recommends that the management of insurance companies to consider putting in place the recommended steps seen as probable ways of ensuring that their financial management practices are improved for better gross premium, return on assets and return on equity. For instance, they should improve the company’s capital structure and ensure that the companies fully utilize their debt facility according to their capabilities.