Firm Characteristics and Financial Performance of Insurance Firms in Kenya

Abstract

Insurance firms in Kenya continue to experience low penetration rate compared to their counterparts in the financial sector both locally and globally. This greatly hampers their financial performance because widespread coverage and high penetration rate means great customer base. Insurance industry has in the past received minimal attention from scholars and researchers compared to commercial banks. The larger part of the studies done in the insurance sector has concentrated in the mature and the developed economies as opposed to developing countries like Kenya. There is a great need to conduct more studies in the insurance sectors in developing economies. The purpose of this study was to investigate the influence of firm characteristics on the financial performance of insurance firms in Kenya. The specific objectives were; to investigate the influence of equity capital, underwriting risk, firm leverage, and firm liquidity on financial performance of insurance firms in Kenya; and finally, to investigate the moderating influence of firm size on the relationship between firm characteristics on performance of insurance firms. The study was anchored on the following theories; agency theory, trade off theory, liquidity preference theory and modern portfolio theory. The research philosophy adopted was positivism while the correlation research design was adopted. The study used secondary data which was collected using data collection sheet from Insurance Regulatory Authority (IRA), Association of Kenya Insurers (AKI) and individual firms’ websites. The target population of the study was 54 insurers that operated in Kenya for the ten years (2010-2018). The unbalanced panel data was analyzed using Random and Fixed effect model where Hausman test select model for testing the hypotheses. Various tests were conducted related to panel data in order to ensure stationarity of the data for reliable end results. The tests for unit root tests were Pesaran and Shi W-stat, ADF- Fisher Chi-Square, PP-Fisher Chi-Square and Levin, Lin and Chu t* statistic. Wooldridge Test statistic was used to check for serial correlation cases while White’s test was used to check for heteroscedasticity. Multicollinearity was tested using the VIF test. The study found that underwriting risk, liquidity and equity capital had a significant negative effect on financial performance while the leverage had a positive and significant effect on the financial performance of insurance firms in Kenya. firm size negatively moderated the relationship between; underwriting risk and financial performance, liquidity and financial performance. However, firm size did not moderate the relationship between equity capital, leverage and financial performance. The study recommends that insurance firms to embrace feasible financial leveraging strategies that can boost firm profitability. Also, they need to conduct effective liquidity management to maximize the value of the company and its financial performance. Besides, they should divert their focus towards increasing premium to reduce underwriting risk and enhance their financial performance. Finally, it is crucial for the insurance firms to utilize Equity Capital optimally such that it does not become a liability as a consequence of the interest paid.