Insurance Risks and Financial Performance of Insurance Companies in Kenya

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The insurance industry is instrumental in economic growth through enabling protection, capital creation and promoting commerce. However, there has been a decline in the insurance industry's profitability in Kenya. Hence, the study assessed the effect of insurance risks on the financial performance of insurance companies in Kenya. Specifically, the study examined the effects of credit risk, liquidity risk, solvency risk, reinsurance risk and underwriting risk on financial performance of insurance companies in Kenya. GDP was used as a moderating variable. The study was anchored on agency theory, credit risk theory, liquidity preference theory and collective risk theory. The target population included all the 53 licensed insurance companies operating in Kenya since 2015. A census approach was used. Explanatory research design and positivism research philosophy were utilized. Secondary data was gathered from audited financial statements submitted to Insurance Regulatory Authority for the period between 2015 and 2020. With the aid of STATA, panel data was analysed through descriptive statistics, correlation and regression analyses. The multiple regression results revealed that credit risk had a negative significant effect on financial performance, liquidity risk had a negative significant effect on financial performance, solvency risk had a negative significant effect on financial performance and underwriting risk had a negative significant effect on financial performance. But reinsurance risk had a positive insignificant effect on financial performance. GDP growth rate significantly moderates the relationship between the insurance risks and the financial performance of insurance companies in Kenya. The study recommended that insurance companies should have good credit risk management frameworks to minimize credit risks, implement proper investment portfolio management to guard against liquidity risks, in cases of negative asset base, increase the share capital, cover most of their claims themselves but ensure they have adequate reinsurance where high risk investment is involved and put in place proper policy estimation and valuation techniques. Keywords: Credit risk, liquidity risk, solvency risk, reinsurance risk, underwriting risk, GDP, financial performance, insurance companies, Kenya