BBSA Research Projects (2014)

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The factors for the growth of the mortgage industry in Kenya between 1980 and 2012
(Strathmore University, 2013-03) Dima, Adam Dima
This study was carried out with the aim of looking into the growth of the mortgage industry in the over the past years and the variables that have affected this growth so far. It aims at understanding the motivating factors for the players in this industry. By analyzing a selection of factors in relation to the size of the mortgage industry, stakeholders in the mortgage industry could stand to gain through the determination of relationships that exist. It also aimed at determining the reason for the rapid growth of the industry over the span of the previous decade. The study identified the problems faced by stakeholders that have hindered the growth of the mortgage industry over the years. The research was mainly quantitative and mainly used secondary data. The secondary data was obtained from past research which mainly included journals and reports on housing finance and its developments over the years. After the data was collected it was analyzed a11d regression on the determinants was carried out to identify which variables affected the mortgage loans level an which did not (and to what degree). The findings identified the variables to consider as the rate non-performing loans, gross domestic product, population size and the prevailing Treasury bill rates. The findings were used to add to the limited existing body of knowledge on mortgage industry. This will serve to inform decisions by the various stakeholders within the mortgage industry as well as policymakers in terms of policy on housing for the public.
A research proposal on viability of crop insurance in Kenya
(Strathmore University, 2013-03) Chebet, Cheruiyot Jackline
Farmers have for a long time suffered losses due to adverse weather conditions and fluctuating prices. Recently crop insurance has been the emphasis for farmers to protect their income from adverse conditions. This study has investigated the viability and expansion of crop insurance and made a comparison on weather indexed insurance and traditional crop insurance to determine whether traditional crop insurance could still work even with the over emphasis on weather indexed insurance. To provide answers to the research questions quantitative methods were employed. Use of simulation of variables, correlation tests, and regression analysis were the major quantitative tools used to analyze the data availed. The findings indicate that there is a high correlation between production and weather specifically rainfall, and production and gross claims of crop insurance cover. The farmers face a high exposure to failure in crop yields due to weather risks hence make crop insurance viable and increase opportunities for insurance companies to develop more insurance products to suit different crops hence risk reduction and expansion of crop insurance.
Quantifying idiosyncratic risk in defined benefit pension schemes in Kenya
(Strathmore University, 2014) Mburu, Edna Njeri
Pension schemes are prone to numerous risks that could affect the funds resulting in payments different from those that were guaranteed on entrance into the scheme. This study sought to measure the idiosyncratic risk in a sample of defined benefit schemes in Kenya, based on a model by Catherine Donnelly, a fellow of the Institute and Faculty of Actuaries. The study was conducted in Nairobi between August 2013 and February 2014. Data was collected from five civil service defined benefit schemes still in operation. The idiosyncratic risk was quantified using the coefficient of variation of each scheme's liability with respect to its expected value. Each scheme presented different levels of the risk based on factors such as the number of scheme members, their ages, salaries and expected pension benefit. The results suggested that the levels of idiosyncratic risk could be reduced by increasing the number of scheme members and that different job classes within the scheme further affected the risk level of the scheme.
A comparison of performance of unit trusts and the stock market in Kenya
(Strathmore University, 2014) Kahura, Kennedy
This paper seeks to make a comparison between the performance of equity unit trusts and the stock market. It answers two questions; whether equity funds are better performers than the market and whether the results obtained over the period of study are consistent with past conclusions of other researchers. Risk adjusted measures of return including Jensen's alpha, Sharpe Index and Treynor Measure are used in calculating the returns to be compared. Evidence from the results indicates that equity funds perform below the stock market unlike in a previous study by Kagunga that concludes unit trusts outperform the market. Raw returns analysis shows inferior returns across the equity funds industry compared to the returns from the market. Evaluating the same based on market adjusted returns simply emphasizes the fact that fund managers have not delivered superior returns relative to the market. In fact, there is only one out of ten funds that outperforms the market. It could therefore be concluded that equity fund managers should just manage indexed portfolios since they have not been able to beat the index. Further investigation could be done to see if the outcome is the same on including dividend yields before comparison is done. Our results question the value of engaging in rigorous investment strategies as opposed to passive; simply saving in high interest accounts or government papers for short term investment as well as long term since I year bond earns around 11% per annum with minimal deviation and 10 year bonds earn around 14%.
The viability of private pension, defined contribution scheme, in Kenya.
(Strathmore University, 2014) Mue, Mathew Musaki
Pension refers to the benefits one receives after attaining retirement age. There has been a significant increase in the needs for such benefits as the number of citizens in the country reaching retirement age has increased. Regardless of the fact, the state has been overwhelmed in the provision of such benefits. It has put in place policies to encourage private provision. There are three main pension schemes: Defined Benefit, Defined Contribution and a Hybrid Scheme. There has been a significant shift from the DB pension scheme to the DC pension scheme. This shift has been as a result of the wider changes in the pension landscape such as change in the legal and regulatory framework within countries and introduction of mandatory funded level just to mention a few reasons. The important question to ask is how suitable are these pension products being offered by private pension providers in particular, insurance companies. This study addressed two issues. First, it attempts to check whether the interest rate used by insurance companies in the calculation of interest earned considered the needs of the pension scheme members and if so protected them against investment risk. Secondly, from the rate acquired, the study determined the benefit amount attributable to the scheme members and showed how it is achieved. The results show that the interest rates used in attaining the earned interest amounts for the scheme members were sensitive to interest rate news. However, it was achieved that the interest rate news was not determined by the company's characteristics nor was it influenced by the needs of the scheme members. In conclusion, the study presented a good opportunity for research on what factors caused the sensitivity of the rate of return used to calculate the interest amounts to interest rate news. It also provided an understanding of the valuation of the pension benefit amounts for scheme members of a defined contributions pension scheme.
Long term implications of early access to pension benefits - the case of Kenya
(Strathmore University, 2014) Rotich, Ivy Chepng'etich
In July 2009, a bill was introduced that allowed members of a pension scheme to access their contributions and 50% of their employer's contribution. This change in law resulted to increased early access of pension funds upon change of jobs by individuals in pension schemes. This study sought to determine the implications of early access of funds by members and the long-term implications it has. Data was collected on a sample of 336 individuals and analysis done on how factors such as age, job change frequency, withdrawal option, withdrawal amounts and financial education of the members affected their retirement income adequacy. The results obtained concluded that increased job frequency and the option to withdraw significantly resulted to reduced retirement income adequacy while increased financial education improves pension adequacy as an individual is able to make more informed decisions.
Identifying the gap between supply and demand of life insurance
(Strathmore University, 2014-03) Wekhuyi, Lisa Nabulumbi
This is a study that aims at helping the insurance industry solve the problem of low insurance uptake taking into consideration the new measures adopted by the industry in an attempt to increase life insurance uptake. To do this, the study aims at merging information from the consumer and supplier side so as to identify the main factors that contribute to the gap barring relationship. This will be done by considering two different concepts. First is considering if the products in the market sufficiently meet policyholder's needs. Second is considering whether the distribution channels used are effective in terms of raising awareness of life insurance products. From this we will deduce the major barriers that contribute to the gap between demand and supply of life insurance.
The impact of corporate governance on underwriting performance of insurance companies in Kenya
(Strathmore University, 2014-03) Mwendwa, Vivienne Thuranira
The study examined the relationship between performance and corporate governance in insurance companies in Kenya. The study was prompted by the collapse of some insurance companies in the recent past as a result of non-proportional relationship between the claims and premiums paid in. The study aim was to seek the relationship between corporate governance and underwriting performance using a sample of 7 companies in the Kenyan insurance industry. A cross sectional study was carried out using MRA to determine the dependence of incurred claims ratios on 7 main corporate governance factors. Multiple Regression Analysis was used to investigate the relationship. The findings revealed that there is no relationship whatsoever between the corporate governance and the underwriting performance. The study justifies need for Insurance companies to make the appropriate and strategic decisions on the business to write under general insurance.
The costs and benefits of reinsurance with respect to the cost of capital
(Strathmore University, 2014-03) Owen, Otieno Kelvin
Reinsurance is a risk management tool that comes at a cost to the insurance companies. This is a report on the research of the costs and benefit of reinsurance with respect to the cost of capital. The introduction explains the meaning of reinsurance and how it relates to the primary reinsurer. Chapter two gives the literature review on the research that has been done on the costs and benefit of reinsurance and the relationship between cost of capital and re-insurance. The next chapter gives the methodology that was used to come up with the data, analyze the data and come up with the conclusion of the report. Chapter four outlines the findings of the report while the last chapter shows the conclusion of the report. This report reveals that the cost of capital although changes at an unpredictable way to changing reinsurance levels the value of the cost of reinsurance is directly correlated to it. It also shows that the cost of capital for the insurer reduces with respect to taking reinsurance by the Insurer
The extent to which social social media can influence a bank run - the case of Kenya
(Strathmore University, 2014-03) Olang, Tabitha Atieno
This research attempts to analyze the risk of a bank run occurring in Kenya by using sociological factors namely; demographic characteristics, bank relations and social media activity to inform on the risk perception and possible withdrawal behaviors of Kenyan bank account holders on receiving adverse information about their bank (s) on social media. The sociological factors considered in the research were obtained through web-based questionnaires which were sent to respondents using email accounts and social media sites such as Facebook. Correlations between sociological factors and the risk perception, possible withdrawal behavior and level of confidence in Kenyan banks were then determined by use of statistical application packages to detect the existence of predictive signals leading to a bank run within the selected area. Bank relations between the bank and the bank account holders has the highest correlation with risk perception, possible withdrawal behavior and level of confidence in Kenyan banks followed by social media activity. The study establishes that Kenyan bank account holders are generally confident in Kenyan banks; the risk of a bank run in Kenya is informed by the existence of information cascade which would lead to a given percentage of bank account holders withdrawing money from their bank accounts without necessarily believing the adverse information about their banks on social media.
Hedging drought catastrophic risk using weather derivatives - a case on large scale wheat farmers in Narok, Kenya
(Strathmore University, 2014-03) Mungai, Elaine Nyambura
This research aimed to demonstrate that a weather derivative could be used by large scale wheat farmers in Narok to protect themselves against the adverse effects of drought. This involved determining the possibility that index based weather derivatives could be used to hedge against drought catastrophic risk. In this case, a drought put option contract was considered as the desired weather derivative. The methodology stipulates the empirical strategy with the study considering rainfall (precipitation) and temperature data from Narok County over a period of20 years from 1994-2013. Data from 1993-1994 was provided by the Kenya Meteorological Department (KMD). Narok was chosen as the study area as it is the highest net producer of wheat in Kenya and has previously been adversely affected by droughts. Both rainfall (precipitation) and temperature were assumed to follow mean reverting processes. The results and analysis shows how these stochastic models were used to estimate the value of evapotranspiration and the speed of monthly rainfall, needed to estimate a drought index based on the Reconnaissance Drought Index (RDI). This value was then used to price drought option contracts over the sample period, whose pay off's were the difference between the strike price K, given as the aridity index for Narok based on (Zlm, Ringler, & Okoba, 2011) and the value of the RDI. From the study's discussion and conclusion, it was established that put option contracts would provide farmers with a positive pay out and hence, effectively hedge against drought catastrophic risk. However, it is recommended that further research should be done to create a standard way of valuing weather derivatives with emphasis made on eliminating spatial basis risk.
Development of reinsurance in Kenya Reinsurance Corporation
(Strathmore University, 2014-03) Gaitho, Edith Wairimu
This chapter describes the research carried out by defining the key concepts relating to the topic of study. It gives a historical background of the problem, up to the current situation and then on to establishing the research questions. It also outlines the objectives of the study at the same time justifying research topic.
Capital adequacy requirements for Kenyan banks
(Strathmore University, 2014-03) Wandera, Benard Ojiambo
This research sought to analyze the relationship between Kenyan bank performance and levels of capital held. Using cross sectional data from bank annual reports and the Nairobi Securities Exchange (NSE) Handbook from 2006-2012, a regression analysis was conducted. Evidence from the results suggested that bank profitability could either vary positively or negatively to the levels of capital held. In certain banks, the relationship was positive while in others, it was negative. Based on these findings, it is therefore, necessary that Kenyan banks hold adequate levels of capital in order to experience an enhanced profitability through interest income on loan and advances.
The best Takaful model versus Conventional Insurance on profitability
(Strathmore University, 2014-03) Kioko, Judith Nzisa
The study was conducted in Nairobi between July 2013 and March 2014, and data was obtained from the leading takaful operator in Kenya Takaful Insurance of Africa (TIA). Takaful is a type insurance that enables policyholders to share in profits if they do not make a daim. The data obtained was simulated across the three takaful models that exist and the profits compared with those from the conventional insurance. Conventional insurance refers to the normal type of insurance. The three takaful models are the mudharabah model, wakala model and wakala with mudharabah model. The research aimed at identifying the best takaful model in terms of profitability. It was found that the best model was the wakala with mudharabah model as it offered the highest profit to the operator. The best takaful model was then compared with the conventional insurance profits. The takaful model proved to be more profitable than the conventional insurance mode of operation.
Evaluation of recent initial public offers subscription levels in the Nairobi Securities Exchange
(Strathmore University, 2014-03) Mulu, Mercy Kalyali
This study investigates the determinants of success for IPOs in the Nairobi Securities Exchange by making a comparative analysis of under - subscribed and oversubscribed IPOs. The population of the study consisted of all initial public offers of common stock at the NSE during the period 200 l-20 ll. Six out of nine of the recent IPOs in Nairobi Stock Exchange have been highly oversubscribed while the remaining three IPOs had subscription levels of 60%, 80% and 60% respectively. In light of these subscriptions, this study investigates why some of the IPOs in Kenya were oversubscribed while others were under - subscribed, what factors were at play to contribute to these subscriptions and finally what does a firm need to do in order to have a successful IPO in the local market. This was aided by the use of questionnaires to collect data from the respondents. Non- parametric methods (Sign Test and Wilcoxon methods) were used to analyze the data obtained which led to the findings that a strong customer base, company expertise, the age of the company, access to a wide capital base, research and development in growth opportunities and business bench - marking go hand in hand with the success of the companies going public.
Insurance for the Public Service Vehicle industry in Kenya
(Strathmore University, 2014-03) Chege, Gathu
The Matatu industry has been faced by a myriad of challenges in the recent past in Kenya. One of the most evident challenges is the past poor performance of the Public Service Vehicle Insurance niche under the Motor Commercial class of business, which has resulted in the collapse of many insurance companies. To tackle this problem, this paper seeks to address volatility of claims by charging an appropriate risk premium to enable the general insurer to break even. The model used to calculate the risk premium credibility estimate to be used in premium pricing was the Buhlmann-Straub model. The model used mainly claims statistics from insurance companies and claims statistics from the industry. The outcome of the model was based on a comparison of different individual car models and their risk premium credibility factors. The government in an effort to1 curb such incidences issued a directive to Matatu owners to be organized into SACCOS in 2010. Therefore, this research is based on using these SACCOS as our incentive to develop a model that can incorporate using a risk premium credibility estimate charged as a deductible to formulate an optimal insurance policy that facilitates insurers to break even. The premium will be calculated based on car models as a rating factor. From the risk premium credibility estimate chargeable it can be concluded that this concept is fairly new and if implemented would provide a feasible risk management technique.
Testing for the significance of Gender as unused information in Automobile Insurance Market
(Strathmore University, 2014-03-14) Kaur, Dhanjal Ikmandeep
In the Kenyan insurance industry, the reported mean loss ratio for general insurance business for the five year period from 2005 to 2008 was 58.4%. The lines of business above mean and adversely contributing to the industry loss ratio were mainly motor private (73.04%) and medical (79.6%) (Association of Kenya Insurers, 2012). Whereas review of mortality experience can help improve loss ratio and premium pricing, there are other methods that an insurer can use, including collecting data on observable indicators that could explain the propensity to loss such as demographic factors (age, gender) or driver specific factors (geographical location, driving history). There is lack of data for the latter two in Kenya since geographical location would require a valid GPS system and proper road conditions whereas driving history needs to be digitalized and well captured by the traffic police system. Conversely, gender and age are easily collected and verifiable. This paper seeks to evaluate whether the use of gender, could provide relevant information that can be used in pricing of motor private business and hence lead to a reduction of loss ratio. By analyzing data collected from one insurer, we conclude that gender is a significant factor in explaining claims amounts, that is, there exists significant correlation between gender and claim amount. This finding is further supported by evidence collected from drivers about their claim experience and perception of gender as a factor of claims. Of interest is that females have a higher claim frequency in value and occurrence negating some of the products offering benefits to female drivers in Kenya. We therefore conclude that there is a case for using gender; however, an insurer will need to consider other competing market factors that come with differentiation in the small general insurance market size in Kenya of2.08%. The study also focused on data from one insurer controlling 11.4% motor private market share by gross premium. Results could differ in a wider scale review and this is recommended as further research area.
A proposed model life table for the Kenyan mortality experience
(Strathmore University, 2014-03-17) Nyakundi, George Onkendi
The Kenyan insurance industry has had the challenge of lacking mortality tables that have been specifically developed out of Kenya's population mortality experience. This forced many insurance companies to base their mortality assumptions on life tables that were developed in other countries such as the UK and SA. These tables were the A 1949-52 and SA85-90 respectively. However, in 2009, the first mortality tables specifically constructed out of the experience of assured lives in Kenya was constructed; the KE2001-03. This research report focuses on the development of mortality tables in Kenya. It proposes a new Model life table that is constructed after adjustment of the KE2001-03. The adjustment is carried out using the Brass Logit model with current census data being the determinant of the parameters of the model. Furthermore the study seeks to determine how the KE200 1-03 life table compares to the A 1949-52 and the SA85-90. This was carried out by a simple comparison of the mortality rates at each age for three mortality tables. Results of the research revealed that the KE200 1-03 life table had the heaviest (highest) overall mortality rates followed by the SA85-90 then the A1949-52 table. In addition, the study revealed that there is a need to be periodically adjusting the mortality tables used by insurance companies in Kenya in order to ensure that the mortality assumptions used in conducting actuarial valuations match the actual mortality experience of the population in Kenya.
Empirical analysis of the desires and concessions of impact investors and social entrepreneurs in Kenya
(Strathmore University, 2014-03-18) Kaunda, Nzilani
Using a mixed methods approach, the content study finds evidence of significant rifts between the entrepreneur's desire to create social impact and the investor's expectation of financial return. Inadequate provision of non-financial support slows down the social entrepreneurs while lack of interaction between both groups presents difficulties in matching each other's desires and expectations. The study established that over 50% of the entrepreneurs businesses sampled are yet to reach the growth stage, limiting their financing options due to the risk associated with new businesses. As a result, such enterprises are entrepreneur-financed. Their low financing capacity has contributed to 73% of social enterprises having initial capital below KES 50 Million which in tum is viewed as a deterrent for impact investors looking to maximize returns. The study finds that social entrepreneurs' greatest challenges are obtaining financing, lack of information about impact investors and legal and regulatory requirements. The study finds evidence that impact investors emphasize on sustainability through generation of financial returns and are unwilling to invest at the earlier stages of business. Their required return of 16% is unattainable for over 50% of social entrepreneurs. The impact investors greatest challenges are measurement of impact, lack of investment-ready opportunities and lack of technical capacity among social entrepreneurs. These rifts can be bridged by matching impact investors and social entrepreneurs based on their impact and return objectives, investing in non-financial support to help entrepreneurs scale up and increasing interactions between both groups by creating a local impact investing network.
Determining for the different classes of general insurance, the most appropriate reserving method
(Strathmore University, 2014-03-19) Ngeene, Nyoro Duncun
Actuarial Science is an applied science and its analysis, which is based on several techniques and methods, involves a lot of uncertainty by nature. As with any other science, Actuarial aims at providing the best truth or estimate despite the uncertainties that exist. The goal of this paper is to evaluate and suggest the best methods of computing reserves for the different classes of general insurance business. The paper focuses on answering the main question how you can best estimate Incurred But Not Reported (IBNR) claims for General Insurance using well known techniques such as those that deal with the classical development triangle, that is, Basic Chain ladder Technique (CLT), Inflation-Adjusted Chain ladder Technique, Average Cost per Claim Method (ACCM) and the Bomhuetter- Ferguson Technique (B-FT) as well as other stochastic methods such as Bootstrapping Method and Archimedean Copulas. The research involved both primary and secondary data and methods such as use of questionnaires, personal interviews and even telephone interviews were administered to collect the required data. Different tools such as Ms Excel actuarial models were used to analyze the data collected from the sampled insurance companies and the conclusions reached by comparison of predicted IBNR to the "actual" IBNR from the simulated data. Moreover, recommendations have been made on the most suitable reserving methods to use for all the different classes of general insurance as categorized by the Insurance Act of Kenya namely Aviation, Engineering, Fire-Domestic, Fire-Industrial, Liability, Marine, Motor Private, Motor Commercial, Personal Accident, Theft, Workmen's Compensation, Medical, Micro and Miscellaneous insurance

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