BBSA Research Projects (2018)

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A Framework to model the monetary value of brands for insurance companies in Kenya
(Strathmore University, 2018) Kigwa, Lilian Wanjiru
The purpose of this study was to come up with a framework for measuring brand equity for insurance companies in Kenya. The concept of brand is widely gaining popularity and plays a role in consumer decision making. Managers are putting in hours of work to create a favorable brand name for their company with no precise way of measuring whether their efforts bear fruits. This study provides a means to measure those efforts for insurance companies in Kenya. In the efforts to meet the stated objective, I used the revenue premium approach and also investigated the role that brand plays in decision making. The study carried out investigations through the use of choice experiments and an analysis of financial statements belonging to 4 insurance companies.
Effects of fraud management practices on the profitability in the insurance industry
(Strathmore University, 2018) Ndolo, Lucy Nzivulu
The purpose of this research was to study the effect of fraud management practices on the profitability of insurance companies in Kenya. The category of fraud focused on was the policyholder and claims fraud which is defined as the fraud against the insurer in the purchase and/or execution of an insurance product by obtaining wrongful coverage or payment. The deductive arguments adopted were; the reasons for fraud risk management in insurance companies in Kenya based on the International Association of insurance Supervisors, the fraud management practices carried out by insurance firms in Kenya more specifically aligned with the claims management guidelines stipulated by the IRA under section 8 of the guidelines and finally the relationship between the fraud management practices and profitability of insurance firms in Kenya. Primary data was collected using a structured questionnaire. Secondary data was collected from the industry statistics provided by AKI for the past three years. The financial data extracted was the net profit and the total assets to obtain the ROA, to indicate profitability. The companies chosen were the top fifteen general insurance companies. The findings of the study showed that fraud risk management policies in insurance companies in Kenya are driven by the need to meet ethical standards as well as the need to enforce regulatory/supervisory standards. Moreover, the most common fraud management practice was fraud response in which investigations were the most preferred technique. Finally, the results of the regression analysis revealed a low correlation between fraud management practices and profitability
A Comparison of aviation insurance to the rest of the general insurance sector in Kenya
(Strathmore University, 2018) Ochwada, Imaan Nasubo
With the popularity of insurance cover booming in Kenya, individuals are scrambling to acquire insurance policy to protect their property, health and loved ones in the event of their death. The premium amount charged for a given cover differs from one insurance type to another due to the difference in risk factors. For Example, for motor insurance, the make, model, year and history of the car affect the premium. For fire, the items worth at the time of cover is a risk factor. For aviation, the type of aircraft, the experience of the pilot as well as the business involved (passenger/cargo). This study's objective is to determine if aviation insurance is as risky as perceived and its comparison to other forms of general insurance. We aim to see how other forms of general insurance perform and how aviation insurance performs relative to that
Impact of pension funds on the stock market volatility in Kenya.
(Strathmore University, 2018) Ondisi, Juliet Moraa
This study is an empirical test of the impact pension funds have on the volatility of monthly stock returns in Kenya. The study involved RBA funds invested in equities and monthly NSE index returns. The time period under study ranged from the year 2002-2015. An ARMA (p,q)- EGARCH (1 , 1) model was used to evaluate the effect on the invested funds on the stock market volatility. However, the study did not find any significant influence of the RBA funds on the NSE market volatility
Impact of macroeconomic variables on stock market volatility : a case study of the Nairobi Stock Exchange.
(Strathmore University, 2018) Onyach, Kevin Onyango
Stock market plays a very important role in economic growth and development. It is a center of network transactions where buyers and sellers of securities meet at a specified price. Movement of stock markets is an important indicator of the growth of the economy. A well-organized stock market mobilizes the savings and activates the investment projects, which lead to the economic activities in a country hence growth of the industry and commerce of the country as a consequence of liberalized ad globalized policies adopted by most emerging and developed country. The key function of a stock market is to act as a mediator between savers and borrowers. It further mobilizes funds from a large pool of savers and directs it into worthy investments that are sure going to generate sufficient profits. It also provides liquidity from domestic expansion and credit growth. The stock market performance can be measured by changes in its index which is inclined by many factors macroeconomic, social and political factors. A stock market is also a subsidiary market which assigns policy for investors to easily buy and sell the stocks. Stock prices depict predictions of the upcoming representation of corporate firms whether they are performing poorly or the vice versa
The Effect of political risk on exchange rate volatility: the case of Kenya
(Strathmore University, 2018) Ogolla, Faith Akinyi
The Kenyan economy, like many other economies in the world, is sensitive to the political events that occur. In modem day, economies with stable political environments and efficient economic policies have strong and healthy economies and are a big draw for investors. Stable exchange rates are an indicator of good economic performance. This paper examines the effect of political risk in Kenya on the volatility of exchange rates. It uses daily time series data of the Euro and USD exchange rates that covers a period from June 2007 to August 2013. The period covers three major political events; the 2007 general election, the 2010 constitutional referendum and the 2013 general election. This study uses a TGARCH(1,1) with a dummy variable for political risk. Results from the data analysis show that political risk has significant effects on the volatilities of the Euro and USD exchange rates. Recommendations on additional studies are made. First, a possible study can be done to investigate the effect of political risk on additional exchange rates e.g. the Japanese yen (JPY), the British pound (GBP), etc. Similarly, further research could be done to establish the effect of both positive and negative political shocks on Kenyan economy
An Aggregate analysis of the impact factor of the index based livestock insurance pastoralists in Kenya
(Strathmore University, 2018) Matano, Del Words
The purpose of this study was to quantify the effects of Index Based Livestock Insurance in Kenya on income generation and welfare enhancement of pastoral households. Index-Based insurance attracts attention as a potentially effective tool for reducing vulnerability of agricultural household’s in developing countries. However, previous literature has assumed away how household intertemporal behavior and welfare would change by reduced production risk and shock due to index-based insurance. The paper employed the endogenous treatment regression model in order to quantify the effects of Index Based Livestock Insurance on an aggregate level. The study finds that insurance provision induces pastoralists to shift production towards higher return but higher risk breeds of livestock. The results support the view that financial innovation can mitigate the real effects of uninsured production risk.
Hedging longevity risk using longevity swaps
(Strathmore University, 2018) Wanyama, Assumpta Adhiambo
Longevity-linked securities provide the desirable hedging instruments to insurers and annuity providers, and on the other hand, diversification benefits to their counter parties such as the reinsurers and banks. In Kenya however, the longevity market is not in existence and as such this paper seeks to model a longevity swap in the Kenyan context and determine its effectiveness in hedging longevity risk. The longevity swap is modeled using the distortion approach; Wang transform. With the projected cash flows for the floating and the fixed leg, the swap value is calculated, which gives the amount the insurer or annuity provider will have to pay to get into the contract. In determining the hedge effectiveness, sensitivity analysis was conducted on the parameters including the interest rates, cohort ages, term of the swap against the swap premium and the swap value. The results were that the premium increases with the term and entry age of the reference cohort. In terms of the swap value which is the difference between the present values of the floating against the fixed leg, as the population gets older the swap gets cheaper and therefore becomes more effective to hedge for lower ages.
A Dynamic financial optimization approach to structuring mortgage backed securities in Kenya
(Strathmore University, 2018) Ng'eno, William Kipyegon
Ideally, there should be a match between the demand for housing in an economy and its supply. This would ensure stability in house prices as well as affordability (Munene, 2010). In sub-Saharan Africa, slum populations grow at 4.5 percent per annum (Marx, Stoker, & Suri, 2013). At this rate, slum populations would double every fifteen years. It is expected that Nairobi 's population will grow to over 8 million by the year 2025 given the rapid urban population growth rate. Unlike cities in developed countries, this increase is not accompanied by a corresponding improvement in socio-economic and environmental development (Mutisya & Y arime, 2011 ).
The Impact of longevity risk in defined benefit private pension funds
(Strathmore University, 2018) Mlambo, Florence Mghoi
Retirement benefits should be able to last until the retiree dies. With improvements in fields like technology and medicine, there has been a reduction in mortality rates and an increase in life expectancy. Defined benefit pension plans are one of the stakeholders of longevity risk that will suffer great losses if they ignore longevity risk. This study will use the Lee Carter model to forecast mortality rates and show the increasing trend of life expectancy and how this affects the defined benefit pension funds. The main purpose of this paper is to determine how uncertainty associated with future mortality and life expectancy outcomes would affect the liabilities of a defined benefit pension plan. Finally, this paper will measure longevity risk by comparing the actuarial present values of annuities in Israel over the years and show the trend in the actuarial present values
A Comparison of Europe's solvency II model to Kenya's risk based capital framework.
(Strathmore University, 2018) Ndung'u, Anne Wanjiru
Kenya has experienced a lot of growth on the insurance industry to the extent of being ranked the best insurance industry in the East African region. Part of this growth can be attributed to the change of the solvency framework to Capital Based risk model that has seen insurance companies become more stable. This growth has however not reflected in the position of the Kenyan industry in comparison to the global markets. This study has compared the solvency frameworks for Kenya to that of Europe which is among the leading insurance industries globally to find out what improvements Kenyan insurers can make to their framework to improve efficiency of the industry leading to increased growth.
Impact of the announcement of senior management changes on company value in the financial sector of the Nairobi Securities Exchange
(Strathmore University, 2018) Jesai, Veronica Akena
This study examines the effect of a senior management change on the share price of a company. Previous international studies have shown mixed and inconsistent results, hence the interest to test if the same would apply in a Kenyan setting. The analysis was performed on a sample of 13 companies listed in the financial sector of the Nairobi Securities exchange that made a senior management change. Announcement between the years 2000 and 2016.The study used an event study approach and the market model, to investigate whether abnormal returns, average abnormal returns and cumulative average abnormal returns were significant. Using the standard event study methodology, statistically insignificant positive and negative abnormal and average abnormal returns were found, while statistically significant positive and negative cumulative average abnormal stock returns were found. From the study findings it became apparent that a senior management change has an impact on actual stock performance in Kenya. A possible recommendation for these listed companies therefore, would be to plan a succession strategy taking these effects into account
Determining premiums for small-holder farmers in Kenya for weather index insurance
(Strathmore University, 2018) Kadenge, Lisa Mwende
This research aimed to demonstrate that weather index insurance could be used by what farmers in Narok to protect themselves against adverse effects of drought. This involved determining the minimum amount of premiums that would be required from small scale wheat farmers. In this case a cash or nothing put option which has similarities with a weather index was considered. The methodology involved using rainfall data from Narok County over a period of 20 years. Data from 1993-2013 was provided by the Kenya Meteorological Department of Kenya. Narok was chosen as the study area since it is the highest net producing county of wheat in Kenya and it has previously been affected be droughts. The average amount of rainfall during the planting season was used as the trigger amount. A rate of 5% was assumed to determine the premiums. From the study's conclusion, it was established that the cash or nothing put option could be used to hedge for drought and it gave an affordable amount of premiums to be paid for 100 currency units.
The Relationship between stock returns and the rate of inflation
(Strathmore University, 2018) Mwashashu, Charles Oloolumbwa
The purpose of the study is to investigate the relationship between stock returns and the rate of inflation in the Kenyan market using monthly time series data between January 20 I 0 and October 2017. The study uses the Unit Root test, Granger Causality test, Johansen's co-integrated test and the Vector Enor Connection Model (VECM). The Granger Causality test reveal that returns Granger Cause inflation although the result is inconsistent with the economic theory. However, the Johansen's test of co-integration show that there exists at most one co-integrating and the co-integration estimate reveals that returns have a significant relationship with inflation in the long run in Kenya. The VECM model reveals that in the short-run, inflation and returns have a significant positive relationship. Similarly, in the long-run, the study finds that returns and inflation have positive relationship. The study gives insights to investors that they can use stocks to hedge against inflation since inflation and returns are co-integrated in the long-run with a positive relationship
Impact of longevity improvements on life insurance companies: a study of Taiwan
(Strathmore University, 2018) Maina, Catherine Wachera
The whole world has noted an unmatched reduction in the mortality rates and Kenya is no exception. These on-going improvements have brought out the need of mortality forecasting for annuitants as well as pensioners in order to prevent insolvency. This has compelled academicians and actuaries to focus their interest in the particular field of mortality and longevity risk. Appropriate modelling techniques or projected life tables are needed for pricing and reserving. In pa1ticular the use of stochastic models which take into account various risk causes and components and the relevant impact on portfolio results as opposed to deterministic models that were only based on expected present value. This study extends the literature by using the Lee-Carter method to forecast mortality risk for life insurance companies. The main focus of this paper will be to determine the uncertainty associated with future mortality and how it impacts on the overall risk assessment of Life Insurance companies in developing countries. Using the Lee-Carter proposed by Lee-Carter in 1992 to fit mortality rates, I forecasted future mortality trends using the past trends in mortality rates. I then determined the impact that the mortality trends have on life insurance companies. This results show that improved longevity has a big impact on the cash flows of life insurance companies since they affect the Actuarial Present Value.
Calculating risk based capital requirement using correlation method
(Strathmore University, 2018) Omar, Farooq Idle
Kenya has 49 insurers, five re-insurers and almost 200 brokers in a country where about 3 percent of the population has cover. A lack of proper risk management has seen many insurers in Africa become insolvent. Kenya, for example, has seen at least seven insurers in the last decade being placed under statutory management, and eventually liquidated, due to inadequate capital. In view of this, this project will examine risks that affect capital calculation of a life insurance company in Kenya.
Application of the Hedonic pricing model in real estate valuation in Nairobi County : a study of the Hedonic model
(Strathmore University, 2018) Inganji, Tecla Alumasa
Housing occupies an important position in the Kenyan psyche along with the concept of home ownership. The residential developments and investments attract both institutional, corporate organizations as well as private individuals. There are indications that the residential market in Nairobi is very active and that most of the valuation firms in Nairobi carry out market-based valuation of residential properties. The study is about the relevance of the hedonic pricing model in Nairobi and in particular to assess what kind of pricing methodology is used in the valuation of property in Nairobi County. The study attempted to determine the various attributes that are considered in the pricing models used in the County. The study was carried out in Lavington and Riverside estates, which are up-market residential estates of Nairobi. The research was qualitative and was conducted using information gathered from questionnaires, interviews and secondary material from Institution of Surveyors Kenya. The study found out that the significant factors that determine the value of a residential property are size of plot, location, services, developments, land reference number and the characteristics of the plot. The study as well found out that the most preferred method of valuation used in Nairobi is the Cost approach, however, comparable sales are adopted to justify the final outlook of the value.
Pricing a post-retirement medical insurance product
(Strathmore University, 2018) Ndubai, Jackline Mwendwa
Privately purchased medical insurance is very expensive for retirees. In Kenya, some companies even put an age cap restricting on insurance. A post-retirement medical insurance product helps in planning for medical expenses after retirement and ensures that such expensive costs are avoided. This paper reports on the pricing procedure undertaken for the new upcoming product as well as the sensitivity of the profit margin to the various variables used in the model. Profit testing of the product was run on one of the insurance companies in Kenya. The pure premium method is used to obtain a premium based on claims experience, instead of guessing a reasonable premium' to be used in the profit testing model. Data was obtained from an insurance company and constituted of their medical claims experience as well as their loss ratios over 2013-16. Premiums were calculated and a mispricing established in a case where profit testing was not incorporated. The study also revealed that the fund charge, inflation and the investment rate were significant in the pricing process and had a significant impact on the profit margin. Every insurance company's goal is to make profit. Hence, even if the company strives to make post-retirement health-care affordable, the company should ensure that the pricing model constructed results in a reasonably profitable premium. The incorporation of profit testing reduces the likelihood of a mis-pricing scenario. Furthermore, it is important that the inflation rate, investment rate and fund charge actual values are as close to the expected values as is possible.
Impact of dynamic pension contribution rates on adequacy of retirement benefits.
(Strathmore University, 2018) Wambugu, Judy Wangari
The retirement income an employee can anticipate is greatly contingent on their salary, contributions, investment strategies and consequently investment returns. Nonetheless, the contributions along with the interest earned are uncertain to be sufficient to cater for the employees' retirement needs. The nature of many pension schemes is to emphasize on the accumulation phase of the contributions with the aim of estimating the retirement benefits, and fail to take into account the forecasting phase of the retirement benefits, by determining the amount of pension a retiree will require in order to cater for their retirement needs. Forecasting retirement needs will ensure pension adequacy by obtaining an adequate target pension income and subsequently an optimum contribution rate that will meet this target pension. This study therefore sought to determine how the contribution rate can be varied, as experience emerges on various parameters including interest earned on contributions and projected retirement salary, with the aim of increasing the likelihood of pension adequacy. However, employers would like stability of their costs, thus they desire to have a fixed contribution rate. It is the member's contribution rate that will be dynamic. Adequacy of the pension income is measured by the degree to which the after-retirement earnings that individuals obtain, can maintain the living standards they had prior to retirement. This measure of adequacy is defined as Income Replacement Ratio(IRR). A stochastic model will be simulated to examine adequacy of retirement benefits and consequently how much the members need to save now in order to achieve that target pension. The study revealed that both the contribution rate and investment strategy adopted in the pension scheme influence the adequacy of retirement benefits. The study recommends that individuals should increase their savings as adequacy of pension income largely depends on how much is being contributed into the pension fund. The pension administrators should also review the investment strategies employed and diversify the investments of the scheme so as to cushion against adverse changes in market conditions.
Quantification of foreign exchange exposure in insurance companies in Kenya
(Strathmore University, 2018) Kantai, Sanau Milanoi
The study sought to quantify foreign exchange exposure in insurance companies in Kenya. This was achieved through evaluating twenty Kenyan insurers using two main objectives. The first was to establish the statistical significance of foreign exchange exposure for Kenyan insurance companies. A by-product of this, was that the optimal lag at which the different insurers experience the highest exposures could be defined. The second objective was to determine whether general insurers experience more significant foreign exchange exposure than life insurers. To accomplish this, the study employed a cash flow-based technique; the Almon Polynomial Distributed Lag model, which modelled the change in individual companies' operating income caused by changes in the foreign exchange rate. Using the above model, the study found that sixty percent of the insurers sampled had significant foreign exchange exposure. This reinforced the conclusion that the insurance industry in Kenya has a statically significant foreign exchange exposure. However, the study failed to prove that general insurers experienced exposure to a greater level of severity than life insurers.

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