BBSA Research Projects (2015)

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An analysis of longevity risk in a portfolio of life annuitants
(Strathmore University, 2015) Njeri, Sharon
Longevity risk has economic significance for governments, individuals and corporations. There is need to analyze the expected future lifetime of a population anticipating to receive lifetime benefits in Kenya. This paper performs such an analysis on the annuitants of a Kenyan life insurance company by making use of the Lee carter model and further describes ways to manage this risk. The results of this paper are directly relevant to annuity providers. It is found that life expectancy is increasing in the future up to some point where it gradually decreases. Conclusions made are that several models should be used to investigate this risk so as to reduce model errors and that impact of the data used is financially material.. Suggestions are that companies should create Value at Risk estimates of capital to cover this risk over one year periods and that more research should be done on managing longevity risks by use of capital markets in the country.
An analysis of the effect of investment climate on performance of public private partnerships - a case study of Sub Saharan Africa
(Strathmore University, 2015-12) Wainaina, Eric Mwangi
The study investigates the relationship between the performance of Public Private Partnerships (PPPs) and the investment climate in Sub Saharan Africa. The investment climate should significantly affect the performance of PPPs since good investment climate is a necessary prerequisite for investment. Infrastructure investments are essential to achieve economic prosperity, promoting growth and enhancing well-being. Recently to meet the growing demand for infrastructure development public entities have started to too).;_ at Public Private Partnerships to meet this deficit. The private sector participation is critical, bringing more funds; expertise and efficiency to the development of projects. For the analysis, a range of advanced panel estimators, namely random-Poisson, negative binomial, random generalized least square (GLS), random-tobit, were utilized to overcome the potential data related problems and for the robustness check of the estimated results. The results of the analysis suggest that large size and relatively higher income markets attract more PPP projects. The empirical evidence also suggests that macroeconomic stability, quality of regulation and governance are important factors in determining PPP in the infrastructure. The country risk is found to have some role in determining investment in PPPs although not to a very significant effect. The findings of this study will help the policymakers of developing countries in framing up such policies, so as to encourage more private firms to engage in infrastructure building through PPP.
Calibration of rainfall in weather index - based micro - insurance for agriculture
(Strathmore University, 2015-11) Ng'ang'a, Wanjiru
This project presents the calibration of rainfall in weather index-based micro-insurance for agriculture in Kenya. It simply seeks to determine if rainfall alone is a significant factor in order to use it as an index that will determine indemnity payments when an event arises. Using linear regression the study found the relationship between expected yield and rainfall, thereafter a payment index was calibrated. The results showed that rainfall is a significant factor in determining the yield of a crop in Kenya and would be a very useful product in micro-insurance for agriculture in Kenya. It is recommended that this product should be administered in different geographic framing regions in Kenya having tailor made the index to the specific region's specifications.
Cost of risk retention through a captive vs risk transfer: a case study of Kenya electricity generating company (Kengen)
(Strathmore University, 2015) Okumu, Harriet Achieng'
This research is a case study of Kenya's largest producer of electricity, Ken Gen. Due to the nature of production of electricity, the company has to insure all its assets together with insuring itself against costs of liability either to its employees or to the public. Although the company experiences very high insurance costs, it has been operating without a captive.This research proves that had the company set up a captive 1 0 years ago, it would have had surpluses of which would have increased its profits.
Determining incurred but not reported (IBNR) reserves using a collective risk model framework for a general insurance business line in a Kenyan insurance company
(Strathmore University, 2015) Mboko, Willis Meshack
General Insurance companies set up reserves in order to meet future claim liabilities. Reasonable forecasting of these liabilities is therefore an integral part of an insurer's business. Actuarial methods such as the chain ladder method have long been used to estimate insurer liabilities. Stochastic improvements of the chain ladder method mhave also been developed in order to obtain a standard error around a point estimate and a full distribution in some instances. However, such methods depend on heavily aggregated data in run-off triangles. Such an aggregation leads to loss of potentially predictive information. This paper uses specific claim information such as reporting delay and size of individual claims to forecast claim liabilities. It uses the collective risk model to combine expected claim size and frequency of claims. The data-set used in modelling is a realistic liability business from a Kenyan insurer. A final comparison of existing methods (Mack and Over-Dispersed Poisson) and the collective risk model is done for validation purposes. From the case-study findings, the collective risk model was preferred over traditional stochastic methods since it had a lower predictive error and was more realistic in modelling the claim process.
Diagnosis based risk adjustment of capitation rates: the case of the national hospital insurance fund (NHIF), Nairobi Kenya
(Strathmore University, 2015) MUNGAI, JOAN WANJA
This research aimed to provide a wholesome analysis of the claim payment system of the National Hospital Insurance Fund (NHIF) which includes Capitation system and Fee for Service (FFS). Capitation is an amount of money paid in advance to hospitals to cater for the medical needs of each patient, in each period of cover hence in order to be predictive of medical costs must reflect the key risk characteristics that influence the need for medical care. The process of incorporating these factors is lmown as risk adjustment and this paper aimed to carry out such an adjustment for the Kenyan case using demographic factors and diagnostic information alongside development of risk adjusted capitation rates for the NHIF. For the FFS, the research purposed to fit a statistical distribution to· NHIF's randomly occurring claims whose reimbursement is required in full.
Dynamic mortality modelling: fitting a parametric model to Kenyan insurance mortality data and parameter estimation in a VAR/VECM system
(Strathmore University, 2015) Asimba, Geylord Allan
This is among pioneer studies on Modelling Kenyan Mortality using a parametric model. Kenyan insurers have not embraced the use of complex approaches to modelling mortality. They have concentrated on modelling expected returns on investments which they believe is a more significant assumption. Lack of sufficient mortality data has also hindered modelling future mortality. This paper uses four years Kenyan Insurance Mortality data (2007-2010) to assess the appropriateness of the Heligman Pollard Model in modelling Kenyan Mortality. The rates between 2007 and 2009 are used in a VAR system to obtain 2010 rates and a comparison of the HP output and the real rates done. Further, parameter estimates for 2011 are done and the general trend in the movement of parameters over the 5 years discussed. The Heligman Pollard is used in this paper because it captures the whole mortality curve well and also it has recently been used to model South Africa mortality.
Effect of home-host regulatory differences on the efficiency of foreign banks in Kenya
(Strathmore University, 2015) Wandanje, Cyril O.
This study examines the effect of home country and host country regulations on the efficiency of foreign banks in Kenya; using bank level data based on a sample of two foreign banks and three local banks of the top tier category; and country-level data based on two countries: Kenya and the United Kingdom. It applies a two stage Data Envelopment Analysis (DEA) methodology where efficiency scores are detennined using DEA in the first stage then a Tobit regression is applied to establish the regulatory variables that have an influence on bank efficiency in the second stage. The study establishes that over the study period, foreign banks in Kenya have on average exhibited higher levels of efficiency as compared to local banks. The regulatory variables identified to have statistically significant effects on bank efficiency are overall activity restrictions, capital requirements, official supervisory power and private monitoring. The study differs from current studies that only compare local banks and foreign banks efficiencies in local jurisdictions by establishing whether regulatory variables influence the observed efficiency scores.
Empirical analysis of the viability of solar
(Strathmore University, 2016) NJORE, FAITH N
This study evaluates the viability of investment in solar photovoltaic projects. The Autoregressive Moving Average (ARMA) technique was used to model the monthly solar radiation levels within Nairobi for the period between 1985 and 2013 whereas the net present value (NPV) and internal rate of return (IRR) methods were used to evaluate project viability. The solar radiation levels were obtained from the Kenya Meteorological Department and project specific information was obtained from the Strathmore Energy Research Centre. The behaviour of solar radiation levels in Nairobi was found to be ARMA (6, 2) and was high enough to generate sufficient electricity for large-scale use. Further, the forecast power ofARMA (6, 2) model was found to be high given the back testing procedures carried out. The project was found viable for cost of capital within a range of 4% - 6% and energy costs above USD 0.20. It was also noted that project viability is highly dependent on each project's specific details and that several other factors needed to be considered alongside the solar radiation levels before deeming a solar PV project economically viable.
An evaluation on adequacy of retiremnt savings to retirement income - a case of Tata Chemicals Magad
(Strathmore University, 2014-03) Sankara, Lemayian Thomas
Tata Chemical Magadi occupies a significant place in the African economy. It is Africa largest soda ash manufacturer and one of Kenya's leading exporters. The company is an important part of the socio-economic fabric of the lake Magadi in Kenya where its soda ash facility is based. Established in 1911, Tata Chemicals Magadi has been producing soda ash at Lake Magadi for a hundred years. The site is situated 120kms south west of Nairobi.
Forecasting the time varying-beta of nse-20 share companies: Bi-variate garch (1, 1) model vs kalman filter method
(Strathmore University, 2015) Maywa, Nickson K.
This research paper forecasts the time -varying daily beta of ten stocks listed in the Nairobi Securities Exchange 20- Share Index by use of a Bivariate GARCH (1, 1) model and the Kalman filter method. A comparison of the forecasting ability of the GARCH model and the Kalman filter method is made. Forecast errors based on the retUI11 forecasts are used to evaluate the outof- sample forecasting ability of both the GARCH model and the Kalman method. Two measures of error are used: MAE and MSE. The results are inconclusive, based on MSE the Kalman method is superior while based on MAE, the Bivariate GARCH (1, 1) method appears to provide more accurate forecasts of the time-varying beta .
Incorporating dependence into the pricing of joint life annuities.
(Strathmore University, 2015) Ohuru, Vincent Nyarango
This study incorporated dependence of lives into the pricing of joint life annuities in Kenya. Currently the Kenyan industry practitioners base this pricing on the traditional assumption of independence oflives which has long been discredited as it ignores the fact that the underlying lives face similar risks . To value benefits under these policies accurately, a statistical model that assesses the impact of survivorship of one life on another was applied in this study. The Markovian model was applied to incorporate dependence into the pricing ofjoint life annuities. In the Markovian model the researcher considered three types of dependence which are : a) the instantaneous dependence that is due to a catastrophic event affecting both lives; b) the short-term dependence that can cause death to a surviving partner after the death of the spouse; c) the long-term dependence that results from the association between lifetimes, to generate the joint probabilities of survival that were then incorporated into the pricing of joint life annuities.
Insurance business modelling: a comparison of the Takaful insurance and conventional insurance models in Kenya
(Strathmore University, 2015) Yasin, Suleman Salyan
The objectives of this study were to establish whether the Islamic Insurance model is viable in the Kenyan Insurance market and if it can compete with conventional insurance companies in the market. Also, the project aimed to fmd out if and how Takaful Insurance of Africa, as representing the Islamic Insurance model in Kenya iscoping with the disadvantages it faces and how these affect its financial perfonnance. The research project took the fonn of an in depth look at Takaful Insurance of Africa company and its principles, models, methods of operation and financial results from inception in 2008 to starting operations in 2011 to the most current period. The financial ratios were compared with a group of selected conventional insurance companies with a similar market share measured in terms of gross written premiums. A student's T-test was used to test whether there is a significant difference between each of the financial ratios of Takaful insurance and the selected conventional insurance companies for each of the three years when Takaful Insurance of Africa has been in operations. The null hypothesis was that there is no difference in the fmancial ratios meaning that Takaful insurance can compete favorably with the conventional insurers in the market. The findings were that Takaful insurance can indeed compete at par with its conventional counterparts in the Kenyan Insurance market despite the drawbacks it faces due to the strict application of the Islamic principles underlying its operations. This was established from the comparison of ratios as well as the analysis of Takaful 's financial aspects in isolation over the period. The Islamic insurance model is therefore viable in the Kenyan insurance market and can be adopted by more companies since it can compete with the conventional insurance model and perform favorably. Any further research into the area may want to consider other countries with similar economic conditions as Kenya where the Islamic insurance model has been adopted.
A Kenyan insurance fraud scoring system: life insurance
(Strathmore University, 2015) Ong' ang'o, Josephat Auma
The aim of this study was to determine claim characteristics that are correlated with the occurrence of insurance fraud and to, additionally, developing a fraud scoring model. The model's purpose is to provide a probability score on the possibility of a claim being fraudulent. The scope of this study was the Kenyan insurance sector particularly life insurance business with two types of cover: funeral plans and personal accident cover. The data used is honest/paid out claims and simulated fraudulent claims for a period of seven years (2007 - 2013). The findings of this study are that some characteristics such as the claim amount, and the reporting delay are significant indicators of the presence of fraud in a claim. The fraud scoring model developed serves as a handy tool in the detection of fraudulent cases with nearly 90% accuracy depending on the probability threshold chosen by the insurance company.
A logistic regression analysis of the factors that determine the odds of undergraduate students dropping out: a case study of Strathmore University
(Strathmore University, 2015) Mwangi, Andrew Kabucho
This paper adopts a binomial logistic regression model in analysis of individual attributes that determine the likelihood of completing a full time undergraduate degree program. The analysis is based on a case study of Strathmore University where the individual attributes are based on personal characteristics, past educational experiences and level of socio-academic integration into the university system. The average marks obtained in the first year of study is found to be the most significant variable in determining the likelihood of completion. The mean grade, gender, entrance exam, students' residence and school type are also found to be statistically significant in determining the likelihood of completing a full time undergraduate course.
Mortality bonds and longevity bonds: a Kenyan perspective
(Strathmore University, 2015) Muthie, Andrew Gachugo
This paper addresses the problem of mortality risk and longevity risk and describes two ways in which life insurers, pension providers and general annuity providers can mitigate these risks. Specifically, it focuses on how these players in the Kenyan insurance market can make use of mortality bonds and longevity bonds to hedge their mortality risk and longevity risk exposures respectively. It does so by designing and pricing a Sample Kenyan Mortality Bond and a Sample Kenyan Longevity Bond. It applies the two-factor Wang transfonn method to price the bonds. Constant reference is made to a brief case study of the Swiss Re mortality bond issued in December 2003 and the EIB/BNP longevity bond that was announced in November 2004, but never issued. Finally, it develops a table matrix that can be used in describing the possible success or failure of any mortality bond or longevity bond under consideration. This table matrix is applied to the Sample Kenyan Mortality Bond and the Sample Kenyan Longevity Bond in order to infer on their possible success or failure in the Kenyan market.
National hospital insurance fund pricing model: a paradigm shift
(Strathmore University, 2015) Opondo, John Omondi
The NHIF contribution rates have been constant ever since they were last adjusted in 1989. With the increasing level of expenditure due to price and medical cost inflation, this rates are not sustainable in providing benefits to its members and their dependents and meeting administrative expenses. This research project aims to solve this problem by proposing a model for pricing contribution rates that factors in the increase in levels of expenditure over time and therefore ensuring that future liabilities are met. It also aims to ensure equity in the way contributions are made towards the health insurance fund, with high income earners subsidizing for the low income earners. A sustainable contribution rate that is a percentage of insurable earnings is calculated based on forecasts for the next ten years from past data collected from NHIF and KNBS for financial year 2003/2004 to financial year 2013/2014.
Net premium versus gross premium method of valuing .long-term liabilities: a case of Kenya
(Strathmore University, 2015) Waweru, Christine Wangari
An accurate measurement of the various risk components while calculating reserves for longterm liabilities cannot be underrated. In 2014, LFSA stated that there is a need for a sufficiently robust capital regime, which is a good shock absorber to address sudden business adversity given the increase in volatility in the global insurance industry. According to Mutuli (2014), insurance regulators across Africa have had an increased interest to introduce RBC, necessitated by the financial crisis of 2008, which saw many countries reassess their risk management techniques. This will necessitate the use of gross premium method when it comes to .the valuation of long term liabilities.
Prediction of student loan default rates
(Strathmore University, 2015-11) Abwoga, Susan Manya
Pricing health microinsurance using basic actuarial techniques: the Kenyan case
(Strathmore University, 2015) Macharia, Ivy Muthoni
This paper was an attempt to develop a pricing model for health micro insurance in Kenya, in particular Private Medical Insurance (PMI) and Health Cash Plans. It utilized national health statistics from the Kenya National Bureau of Statistics and the World Health Organisation to estimate incidence rates for the various benefits that would be offered under a health micro insurance scheme, as well as the costs of providing these benefits. These two variables were then used as inputs to a formula approach based pricing model that yielded the standard risk premium as its output. The incidence rates experienced by people in the age bracket 15-50 were the lowest. The risk premium was found to be highly sensitive to whether incidence rates were assumed to develop exponentially or linearly over time, especially with respect to the frequency of hospital admissions.

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