An Investigation of the factors influencing the financial performance of non-life insurance business in Kenya

Abstract

The study aimed at establishing the extent to which different factors affect the financial performance of non-life insurers in Kenya. The study used return on equity as the measure for financial performance since from a shareholder theory perspective, a firm should aim at maximizing its return to shareholders. From the resource based theory, an insurance firm should aim at owning strategic resources and capabilities in order to improve its competitive advantage and consequently increase its return on equity. To do so, an insurer would need to understand to what extent different factors influence the return on equity of a non-life insurance company in the Kenyan context. The objective of the study was to establish the extent to which different factors influence the financial performance of a non-life insurer. Using publicly available historical financial and economic data for the years 2006 to 2016, the researcher used regression analysis to explore the extent to which firm specific, industry specific, macro-economic factors affect the insurers’ return on equity. All the 34 Kenyan non-life insurers registered as at 2016 were used in the study. The study established that firm specific factors had a significant influence on the variation in the insurers’ return on equity whereas macro-economic and industry specific factors did not have a significant influence on the variation in insurers’ return on equity. The study also found out that expense ratio, claims ratio, underwriting margin and investment yield had a significant influence on the financial performance of insurers. The claims ratio explained return on equity variation better than expense ratio but both factors had a negative impact on the return on equity of the insurers. From the study, market share didn’t have a significant influence on the insurers’ return on equity. As such insurers should focus their resources on optimizing their investment capabilities, underwriting capabilities as well as drive operational efficiencies to reduce expense ratio. Kenyan non-life insurers should also prioritize careful selection of risks over capturing markets share as the latter has no significant influence on insurers’ financial performance.