Quantification of foreign exchange exposure in insurance companies in Kenya
Kantai, Sanau Milanoi
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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.