Effect of Financial Risks on the Financial Performance of Insurance Companies Listed at Nairobi Securities Exchange

Abstract

The effect of financial risk has been considered to be an important issue on the performance of insurance companies. This study empirically examines the effect of financial risk on performance of insurance companies listed at Nairobi Securities Exchange and interprets the result by relating with the regulations. The study used descriptive research design in examining the regression model and collect data from six insurance companies covering the period of six (6) consecutive years, 2012-2017. The study used quantifiable secondary data which was analyzed using descriptive and inferential statistics to analyze on SPSS version 22. Out of the targeted six insurance firms, the researcher was able to obtain complete data from all the six thus a response rate of 100%. The data sources included all NSE hand books and company’s annual reports for the study period was from year 2012 to year 2017. From the results of correlation analysis, it was established that all financial risks negatively correlated to ROA which had statistically insignificant effect, except reinsurance risk which was positively correlated. Financial leverage had a negative and statistically insignificant relationship with financial performance while firm size was positively related with ROA but statistically insignificant. The co-efficient of determination shows a strong relationship between the model variables while R-square value was 0.701 implying that the predictor variables selected for this study explains 70.1% of changes in the dependent variable. This means that there are other factors not included in this model that account for 29.9% of changes in financial performance of insurance companies quoted at the NSE. The model is fit at 95% confidence level. Therefore, the overall multiple regression model was statistically significant and thus suitable in explaining how the financial performance of the insurance firms quoted at the NSE is affected by the selected independent variables. This study therefore concluded that these variables significantly affect financial performance as depicted by the p value (0.000) of ANOVA summary. Hence, the study recommends a check on each variable for listed insurance companies listed at NSE in order to enhance their performance significantly.