Effect of inflation on investment among insurance companies in Kenya

Abstract

The Kenyan insurance industry plays a critical role in financial and economic development. It is in this case that understanding how inflation affects the sector and specifically investment will help make sound business decisions. Inflation is expected and has been proved by this study to have a weak negative effect on the insurance investment as it erodes the value of investments products. The purpose of the study is to investigate the effect of inflation on investment among insurance companies in Kenya. This study was conducted through the use of a descriptive design. The target population for this study was 46 insurance companies in Kenya. The study used purposeful sampling to pick 35 insurance companies authorized to transact miscellaneous class of insurance business and by extension bid bonds business. The secondary data was collected from the companies audited financial statements, the central bureau of statistics and also CBK. The data collected was run through various models so as to clearly bring out the effects of change in inflation on firm‟s investment. The results obtained from the models were presented in tables The study concludes that inflation have a negative influence on the investment among insurance companies in Kenya. Inflation has a coefficient of -0.0668 which indicates that inflationary environment are detrimental to insurance investment. High inflation brings with it less predictable returns on capital purchased and the also the expectation that demand will fall in the future while low inflation will encourage investment and a help businesses develop a long term view. The study recommends that central bank should concentrate on those policies which keep the inflation rate below the first threshold because it may be helpful for the achievement of robust economic growth and enhance investment. The companies‟ management should ensure that good corporate policies are implemented by the insurance companies to offset the effect of this macro-economic factor. Further, the management should also come up with structured solutions and strategies to mitigate the effect of inflation.