The Applicability of Altman’s Failure Prediction Models in the Insurance Companies in Kenya

Abstract

There is a dire need for prediction of business failures since the results of business failure leads to heavy losses both financially and non-financially. Thus a model that could accurately predict business failure in time would be quite useful to managers, shareholders, the government, suppliers, customers, employees amongst other stakeholders. The prediction of business failure is an important and challenging issue that has served as the impetus for many academic studies over the past three decades. The objective of the study was to determine the applicability of Altman’s failure prediction models in the insurance companies in Kenya. The population of the study was composed of Insurance firms that operated in Kenya between 2000 and 2011. All the firms still in operation were used in the study and the five firms that become insolvent during the period were also used. The source of secondary data was from financial reports of these solvent and insolvent companies at the Insurance Regulatory Authority. The research study revealed that Edward Altman’s financial distress prediction model was applicable in 4 out of the 5 failed firms that were analyzed, which indicates an 80% successful prediction of the model. On the 36 non-failed firms analyzed, 24 of them proved that Edward Altman’s financial distress prediction model was successful indicating a 69% validity of the model. The study concludes that Edward Altman model of predicting financial failure of companies was a useful tool for predicting failure of insurance companies in Kenya.