Effect of Ownership Concentration on Financial Performance of Insurance Firms in Kenya

Abstract

The financial performance of insurance firms is of paramount importance, not only to industry stakeholders but also to regulators and policymakers. Ownership concentration, firm characteristics, and their interplay are key determinants in shaping the financial landscape of insurance companies. However, the specific relationships between these variables, particularly in the Kenyan insurance market, have been underexplored. This study aimed to address this gap by investigating the effect of ownership concentration, firm size, solvency margin, and liquidity on the financial performance of insurance companies in Kenya. By leveraging the lenses of agency theory, stakeholder theory, and stewardship theory, the study aimed to unravel the complex web of factors shaping the financial success of insurance companies in a dynamic and competitive market. The study adopts a causal research design, employing secondary data derived from the annual financial reports of 49 out of 57 insurance companies in Kenya from 2018 to 2022. Data collection focused on the aforementioned independent variables and ROA, the dependent variable. Descriptive statistics, correlation analysis, and regression analysis were the key methods utilized to explore the relationships and identify significant predictors of ROA. The regression model revealed an R Square of 0.440, indicating that 44% of the variance in the ROA could be explained by the independent variables. Ownership structure exhibited a positive relationship with ROA (Beta = 0.201, p = 0.041). Firm size showed a significant positive relationship with ROA (Beta = 0.372, p = 0.000), and liquidity positively influenced ROA (Beta = 0.495, p = 0.000). However, solvency margin was not a significant predictor (Beta = 0.068, p = 0.469). In conclusion, this study emphasizes the multifaceted nature of the factors influencing the financial performance of insurance firms in Kenya. While ownership concentration plays a role, the impact is relatively modest compared to the substantial influence of firm size and liquidity. It is recommended that policymakers encourage diversification in ownership structures and governance practices to strike a balance between stakeholder interests. The promotion of growth and scale optimization is advised to capitalize on the strong correlation between firm size and financial performance. Future research can consider international comparative studies to explore variations in the impact of ownership concentration on insurance company performance across different countries. Longitudinal analyses can provide insights into how these relationships evolve over time.