Diversification strategy and performance: a case study of the Kenyan life insurance industry.

Abstract

This study was conducted with the objective of finding out whether highly diversified firms performed better than the less diversified firms. The literature review defines the concept of diversification as used by various authors. The specific areas considered include the scope of diversification, dimensions of diversification and the rationale for diversification. The Kenyan insurance industry is also discussed including the kind of insurance business transacted in the Kenyan insurance market. In essence, the literature review develops a conceptualization of diversification in the insurance industry. A questionnaire was used to collect primary data from the lnsurance firms. This data was used to classify the firms into the three diversity groups employed in the study. Secondary data was obtained from the Registrar General's Office and the Kenya Reinsurance Library. In particular, data was collected on the financial performance of the firms from the annual reports. A total of 10 firms out of 18 firms were included in the study. Analysis of variance was the main statistical tool used. The findings of the study revealed that when the firms were classified on the basis of product diversification, the firms with medium diversity performed better than either the low or high diversity firms. When the firms were categorized on the basis of geographical diversification the firms that were highly diversified performed better than the two other groups. In both cases, the difference in performance was not statistically significant. In spite of the limitations of this study, the findings may help to explain the weak but suggestive relationship found between the extent of diversification and performance, as measured by Return on Assets (ROA). This implies that performance is responsive to diversification.