The Determinants of Financial Performance in General Insurance Companies in Kenya

Abstract

The contribution of general insurance industry in Kenya to her gross domestic product is at 2.08 %. This is quite low inspite of the rising awareness of the importance of insurance and the efforts by insurance companies to expand their presence. This is by introducing micro insurance and takaful, as well as use of alternative distribution channels. In this context, the present study tried to establish the factors determining the profitability of non-life insurers operating in Kenya taking return on asset as dependent variable. The sample for this study include all the 23 general insurance companies in Kenya and it used the data pertaining to four financial years from year 2009-2012. For this purpose, firm specific characteristics such as leverage, retention ratio, liquidity, underwriting risk, equity capital, size, management competence index, ownership and age were regressed against Return on Assets. This study led to the conclusion that profitability of general insurers in Kenya is positively and significantly influenced by leverage, equity capital, and management competence index. Size of the firm (measured as the natural logarithm of total assets) and ownership structure (foreign ownership) have a negative and significant effect on performance of general insurers in Kenya. Further, liquidity has a negative and a marginally significant effect on performance of general insurers in Kenya. The study does not find evidence for the effect of age of the firm on performance of general insurers in Kenya. The study recommends that for general insurers in Kenya to perform better in terms of their return on assets, they should improve on their leverages, equity capital and quality of staff.