The Relationship Between Financial Risk and Financial Performance of Insurance Companies in Kenya

Abstract

Risk management is a process of identifying loss exposures faced by an organization and selecting the most appropriate techniques for treating such exposures (Rejda, 2003). Insurance companies apply various techniques to manage risks. Some of their risks are re-insured by some companies abroad. The financial risk management has gained an important role for financial institutions. Risk management is one of the most important practices to be used especially in insurance companies in order to get higher returns, (Gabriel, 2008). This study endeavored to ascertain the relationship between financial risk and financial performance of insurance companies in Kenya. The objective of the study was to establish the relationship between financial risk and financial performance of insurance companies in Kenya. Secondary Data was collected from Insurance Companies financial reports and multiple regression and correlation analysis were used in the data analysis. From the fidning on the adjusted R squared, the study revealed that 91.7% changes in financial performance of insurance companies in Kenya could be accounted for by changes in capital management risk, financial risk, solvency risk, liquidity risk and size of the company. The stduy revealed that a unit increase in financial risk lead to decrease in financial performance of insurance companies in Kenya. The study established that solvency risk was negatively affecting the financial performance of insurance companies in Kenya. The study also found that liquidity risk negatively affected the financial performance of insurance companies in Kenya. The study concludes that capital management risk negatively affect the financial performance of insurance companies in Kenya. Size of the insurance companies was found to positively influence the financial performance of insurance companies in Kenya. From the finding the study recommends that there is need for insurance companies in Kenya to manage the financial risk. The study also recommends that there is need for the management of insurance companies in Kenya to management their liquidity risk and solvency risk. The study also recommends that there is need for insurance companies in Kenya to increase their size through increase in their assets base. There is need for the management of insurance companies to enhance their capital adequacy.