The effect of firm size on profitability of insurance companies in Kenya

Abstract

Insurance services are now being integrated into wider financial industry and the insurance sector plays an important role in service based economy of Pakistan. Profitability is one of the most important objectives of financial management because one goal of financial management is to maximize the owner` s wealth and profitability is very important determinants of performance. This study investigated the effect of size on the profitability of insurance companies of Kenya. Specifically this study examined the effects of total assets, leverage and market share on profitability (ROA). A key indicator of insurance companies profitability is return on assets (ROA), defined as the before tax profit divide by total assets (TA). Profitability is dependant variable while total assets, leverage and market share are independent variables. A census study of 48 general and long term insurance companies which cover the period of 2009- 2013. Secondary data obtained from the financial statements of insurance companies and annual reports of Insurance Regulatory Authority (IRA). The study was quantitative in nature. Regression model was used to analysis the secondary data collected for the insurance companies. The findings show that there is no relationship between profitability and total assets of the insurance companies and there is significantly positive relationship between size as measured by market share of the insurance companies and profitability. The result also shows leverage had significant on profitability of insurance companies. The study recommends that in order for both general and long term insurance companies to increase their profitability, the companies should engage in activities which will lead to increase in market share. This includes recruiting more agents and increase in marketing through print and social media.