Purchasing Power Risk and the Performance of Non-life Insurance Companies in Kenya

Abstract

This study aimed at re-examining the consequences of purchasing power Risk on Non-Life Insurance Industry in Kenya. Specifically, the study targeted at examining the extent to which inflation rate especially in developing economies have affected the operations of Non-Life Sector. Non-life sector basically deals with two portfolios; investment and Underwriting of premiums which are very sensitive to inflation rate level. In the study, therefore, the role of inflation rate on the performance of general insurance industry is studied and it was observed that inflation rate is a major factor in the performance of general insurance operations. Further, the study critically examined how inflation rate relates with both Real Underwriting and Real Investment activities. It was observed that the two portfolios in the Non-Life are too sensitive to inflation rate to the extent that the movement of inflation rate is inversely proportional to the Real Investment and Real Underwriting Returns. Further the researcher wanted to estimate the inflation thresholds; the lexis points at which inflation becomes detrimental to the activities of Non-Life Industry. It was observed in a developing economy like Kenya, the inflation rate ought to be maintained at a ceiling of 9.2 per cent and a floor of 4 per cent. However, the expectation of the purchasing power Risk is 9.99 %. It is therefore necessary to maintain the Inflation rate below two digit level; below 10% level. It was observed in the study that inflation in Kenya is unstable and unpredictably high with the outlier being observed during 2007/2008 post-election violence. Also it was observed that inflation rates in the country become more unstable especially during and immediately after electioneering period