The impact of foreign exchange risk management practices on financial performance of reinsurance companies in Kenya

Abstract

Organizations that operate beyond their domestic country borders are exposed to foreign exchange risk. Many studies regarding the effect of foreign exchange rate risk have been focused on banking financial institutions, but little has been done with respect to the effect of exchange rate risk on reinsurance companies. This study sought to fill in the knowledge gap by investigating the effect of foreign exchange risk management practices on financial performance of reinsurance companies in Kenya. Primary data was collected using a questionnaire and secondary data from the firm‘s financial reports for the years 2008-2012. Multiple regression analysis was used to analyze the data obtained at 95% confidence level. The study established that the ratio of foreign-currency profit to total profit (p=0.038) and use of operational hedges (p=0.043) were critical variables that managers pursuing shareholder value maximization would need to use so as to have improved financial performance. The foreign currency profit was an important consideration since it implies that the insurance companies enjoyed diversification of both risk and revenue while expanding their customer base. The study also noted that the use of financial hedging instruments was found to be minimal, which indicates that their use was too sophisticated and difficult to implement in developing countries like Kenya with less developed financial systems. The more frequently used means of financial hedging was the choice of currency in which company debt was denominated.