The Effect of Foreign Exchange Rate Volatility on Profitability of Insurance Industry in Kenya

Abstract

The volatility in the foreign exchange rate can become a source of risk for firms. The risk is that adverse volatility in exchange rates may result in a loss to an institution especially those which trade their shares on the money market and those engaging in international business as they are naturally exposed to currency rate jeopardies. The study thus sought after examining the effects of foreign exchange rate volatility on profitability of insurance industry in Kenya. Further the study investigated whether GDP growth rate, interest rate, annual growth rate of productive workforce (age 15 to 64 years) and inflation as control variables affect the profitability of insurance industry in Kenya. The study used a descriptive research design on 49 insurance companies in Kenya. The study covered a period of ten years from 2005-2014. Secondary data was collected from the CBK, World Bank the annual reports of each insurance company under study. Data was then analyzed using a regression model, SPSS and Microsoft Excel statistical soft wares. The results of analysis were then interpreted using tables and graphs to show the relationships. The findings show that Foreign exchange rate volatility negatively impacts on the ROA of the insurance industry. GDP growth rate and inflation also negatively affects ROA. Finally, interest rate has a positive effect on the ROA of the insurance firms. At 5% level of significance, all the independent variables are not statistically significant. The study concludes that exchange rate volatility, GDP growth rate, annual growth rate of productive workforce (age 15 to 64 years), inflation and interest rates have insignificant effect on the profitability of insurance industry in Kenya. This implies that macroeconomic environment is responsible but only to a small extent in determining the profitability of the insurance companies in Kenya. The study therefore recommends that the regulatory authorities of macroeconomic environment should regulate them in such a way that they lead to favor of companies increased profitability and eventually economic growth.