Risk and return of investments held by insurance companies in kenya

Abstract

The objective of this study was to establish the risk and return of investments held by insurance companies in Kenya. The study also aimed to establish whether there are differences in the return across companies for investments on similar assets. It also aimed to establish whether there exists a correlation between risk and return. In order to achieve these objectives, a study was carried out on the investments of 10 insurance companies for the period 1st January 1997 to 31st December 2001. A chi-square one way variance analysis was used to test if the companies had the same mean return per investment category over the five years period. The relationship between risk and return was established by plotting a graph of the mean return and the risk, and comparing the graphs patterns. The results of the study indicates that insurance companies in Kenya invested in five main asset classes; government securities, ordinary shares, secured loans, bank deposits and real estate (land and buildings). Only returns on government securities, bank deposits and ordinary shares were found to be more or less equal across the industry. The study found a relationship between the risk and return only in secured loans. The study showed that most insurance companies invested substantially on land and buildings which had the highest risk with the least return. The study recommends that insurance companies need to reconsider their investments portfolio. There is need to reduce over-concentration on investments in land and buildings and shift investments to other classes.