Effect of Social Risk on the Financial Performance of Insurance Companies in Kenya

Abstract

Abstract

The threat posed by the prevalence of risks facing insurance firms has been a major challenge experienced in the insurance industry the world over. To a large extent, social risks have accounted for huge insurance claims facing insurance firms and have consequently affected their profitability. Social risks arise largely from changes in the social processes, inter-personal behaviors, environmental and political structures surrounding the insurance sector. The study aimed to establish the relationship between social risks and financial performance of insurance companies in Kenya. Descriptive research design was adopted, and all fifty-four (54) insurance firms as at the end of 2019 were targeted for study. Both primary and secondary were used with primary data being collected using a structured questionnaire that was completed by a senior management staff in each company while secondary data comprised of  financial performance measured using ROA for each company for the period 2014-2019. Data was analyzed using descriptive statistics, correlation and linear regression. The study established a statistically significant relationship between social risks and financial performance of insurance firms in Kenya. Further, whereas terrorism and political unrest were found to have an insignificant effect, the influence of social risks arising from substance abuse, lifestyle changes and moral hazard were found to be moderately related. Regression results showed that there was a significant negative relationship between the social risks of fraud and intermediary pressure and financial performance and they adversely impact on profitability. The study recommends insurance firms to carefully consider, assess and evaluate their various social risk mitigation measures in order to lessen the adverse effects on financial performance.

Keywords: Social risks, Insurance Companies, Financial Performance