EFFECT OF ADOPTION OF RISK BASED SUPERVISION METHODOLOGY ON THE FINANCIAL PERFORMANCE OF INSURANCE COMPANIES IN KENYA

Leonard Kipkemboi Bett, Joshua Matanda Wepukhulu

Abstract


Risk based supervision (RBS) model is a structured approach that concentrates on identification of potential risks faced by firms and the assessment of the measures in place to minimize and mitigate those risks. It is designed to promote transparency, provide an early warning system and encourage the regulated entities to both self-assess and report periodically. Implementation of RBS methodology in Kenya is still in its infancy and most entities are in the process of adoption. The few local studies on the subject have therefore been inconclusive due to the relatively short period that RBS has been in force in Kenya. This study attempted to uncover the full impact on financial performance on insurance companies in Kenya, of the RBS model as implemented by the Insurance Regulatory Authority (IRA). Three variables of RBS were studied to determine their influence on financial performance. The target population for the study was 55 licensed insurance companies operating within the republic of Kenya. The study adopted a census study as it evaluated data for all the 55 licensed insurance companies. Data was drawn from financial information submitted to IRA by insurers, which form part of the quarterly and annual returns to that regulator. The study utilized industry data collected for the period between 2012 and 2018 financial years. This represents three years prior to implementation of RBS and three years’ post-implementation, with 2015 being the reference year. Other data was obtained from publicly available information including the websites of CMA, NSE, RBA and AKI.  Inferential statistics of correlation and regression analysis was used to establish the effect of the independent variables on the dependent variables. The study findings indicated a direct and significant relationship between capital adequacy and financial performance; An inverse and significant relationship was noted between actuarial valuation and financial performance of insurance companies; and there was a direct and significant relationship between investments and financial performance of insurance companies. The study recommends full compliance to risk based supervision guidelines by adhering to guidelines on; investments, actuarial valuation and keeping adequate capital (commensurate to risk held) to achieve success in financial performance by insurance companies in Kenya. The Insurance regulator, IRA may use the findings of this study to add value to insurance companies by exploiting the combined effect of variables in the study. They may focus their guidance towards building the capacity of firms by and enhancing policies on Risk Based Supervision, Electronic Regulatory Systems and Risk Based Capital regulations to help the industry improve.


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