Corporate Governance, Financial Risk Management, Firm Characteristics And Performance of Insurance Firms in Kenya

Abstract

The insurance industry plays a pivotal role in providing innovative solutions to the significant social, economic and environmental challenges the country faces. Despite the contribution of the sector, insurance firms are faced with various financial risks. The sector has also been reporting losses while some firms have been put under statutory management due to inability to honor customer claims. This indicates that the firms are not properly managed. This study investigated the relationship between corporate governance, financial risk management, firm characteristics and performance of insurance firms in Kenya. The study was anchored on six theories namely: stewardship theory, agency theory, resource-based theory, credit risk theory, modern portfolio theory and Keynesian liquidity preference theory. The study adopted positivist research philosophy and causal research design. The target population was 55 insurance firms registered by IRA to operate in Kenya as at December, 2018. The study employed secondary data obtained from the audited financial statements of the insurance firms covering a six-year period from the year 2013 to 2018. The data was collected from 51 insurance firms and regression analysis was used to evaluate the relationship between the variables. The findings indicated that corporate governance significantly affect the financial performance of insurance firms in Kenya. Specifically, board composition negatively and significantly affects financial performance. The results implied that increasing the number of executive directors in the board hinders the performance of insurance firms. Similarly, Board size negatively and significantly affects financial performance implying that bigger board sizes are detrimental to insurance firm performance. Board diversity positively and significantly affects financial performance. The results implied that boards consisting of more professionally qualified directors enhance firm performance. Similarly, board independence positively and significantly affects financial performance implying that allowing company directors to be independent promotes better firm performance. The results also indicated that financial risk management significantly affects firm performance. Specifically, credit risk negatively and significantly affects financial performance while market risk, operational risk and liquidity risk positively and significantly affects financial performance. The findings also indicated that firm characteristics significantly affect performance. Specifically, firm size positively and significantly affects performance while firm age negatively and significantly affects performance. The results imply that young and large insurance firms perform better than small and old insurance firms. The findings also indicated that financial risk management intervenes the relationship between corporate governance and performance of insurance firms. Similarly, firm characteristics moderate the relationship between corporate governance and performance. The study concluded that corporate governance is critical as it ensures better financial performance. The study also concluded that firm characteristics enhances corporate governance which in turn boosts financial performance. The study recommends that directors should put in place proper corporate governance structures and risk management strategies to boost financial performance. The Insurance Regulatory Authority should also ensure insurance firms adopt appropriate governance structures and risk management strategies in order to enhance performance.