036

Imperial Journal of Interdisciplinary Research (IJIR)
Vol-3, Issue-5, 2017

ISSN: 2454-1362, http://www.onlinejournal.in
Effects of Risk Management on

Financial Performance of Insurance
Companies in Mombasa County Kenya
Esther Mnyazi Chipa1 & Dr. Gladys Wamiori2
1
Student - Jomo Kenyatta University of Agriculture and Technology
2
Lecturer - Jomo Kenyatta University of Agriculture and Technology
Abstract: The purpose of this study was be to the operational risks; That insurance companies
investigate the impact of risk management on should employ mush of the enterprise risk
insurance company’s financial performance. The management in order to be able to diversify into
research was carried out on insurance companies other products that improve on the revenue streams
located in Mombasa County. The objective of the
study was to analyze the effects of risk management INTRODUCTION
on the financial performance of Insurance
companies in Mombasa county, to examine the 1.1 Background of the Study
effects of liquidity risk management on its financial Risk management is an important discipline in
performance, to examine the effects of a firms business especially the insurance business.
operational risk management on financial Recently, businesses put great emphasis on risk
performance, and to examine the effects of firms management as this determines their survival and
enterprise risk management in financial business performance. Insurance companies are in
performance. The study was targeting Directors, the risk business and as such cover various types of
Managers or Head of Departments, staff and risks for individuals, businesses and companies. It
Agents of insurance companies located in is therefore, necessary that insurance companies
Mombasa County. The target population will be manage their risk exposure and conduct proper
150 respondents who will be contacted. The analysis to avoid losses due to the compensation
research approach which will be used by the claims made by the insured. However, Kadi (2003)
researcher will be a descriptive approach. Data observes that most insurance companies cover
collection instruments to be used will be; insurable risks without carrying out proper analysis
observation, questionnaire and interviews websites, of the expected claims from clients and without
journals. Analysis was performed using SPSS putting in place a mechanism of identifying
version 23. Descriptive and inferential statistics appropriate risk reduction methods.
will mainly be used to summarize the data. This
will include percentages and frequencies. Tables, Poor management of risk, by insurance companies,
charts and graphs will be used as appropriate to leads to accumulation of claims from the clients
present the data collected for ease of hence leading to increased losses and hence poor
understanding and analysis. The overall effect of financial performance (Magezi, 2003). Risk
the analyzed factors was very high as indicated by management activities are affected by the risk
the coefficient of determination. The overall P- behaviour of managers. A robust risk management
value of 0.00 which is less than 0.05 (5%) is an framework can help organizations to reduce their
indication of relevance of the studied variables, exposure to risks, and enhance their financial
significant at the calculated 95% level of performance (Iqbal & Mirakhor, 2007) .Further; it
significance. This implies that the studied is argued that the selection of particular risk tools
independent variables namely liquidity risk tends to be associated with the firm’s calculative
management, operational risk management and culture and the measurable attitudes that senior
enterprise risk management have significant on decision makers display towards the use of risk
factors influencing financial performance of management models. While some risk functions
insurance companies in Kenya. The study focus on extensive risk measurement and risk based
recommends the following: That insurance performance management, others focus instead on
companies should be as liquid as possible to be qualitative discourse and the mobilization of expert
able to service claims as and when they fall due; opinions about emerging risk issues (Mikes and
That insurance companies should share their risks Kaplan, 2014).
with re-insurance companies in order to minimize
Imperial Journal of Interdisciplinary Research (IJIR) Page 259

In recent years, insurance companies have of risk management on financial performance of

increased their focus on risk management. insurance companies
Meredith (2014) suggests that there should be
careful judgment, by management of insurance In risk management, a prioritization process must
companies, of insurable risks in order to avoid be followed whereby the risk with the greatest loss
excessive losses in settling claims. It follows that and greatest probability of occurrence is handled
risk management is an important factor in first and risks with lower loss are handled later
improving financial performance (Okotha, 2006). (Kiochos, 1997, & Stulz, 2003). There is however,
no specific model to determine the balance between
The central function of an insurance company is its risks with greatest probability and loss and those
ability to distribute risk across different participants with lower loss, making risk management difficult.
(Merton, 2005). Saunders and Cornett (2008), also Banks (2004) notes that the key focus of risk
state that modern insurance companies are in the management is controlling, as opposed to
risk management business. They discuss that eliminating, risk exposures so that all stakeholders
insurance companies undertake risk bearing and are fully aware of how the firm might be impacted.
management functions on behalf of their customers
through the pooling of risks and the sale of their Insurance companies borrow heavily from the risk
services as risk specialists. This indicates that management process suggested by Kiochos (1997).
management of risks should take the centre stage in According to Kiochos (1997), the risk management
the operations of insurance companies. process involves four steps: identifying potential
losses, evaluating potential losses, selecting
1.1.1 Risk Management appropriate risk management techniques for
Risk is defined as the uncertainty associated with a treating loss exposures and implementing and
future outcome or event (Banks, 2004). Further, administering the risk management program.
risk is a concept that denotes a potential negative Kimball (2000) concurs that risk management is
impact to an asset or some characteristic of value the human activity which integrates recognition of
that may arise from some present process or future risk, risk assessment, developing strategies to
event (Douglas and Wildavsky, 1982). Rejda manage it and mitigation of risk using managerial
(2008) defines risk management as the process resources. Generally, a proper risk management
through which an organization identifies loss process enables a firm to reduce its risk exposure
exposures facing it and selects the most appropriate and prepare for survival after any unexpected
techniques for treating such exposures. crisis.
According to Saleem & Abideen (2011), risk 1.1.2 Financial Performance

management involves identifying, analyzing, Financial performance can be measured through
assessing, monitoring and controlling risks hence evaluating a firm’s profitability, solvency and
leading to better process of decision making. liquidity. The return on equity (ROE) and the
Saleem & Abideen (2011) further assert that return on assets (ROA) are the common measures
organizations which use risk management practices of profitability. By monitoring a firm’s profitability
have high financial performance and a high levels, one can measure its financial performance.
competitive edge in the market. According to Solvency measures give an indication of a firm’s
Amaya & Memba (2015), insurance firms manage ability to repay all its indebtedness by selling all of
risks transferred to them by other persons after its assets. It also provides information about a
agreeing to compensate the persons in the event of firm’s ability to continue operating after
financial losses. Amaya & Memba (2015) further undergoing a major financial crisis. Quach (2005)
assert that insurance provides protection to persons states that solvency measures the amount of
against an insured event by paying a predetermined borrowed capital used by the business relative to
sum of money in case that event happens. This the amount of owners’ equity capital invested in
allows persons to protect themselves against the business as an indication of the safety of the
financial losses which require risk management and creditors interests in the company.
financial performance analysis. What Amaya &
Memba (2015) did not mention is that most According to Amaya & Memba (2015), examining
organizations do not embrace use of risk financial performance calls on identifying financial
management nor do they have a documented risk strengths and weaknesses of an institution which
management policy and hence they are not in a involves looking at the association of items in
position to deal with risks accordingly or profit and loss account plus balance sheet.
systematically which eventually leads to negative Insurance companies help other persons in
effects (Saleem & Abideen, 2011). This spreading their financial risks just by paying small
inadequacy called for the current study on effects amounts of money which when put together as a

group makes a pool, from which those who will insurance companies. It is important that these
suffer losses will be paid. According to the study, factors be managed efficiently by insurance
examining financial performance of insurance companies, to avoid financial failure and
companies was crucial since insurance companies bankruptcy to the firm.
form a financial intermediation in the economy. By
financial intermediation, capital was accumulated The 21st century has seen great efforts to risk
into a nation’s economy because money management. Babbel & Santomero (2006) note that
contributed by customers of insurance companies insurers should assess the various types of risks
was put into projects which are long term in nature they are exposed to and devise ways of effectively
ensuring that a pool of money was accessed by managing them. They further suggest that insurers
borrowers when they need it for investment, should accept and manage at firm level, only those
usually done in stock exchange where they easily risks that are uniquely a part of their services. This
meet with savers hence reducing risks involved if will reduce the risk exposure. Stulz (2004)
borrowers and savers deal directly among suggested that risk management is a viable
themselves (Darzi, 2011). Liquidity indicates a economic reason why firm managers, might
firm’s ability to meet its financial obligations as concern themselves with both the expected profit
and when they mature without disrupting the and the distribution of firm returns around their
normal operations of the business. According to expected value, hence providing a rationale for
Quach (2005), liquidity can be analysed aligning firm objective functions in order to avoid
structurally and operationally. Further, operational risk.
liquidity refers to the cash flow measures while
structural liquidity refers to the composition of the Proper risk management is important in the daily
balance sheet. operations of any insurance company to avoid
financial losses and bankruptcy. This is in line with
The incidence and relative magnitude of internal or Jolly (2007) contribution that preventing losses
external disruptions to business activities from risk through precautionary measures is a key element in
events also vary considerably across firms reducing risks and consequently, a key driver of
depending on the nature of activities and the profitability. The efficiency of risk management by
sophistication of internal risk measurement insurance companies will generally influence their
standards and control mechanisms. While financial performance. Gold (2009), asserts that
companies should generate enough expected insurance companies could not survive with
revenues to support a net margin that absorbs increased loss and expense ratios.
expected risk losses from predictable internal
failures, they also need to hold sufficient capital Generally, company operations are prone to risks
reserves to cover the unexpected losses or resort to and if the risks are not managed the firm’s financial
insurance (Zsidison, 2003). This ensures that losses performance will be at stake. Firms with efficient
do not impact negatively on the firm’s financial risk management structures outperform their peers
performance. as they are well prepared for periods after the
occurrence of the related risks. This study hopes to
1.1.3 Risk Management and Financial come up with an expected positive relationship
Performance between risk management and performance of
The main focus of risk management has mainly insurance companies.
been on controlling and for regulatory compliance, 1.1.4 Insurance Industries in Kenya
as opposed to enhancing financial performance According to Insurance Regulatory Authority, there
(Banks, 2004). However, this risk management are 49 insurance companies in Kenya. Among the
often leads to enhanced financial performance as 49 insurance companies, 23 are life insurance
regulatory compliance and control of risks enables companies and 26 are purely non-life insurance
the organization to save on costs. Banks (2004) companies while the total number of general
further suggests that by managing risks, the insurance companies is 37 (IRA, 2014). Out of the
managers are able to increase the value of the firm 23 life insurance companies, 16 companies also
through ensuring continued profitability of the engage in general insurance business. This implies
firm. that there are 7 pure life insurance companies. The
IRA is the industry regulatory body which is
Standard and Poor’s (2013) identifies poor liquidity mandated to supervise and regulate the insurance
management, under-pricing and under-reserving, a industry players. The industry has also established
high tolerance for investment risk, management self-regulation through the Association of Kenya
and governance issues, difficulties related to rapid Insurers (AKI).
growth and/or expansion into non-core activities as There are many challenges facing the insurance
main causes of financial distress and failure in industry including structural weaknesses, fraud by

both clients and employees, high claims, delays in key risk management practices that had a direct
claim settlement, delayed premium effect on financial performance.
collection, lack of liquidity leading to collapse of
some firms, low economic growth poor Kinyua (2010) assessed risk as a component of
governance, low penetration of insurance services corporate strategy in selected life insurance
and industry saturation. companies in Kenya and found out that insurance
companies faced competitor, regulation and de-
Over the past decade, at least 9 insurance regulation risk and industry economics and
companies have suffered and collapsed due to the recommended that insurance companies should
above risks. The many risks and challenges facing deploy strategic planning tools to give the firms an
the insurance industry in Kenya have prompted the all-inclusive perspective of strategic planning.
insurance regulatory body, IRA, to establish a Njoroge (2013) also conducted a research on the
comprehensive risk management guideline for the strategic risk management practices by AAR
insurance sector, effective June 2013. Insurance Kenya Limited showed that reputational
risk is significant in insurance companies. The
study emphasized the importance of risk
1.2 Problem Statement management in insurance business.
Insurance companies are in the core business of
managing risk. The companies manage the risks of This study on the relationship between the various
both their clients and their own risks. This requires risk management practices adopted by the
an integration of risk management into the insurance companies in Kenya and their financial
companies’ systems, processes and culture. Various performance is aimed at addressing the challenge
stakeholders pressure their organizations to of ever emerging risks within the sector. It is an
effectively manage their risks and to transparently attempt to critically examine the various practices
report their performance across such risk through which insurance companies manage the
management initiatives. Banks (2004) argues that various types of risks that they face, and determine
some risks can and should be retained as part of the if there was any relationship between the practices
core business operations and actively managed to and the financial performance of these companies.
create value for stakeholders, while others should The study, therefore, sought to fill the gap in
be transferred elsewhere, as long as it is cost knowledge about the possible existence of a
effective to do so. relationship between risk management practices
and financial performance of insurance companies
According to Stulz (2006), some risks present in Kenya.
opportunities through which the firm can acquire
comparative advantage, and hence enable it to 1.3 Objective of the Study
improve on financial performance. Generally, This study was guided by both general and specific
review of the literature on risk management seems objectives as follows:
to suggest that better risk management practices
result in improved financial performance of the 1.3.1 General Objective
firm. By linking risk management and The general objective of the study was to find out
performance, insurance firms can more effectively how risk management affects financial
and efficiently understand the value of performance of insurance companies.
implementing a risk management framework.
1.3.2 Specific Objectives
A number of studies have been conducted on risk i. To determine the extent to which liquidity
management by companies in Kenya but little has risk management influence the financial
been studied on Insurance companies. A study on performance of insurance companies in
the effect of risk management practices on the Mombasa County.
financial performance of commercial banks in ii. To determine the extent to which
Kenya by Mwangi (2010) showed evidence that operational risk management influence the
risk management and the related practices are financial performance of insurance
considered significantly important to the operations companies in Mombasa County.
and financial performance of these commercial iii. To determine the extent to which
banking institutions. The study also found that enterprise risk management influence the
some risk management practices have a greater financial performance of insurance
significance on financial performance than others, companies in Mombasa County.
that is, the existence of a risk management policy
and the integration of risk management in setting of
organizational objectives were considered to be the

1.4 Research Questions 2.2Theoretical Review

i. What effect does liquidity risk management have
on the financial performance of insurance 2.1.1 Risk Management Theory
companies in Mombasa County? Risk management is the identification, assessment,
ii. To what effect do operational risk management and prioritization of risks followed by coordinated
have on the financial performance of insurance and economical application of resources to
companies in Mombasa County? minimize, monitor, and control the probability
iii. What effect does enterprise risk management and/or impact of unfortunate events or to maximize
have on the financial performance of insurance the realization of opportunities (Wenk, 2005).
companies in Mombasa County? Effective risk management can bring far reaching
benefits to all organizations, whether large or
1.5 Significance of the Study small, public or private sector (Ranong &
This study will be significant to insurance Phuenngam, 2009).
companies, general public, students and the
insurance regulators as it will offer valuable These benefits include, superior financial
contributions from both a theoretical and practical performance, better basis for strategy setting,
perspective. Theoretically, it will contribute to the improved service delivery, greater competitive
general understanding of risk management advantage, less time spent firefighting and fewer
practices and their effect on financial performance. unwelcome surprises, increased likelihood of
change initiative being achieved, closer internal
The study will enable Insurance companies in focus on doing the right things properly, more
Kenya to improve their risk management process efficient use of resources, reduced waste and fraud,
and to adopt efficient strategies to improve firm and better value for money, improved innovation
financial performance through the risk management and better management of contingent and
processes. This will enable the insurance maintenance activities(Wenk, 2005).
companies to perform better and to grow their
businesses and maintain a competitive advantage. According to Dorfman (2007), ensuring that an
Apart from benefiting the insurance companies, the organization makes cost effective use of risk
general public will benefit from the study through management first involves creating an approach
improved insurance services and better built up of well-defined risk management practices
management of risks. This will result to affordable and then embedding them. These risk management
rates of insurance premiums and reduction in levels practices include financial risks management
of non-payment and fraud. practices, operational risk management practices,
enterprise risk management practices, and strategic
The study will be helpful to the government in risk management practices.
improving regulations on insurance practices in
Dixon et al., (1990) said that appropriate
Kenya through the IRA and safeguarding the
performance measures are those which enable
resources of the country. Lastly, the study will add
organizations to direct their actions towards
to the existing body of knowledge on risk
achieving their strategic objectives. Reid and
management to benefit academicians and aid
Ashelby (2002) contends that performance is
further research on risk management in the
measured by either subjective or objective criteria,
insurance sector and the financial sector.
arguments for subjective measures include
1.6 Scope of the Study difficulties with collecting qualitative performance
This study will be conducted in Mombasa County. data from small firms and with reliability of such
It will be majorly conducted in the town centers data arising from differences in accounting
since most of the insurance companies are located methods used by firms. In order to survive and
in the urban areas. succeed in a competitive market, firms must focus
on maximizing profit or they will eventually be
driven out of business (Dutta and Radner, 1999).
LITERATURE REVIEW John (2011) supports this claim by saying that only
efficient firms stay in the market, and that less
2.1 Introduction productive firms will eventually exit many markets.
This chapter critically reviews the available Performance measures provide a mechanism for
literature on risk management and financial the organization to manage its financial and non-
performance. It begins by reviewing theories financial performance.
related to risk management, then an overview of
the empirical studies and literature on the risk Accountability is increased and enhanced, ensuring
management and financial performance that projects support the organizational strategy and

that better services and greater satisfaction are

provided to a customer Wilks and imblelman Enterprise Risk Management (ERM) was
(2004) found out that objective performance developed by COSO in 2004 to address risk
measures include indicators such as profit growth, management issues related to an organization. The
revenue growth, return on capital employed. frame encompasses all component of internal
Financial consultants Stern Stewart and Co. created control frame work, but adds also the components
Market Value Added (MVA), a measure of the of objective setting, event identification and risk
excess value a company has provided to its response (Rittenberg, 2005). COSO (2011)
shareholders over the total amount of their emphasizes the importance of objective setting in
investments (John, 2011). the entity and relates it to risk assessment as a
precondition. However it should be emphasized
This ranking is based on some traditional aspects of that the company internal control framework
financial performance including: total returns, sales should be established in order to have reasonable
growth, profit growth, net margin, and return on assurance to achieve established objective, risk
equity Dwivedi (2002) argues that other financial identification and analysis are the critical
measures should include value of long-term components.
investment, financial soundness, and use of
corporate assets. John (2011) discussed accounting In evaluating the effectiveness of internal control
based performance using three indicators: return on activities, it is essential to assess them against
assets (ROA), return on equity (ROE), and return entity’s objectives and related risks. Internal
on sales (ROS). Each measure is calculated by control should provide for an assessment of the
dividing net income by total assets, total common risks the agency faces from both internal and
equity, and total net sales, respectively. The current external sources. Once risks have been identified,
study proposes to assess company financial they should be analysed for their possible effect.
performance using the following indicators as used Management then has to formulate an approach for
by the various scholars discussed in previous risk management and decide upon the internal
studies above, Profitability, Return on asset and control activities required to mitigate those risks
earnings per share. and achieve the internal control objectives of
efficient and effective operations, reliable financial
2.1.2 Enterprise Risk Management Theory reporting, and compliance with laws and
According to Tseng (2007), Enterprise Risk regulations. The objective of financial reporting
Management (ERM) is a framework that focuses and performance in the entity, the production of
on adopting a systematic and consistent approach accurate, complete, relevant, timely and reliable
to managing all of the risks confronting an financial information to demonstrate and maintain
organization. Gordon et al. (2009) on the other accountability, to meet statutory reporting
hand define ERM as the overall process of requirements, to account for an organization’s stake
managing an organization’s exposure to uncertainty holders for the financial performance (CIPFA
with particular emphasis on identifying and 2002:24). Cebenoyan and Strahan (2004) find
managing the events that could potentially prevent evidence that banks which have advanced in risk
the organization from achieving its objective. ERM management have greater credit availability, rather
is an organizational concept that applies to all than reduced risk in the banking system.
levels of the organization”. The greater credit availability leads to the
opportunity to increase the productive assets and
In conducting ERM, the following are listed as bank’s profit. Schroeck (2002) and Nocco and
some of the areas or aspects of the organization that Stulz (2006) stress the importance of good risks
a risk manager need to look into namely: the management practices to maximize firms’ value. In
people, intellectual assets, brand values, business particular, Nocco and Stulz (2006) suggests that
expertise and skills, principle source of profit effective enterprise risk management (ERM) have a
stream and the regulatory environment (Searle, long-run competitive advantage to the firm (or
2008). This will help organization to balance the banks) compared to those that manage and monitor
two most significant business pressures; the risks individually. Schroeck (2002) proposes that
responsibility to deliver succeed to stakeholders ensuring best practices through prudent risk
and the risks associated with and generated by the management result in increased earnings.
business itself in a commercially achievable way.
By doing so, the risk manager is constantly aware The survival and success of a financial organization
of the risks it faces and therefore constantly depends critically on the efficiency of managing
monitors its exposure and be positioned to change these risks (Khan and Ahmed, 2001). More
strategy or direction to ensure the level of risks it importantly, good risk management is highly
takes is acceptable. relevant in providing better returns to the

shareholders (Akkizidis and Khandelwal, 2007; Al- (2007) confirmed that insurers heavily depend on
Tamimi and Al-Mazrooei, 2007). In addition, estimating the activities in future. This estimation
prudent risk management by financial institutions helps them to avoid adverse selection which is a
is the hallmark to avoid financial distress that could situation where those who buy insurance are
lead to a full blown financial crisis. individuals with high chances of encountering big
perils with higher claims than premiums paid.
2.1.3 Contingency Planning Theory According to Nyce (2007), traditionally, insurers
Contingency planning (CP) also known as business calculated premiums using univariate analysis
continuity planning is a crucial element of risk which involves one factor analysis like use of only
management. The fundamental basis of the age of an insured. But because of technology,
Contingency Planning (CP) is that, since all risks multivariate analysis which involves many factors
cannot be totally eliminated in practice, residual is nowadays used to get the premiums. This has led
risks always remain (Henderson, 1980). to predictive analytics used to determine the
additional information required to get the premium,
Despite the organization’s very best efforts to (Nyce, 2007). The results produced by predictive
avoid, prevent or mitigate them, incidents will still analytics show the likely occurrences with most
occur. Particular situations, combinations of results showing higher probability of the event
adverse events or unanticipated threats and occurring.
vulnerabilities may conspire to overwhelm even the Adams and Buckle’s (2003) study in the Bermuda
best information security controls designed to market examined the determinants of corporate FP
ensure confidentiality, integrity and availability of and found that highly leveraged, lowly liquid
information assets (Hisnson and Kowalski, 2008). companies had better operational performance than
lowly leveraged, highly liquid companies and that
In the context of this study, CP is defined as the performance was positively related to underwriting
totality of activities, controls, processes, plans etc. risk, suggesting that actuarial and operational risks
relating to major incidents and disasters. It is the are well managed. These results confirm those of
act of preparing for major incidents and disasters, Adams (1996) for the New Zealand market and
formulating flexible plans and marshaling suitable Akoteyet.al, (2013) for the Ghanaian market.
resources that will come into play in the event, Charumathi (2012), Chen and Wong (2004) and
whatever actually eventuates. The very word Chen et al, (2009) however contradict these
‘contingency’ implies that the activities and findings where they established that size is
resources that will be required following major positively related to profitability while premium
incidents or disasters are contingent (depend) on growth, leverage and equity capital are negatively
the exact nature of the incidents and disasters that related. Shiu’s (2004) study on the U.K. general
actually unfold. In this sense, CP involves insurance industry revealed that liquidity,
preparing for the unexpected and planning for the unexpected inflation, interest rate level and
unknown. The basic purpose of CP is to minimize underwriting profits were statistically significant
the adverse consequences or impacts of incidents determinants of the insurers’ performance. Choi,
and disasters (Odhiambo & Waiganjo, 2014). (2010) also tested the relationship between firm
size, age, and growth for the U.S. property and
liability insurance industry, and found that that
young firms grow faster than old firms during the
2.1.4 Multivariate Theory
sample periods thus impacting on their financial
Powell (2008) asserts that multivariate analysis
performance.
involves the examination of two or more variables
at the same time and then consider their 2.3 Conceptual Framework
interactions as predictors of losses in insurance A conceptual framework is used in research to
industry. According to Nyce (2007), multivariate outline possible courses of action or to present a
analysis includes advanced regression and time preferred approach to an idea or thought (Riggan,
series models which are used by business firms to 2012). Conceptual framework is an analytical tool
predict the trends or relationships of balance sheet with several variations and context (Ravitch &
and profit and loss account items which enable Riggan, 2012). It is used to make conceptual
them to know likely situations in the future. Nyce distinctions and organize ideas.

Liquidity Risk Management
.Cash flow projections
.Effective cash management
.Management policy
Operational Risk Management
Financial performance
.Management information system
.Profitability levels
.Human resource management
.Customer satisfaction
.Internal audit/controls
Enterprise Risk Management
.Service/Product quality
.Capital requirements
.Governance and supervision
.Risk appetite
Independent variables Dependent variable
Figure 2.1: The Conceptual Framework
2.4 Empirical Review Insurers are in the risk business. In the process of
providing insurance and other financial services,
2.4.1 Liquidity Risk Management they assume various kinds of actuarial and financial
risks. Reid and Ashelby (2002) the risks contained
Liquidity risk in an insurance company is in the insurer’s product sales-that is, those
considered as less threatening than in bank because embedded in the products offered to customers to
of higher frequency of money exchange takes place protect against actuarial risk-are not all borne
in banking industry compared to insurance industry directly by the insurer itself. In many instances, the
(Eckles, Hoyt & Miller, 2014). However, liquidity institution will eliminate or mitigate the actuarial
risk management is equally important in insurance and financial risk associated with a transaction by
as in banking sector because of interconnection of proper business practices; in others, it will shift the
financial system leading to cash crisis and secondly risk to other parties through a combination of
liquidity risk may prove very expensive to insurer reinsurance, pricing, and product design (Mayers &
due to meeting the cost of liquidity and also Smith, 1987). Only those risks that are not
impacting the Assets and Liability mismatch. eliminated or transferred to others are left to be
Based on earlier researches, the studies did not managed by the firm for its own account. This is
center on the liquidity risk especially in the the case because the insurance industry recognizes
insurance industry. Financial risk management can that it should not engage in business in a manner
be qualitative and quantitative. As a specialization that unnecessarily imposes risk upon it, nor should
of risk management, financial risk management it absorb risks that can be efficiently transferred to
focuses on when and how to hedge using financial other participants (Dutta a& Radner, 1999)..
instruments to manage costly exposures to risk. In Rather, it should manage risks at the firm level
the banking sector worldwide, the Basel Accords only if they are more efficiently managed there
are generally adopted by internationally active than by the market itself or their owners in their
banks for tracking, reporting and exposing own portfolios. In short, it should accept only those
operational, credit and market risks (Dixon et al., risks that are uniquely a part of the insurer’s array
1990). of services. Elsewhere it has been argued that risks
facing all financial institutions can be segmented
into three separable types from a management
perspective (Oldfield & Santomero, 1997).

These are risks that can be eliminated or avoided governments that insurers protect their assets and
by standard business practices, risks that can be revenues, and that policies and scientific methods
transferred to other participants and risks that must are established to ensure a minimum financial
be actively managed at the firm level. solvency and the continuity of its operations.
In these cases, the practice of risk avoidance
involves actions to reduce the chances of As seen in the research by Laeven & Perotti
idiosyncratic losses from standard insurance (2010), operational risk is increasingly important in
activity by eliminating risks that are superfluous to the management and corporate governance of
the institution’s business purpose. John (2011) insurance companies, which increasingly have
common risk avoidance practices include at least greater implications and interactions with the other
three types of actions. The standardization of risks that this insurers face, such as market or credit
process, insurance policies, contracts, and risks. The management and analysis of operational
procedures to prevent in efficient or incorrect risk is a necessary activity for insurers, presenting
financial decisions is the first of these. many opportunities for development and a major
field of study on conceptual and practical issues
Another is the construction of portfolios on both due to the particularity and complexity implied in
sides of the balance sheet that benefit from this type of risk.
diversification and the application of the law of
large numbers and central limit theorem, which The new European regulation, Solvency II, will
reduce the effects of any one loss, experience. inexorably increase the need of an effective
Finally, the implementation of incentive- management of operational risks and the
compatible contracts with the institution’s development and implementation of structured
management to require that employees be held methodologies for its analysis. It is also reviewed
accountable is the third. In each case, the goal is to the classical technique of modeling, Value at Risk
rid the firm of risks that are not essential to the (VaR), and other methodologies for the analysis
financial service provided, or to absorb only an and quantification of operational risk for insurers.
optimal quantity of a particular kind of risk. Wilks Horcher (2005) states that operational risk is not a
& imblelman (2004) found that there are also some new risk, in fact is the first risk that an insurer has
risks that can be eliminated, or at least substantially to manage, even before signing the first policy.
reduced, through the technique of risk transfer. However, the idea that operational risk
management is a discipline with its own
Markets exist for many of the risks borne by the organizational structure, tools and processes, like
insurance firm. Actuarial risk can be transferred to credit or market risks, is new and has evolved
reinsurers. Catastrophe risk can be offset somewhat considerably lately (Hernández& Martínez, 2012b).
by undertaking a position in catastrophe futures and In 1998, the Committee on Banking Supervision
in catastrophe bonds. Indeed, a number of capital published an advisory work related to operational
market alternatives for dealing with this kind of risk, enabling it to become an accepted part of good
risk are currently under consideration (Jaffee & risk management practices in modern financial
Russell, 1997). Interest rate risk can be hedged or markets.
transferred through interest rate products such as
swaps, caps, floors, futures, or other derivative According to this study, the major types of
products4 Insurance policies and lending operational risk include failure of internal controls
documents can be altered to effect a change in their and corporate governance. Failures that can lead to
duration and convexity. Equity market risk can be financial losses through error, fraud, or failure in
reduced with an appropriate futures position in the implementation of obligations in a timely
equities. In addition, an insurer can offer products manner or that could compromise the existence of
that absorb some financial risks, while transferring the entity in some way. This could include all
other risks to the purchaser. Dwivedi (2002) levels of the organization that exceeds its authority
defined contribution pension plans and variable or conduct unethical and unsafe practices. Other
universal life policies are clear examples of this aspects of operational risk include systems failures
approach. in information technology, or events such as fires
and other disasters (Ai & Brockett, 2008). Most
2.4.2 Operational risk management financial institutions allocate the responsibility for
Erkens, Hung & Matos (2012) describe that managing operational risk to managers in the
insurance companies face many risks, which should business units, so it is necessary to develop the
be managed, but their core competences and main incentive structures and processes for best
contribution to society is to accept the risks practices.
underwritten by businesses and individuals, hence
the strategic importance for citizens and

Those systems are being incorporated into the operational risk disclosure. While banks have come
overall process of internal evaluation, and requiring a long way in establishing best practices for
to those responsible for the business units and managing market, credit and liquidity risks,
losses the details of the results of corrective actions standards of practice for ORM have been far less
undertaken. Operational risk is a broad concept and uniform, with a range of approaches to the three
is defined by the Basel Committee on Banking lines of defense identified by BCBS.
Supervision (2004) as the risk of loss resulting
from inadequate or failed internal processes, people A well-defined and articulate ORM framework
and systems or from external events.‖ Operational needs to be part of the entire bank culture. We
risk management is in the early stages of expect regulators to continue elevating standards
development. According to Williams et al. (2006) for banks’ ORM, mandating banks to be much
awareness of operational risk as a separate risk more proactive in identifying, measuring,
category is being driven by most accounting firms, managing and disclosing operational risks.
which are beginning to include comments from
risks in their annual audit reports. 2.4.3 Enterprise risk management
This Practice discusses Enterprise Risk
On the other hand, only a few financial institutions Management (ERM) practices within insurance
now measure and report their risks on a regular organizations. According to the Casualty Actuarial
basis, although many are monitoring the Society, ERM is defined as “the discipline by
operational performance indicators, analyze the which an enterprise in any industry assesses,
experiences of loss and monitor the audit and controls, exploits, finances, and monitors risks
regulatory ratings. Iwaarden, Smith & Visser from all sources for the purpose of increasing the
(2006, p68) unlike market risk, and perhaps credit enterprise's short- and long-term value to its
risk, operational risk factors are mostly internal, stakeholders.”
and there is still no clear mathematical or statistical
relationship between individual risk factors and the The Committee of Sponsoring Organizations
likelihood and size operating losses (revenue (COSO) of the Treadway Commission defines
volatility). Sound operational risk management ERM as "a process, effected by an entity's board of
(ORM) should be a core element of any directors, management and other personnel, applied
institution’s overall governance and an integral part in strategy setting and across the enterprise,
of its enterprise risk management McNeil, Frey & designed to identify potential events that may affect
Embrechts , 2005).This entails disciplined and the entity, and manage risks to be within its risk
continuously monitored operational risk appetite, to provide reasonable assurance regarding
identification and mitigation efforts. The objective the achievement of entity objectives.” Both
is to avoid errors and occurrence of events capable definitions recognize ERM as a corporate function
of causing material financial or reputational losses that motivates an enterprise-wide understanding of
and any adverse impact on clients and risk and encourages commitment to the discipline
counterparties. Banks and other financial of risk-based decision-making.
institutions are no exception.
The practice of ERM within the insurance industry
However, the Basel Committee on Banking continues to evolve. Those insurers that had
Supervision’s (BCBS) survey of 60 significantly committed to the discipline of ERM several years
important banks in 20 jurisdictions has found that ago have begun to realize tangible benefits from
most banks are behind in implementing the their investment; many more insurance
“Principles for the Sound Management of organizations continue to work to implement or
Operational Risk” that it published in June 2011. enhance the discipline within their management
The “Principles” address governance, the overall framework. Meanwhile, interest in these practices
risk management environment and the role of continues to grow among rating agencies and
disclosure, and identify three lines of operational regulators who are interested in how insurers utilize
risk defense: business line management, an ERM in the day-to-day management of their
independent corporate operational risk businesses and pursuit of their goals.
management function, and an independent review.
Effective ERM is supported by a substantial
The BCBS survey concluded that many banks amount of quantitative analysis (Liebenberg &
showed some weakness in most areas but more Hoyt, 2003). While certain technical risk
egregiously in four key areas: operational risk measurement approaches are referenced within this
identification and assessment, change management, Practice Note, a thorough discussion of these
operational risk appetite and tolerance, and approaches is outside the scope of this Practice

Note. In addition, we recognize that the ERM 2.5 Critique of the existing literature relevant to
practices of any given insurance organization may the study
differ from those discussed within this Practice
Note, since the practice of ERM and regulatory So many theories has been advanced on risk
oversight of ERM continue to evolve. In order to management most of this seems to be making a
be successful, the ERM initiative needs to be focus on financial institutions that provide the
comprehensive. However, introducing enhanced services of lending e.g. banks and Sacco’s to
standards of risk management is a progressive reduce the risk of default and other risks leaving
process that cannot be achieved instantaneously aside the insurance companies which deal with
(Kumaraswamy, 2005). insuring different risks ranging from general to life
(Liebenberg & Hoyt, 2003). Lack of focus of risk
Therefore, it is necessary for an organisation to management on insurance companies has lead to
decide the scope of the ERM initiative, as it collapse of some insurance companies which could
develops. The scope of the initiative will be defined not be in a position to operate due to unmanaged
by the range of benefits the organisation is seeking risks.
to achieve and this will be influenced by the
expectations of the various stakeholders in the
2.6 Summary of Literature Review
organisation. Traditional risk management Although financial performance is influenced by a
separates risk categories into so called risk-silos
combination of factors facing the firm, a review of
(Liebenberg & Hoyt, 2003). This means that
the literature provides evidence as to why firms
different risk types; market, credit, liquidity and
should concern themselves with risk management.
operational risk are managed separately. The
Vaughan and Vaughan (2008), provide a
downside of this method is that because of the compelling reason for risk management by firms.
splitting up of the risks, every risk needs to be They assert that the primary goal of risk
managed individually, leading to inefficiencies in
management by firms is for survival. Risk
risk management.
management guarantees the continuity of the firm
as an operating entity, hence ensuring that the
Research on ERM has proven that ERM-adopting
firm is not prevented from attaining all its other
firms are able to produce a greater reduction of risk goals through losses that might arise from pure
per dollar spent on risk management. Firms risks. It is evident that the decisions made by
adopting ERM also experience a reduction in stock
managers affect the risks and financial performance
volatility. Due to the costliness and complexity of
of an insurance company. This then emphasizes the
ERM implementation, the reduction in stock
need for a proper risk management strategy to
volatility is gradual and grows over time (Eckles,
direct the goals and interests of management to the
Hoyt & Miller, 2014). To study the value interests of the organization. A firm’s stakeholders
implications of ERM in insurance companies, Hoyt
also require an assurance that their interests are
& Liebenberg (2011) created two main variables;
safeguarded by firm’s management and strategies.
Tobin‘s Q and ERM. Tobin‘s Q is the most often
From the literature, it is discovered that the desire
used proxy for firm value (Smithson & Simkins,
to improve financial performance should be
2005). balanced with the risks associated with the
operations of the firm. This then leads to the
The study has shown that firm engagement in ERM
development of a risk management program to
has positive outcomes. The announcement of a
meet the strategies of an organization.
chief risk officer (CRO) is used as one of the
indicators for ERM implementation. The mean and 2.7 Research Gaps
median Tobin‘s Q observations are significantly Research gaps exist since none of the studies
higher in the group with an identifiable ERM address the effect of risk management on the
program, meaning a higher firm value for the ERM financial performance of insurance firms. In
users Baxter, Bedard, Hoitash & Yezegel (2013) addition, majority of the studies are either done in
have investigated whether firms with high-quality the banking sector. In addition, the majority of the
ERM systems in place, perform better and are studies are done in developed economies hence
higher valued than firms with lower quality ERM leaving scarce literature in developing economies.
systems in place. Their findings show that a higher
level of ERM implementation ―assists A number of findings in the literature reviewed
performance by helping to mitigate losses and/or to show that Total assets turnover, Net profit margin,
take advantage of opportunities. Owners’ leverage, Return on assets and Return on
equity are positively related. Much has not been
done on the financial performance of insurance

firms in Kenya. According to Boadi, et al. (2013), financial performance of insurance firms in
studies on profitability of Insurance industry have Mombasa County, Kenya. According to Thayer-
not been widely conducted especially in emerging Hart, et al., (2010), a descriptive research design is
and developing markets. Cagil and Karabay (2010) appropriate because primary data is collected from
assert that most of the studies on insurance industry a sample of respondents and findings of study
have used Data Envelopment Analysis to assess generalized to represent whole population where
their financial performance with a few studies the sample was drawn from.
using multivariate analysis. It is because of this
reason that the present research used multivariate 3.3 Target Population
analysis to study the influence of risk management The target population of this study was 150
practices on financial performance of life assurance respondents comprising of 50 directors, 60 senior
firms in Kenya with a concentration on adverse managers, 20 junior staff and 20 agents involved in
selection problem. risk management of insurance firms. The directors,
senior managers, junior staff and agents were
drawn from the following companies:, Pan African
RESEARCH METHODOLOGY Life assurance ltd,Pioneer Assurance
Company,jubilee Insurance Company ltd,AAR
3.1 Introduction
Insurance Kenya ltd,Apollo Life Insurance
This section presented methodology that was used
Company , British American Insurance
in collecting and analyzing data. The section
company,CFC Life Insurance Company,CIC
further described type and sources of data, research
General Insurance ltd,CIC Life Assurance
design, target population, sampling techniques and
ltd,Madison Insurance Company,First Assurance
sample size plus pilot study and how data was
Company ltd,Cannon Assurance ltd,Kenidia
analyzed
Assurance Company,UAP Insurance Company and
Heritage Insurance Company. The respondents are
3.2 Research Design as shown in table 3.1 below.
The current study used a descriptive research
design to study effects of risk management on
Table 3.1 Target population

Number of respondents
Name of company Directors managers staff Agent TOTAL
Pan African life assurance ltd 4 4 2 2 12
Pioneer Assurance company ltd 4 4 1 2 11
Jubilee Insurance Company ltd 4 4 2 1 11
AAR Insurance Kenya ltd 3 4 3 1 11
Apollo Life Insurance Company 3 4 1 1 9
British American Insurance Company 4 4 1 3 12
CFC Life Assurance Ltd 3 4 1 1 9
CIC General Insurance Ltd 4 4 2 2 12
CIC Life Assurance Ltd 4 4 1 1 10
Madison Insurance Company 3 4 1 1 9
First Assurance Company Ltd 3 4 1 1 9
Cannon Assurance Ltd 2 4 1 1 8
Kenindia Assurance Company 3 4 1 1 9
UAP Insurance Company 3 4 1 1 9
Heritage Insurance Company 3 4 1 1 9
TOTAL 50 60 20 20 150
3.4 Sampling Frame Kenya will form the sampling frame of the study as
A sampling frame is the list from which the sample shown in Appendix V.
is selected, so the quality of the sampling frame
affects the quality of the sample (Mohadjer, 3.5 Sample Size and Sampling Techniques
Krenzke & Kerckhove, 2013). Basically, a The study’s sample size was 45 respondents which
sampling frame is a complete list of all the represented 30 % of target population. According
members of the population that were studied. A list to Yount (2013), 30 % is appropriate as a sample
of 49 insurance companies operating in Mombasa,

for small populations. Stratified random sampling reliability. Permission to disseminate

was used to select respondents in this study. questionnaires was sought through an introductory
letter (Appendix I)
3.6 Data Collection Instruments
The study collected both primary and secondary 3.8 Pilot Testing
data. Primary data was collected using structured According to Gardner et al. (2012), pilot study is a
questionnaires while secondary data was collected small scale version that produces meaningful
from published reports from AKI and audited findings by confirming design and operational
financial statements as presented to IRA for the processes of the main study. Pilot study was used
period 2010 to 2014,published journal articles, to test reliability of questionnaire of this research.
policy documents. Structured questionnaire was
appropriate in the study because respondents 3.8.1 Validity of the Instruments
readily responded truthfully to sensitive questions Validity is the extent to which inferences made
as they completed it at a time and place convenient based on numerical scores are appropriate,
for them (Eiselen & Uys, 2005) and was E-mailed meaningful and useful. Validity of the study is
to respondants. assessed depending on the purpose, population and
environmental characteristics in which
3.6.1 Primary Data measurements take place (Cohen et al. 2011).
The major tool of data collection for the study was Kothari (2004), states that validity is the most
the questionnaires for primary data. Neumann critical criterion and indicates the degree to which
(2011) asserts that questionnaires give respondents an instrument measures what it is supposed to
freedom to express their views or opinion and to measure. Cohen et al. (2011) states that to
make suggestions. Researchers use questionnaires demonstrate content validity the research
so that they can obtain information about the instrument must show that it fairly and
thoughts, feelings, attitudes, beliefs, values, comprehensively covers the domain or items that it
perceptions, personality and behavioral intentions purports to cover. To test validity of the data
of the research participants in a large population. collection instruments, a pilot study will be carried
From the questionnaires, the staff, directors and out to identify the research instrument that is
agents or the owners were asked to evaluate the ambiguous. This involves distributing samples of
extents to which risk management factors affect the the research instrument to five respondents, hence
financial performance of insurance companies. the response and understanding of the questions
Respondents choice ranged from 1 to 5 where 1 = analyzed. Ambiguity and irrelevant information
strongly agree, 2 = agree, 3 = neutral, 4 = disagree noted in the questionnaire will be modified for
and 5 = strongly disagree. Questionnaires provided validity purpose. The respondents will also be
data in the same form from all respondents. requested to respond on the clarity of the questions
presented to them.
3.6.2 Secondary Data
Secondary data was obtained from websites, 3.8.2 Reliability of the Instruments
published journal articles, policy documents and Reliability is the extent to which a research
other official documents. Records were examined instrument yields measures that are consistent each
to gather more information on various aspects of time it is administered to the same individuals or
performance of insurance companies. Mugenda & yields consistent results (Kothari, 2004). Internal
Mugenda (2013) defined secondary data as any consistency reliability will be done after all items
publication by an author who was not a direct have been constructed. A pilot study will be carried
observer or participant in the events described. out among 10 staff or agents from 3 randomly
Researchers used secondary data because of selected Insurance companies in Mombasa County,
breadth of data available at their disposal. Kenya to identify some of the short comings likely
to be experienced during the actual study and hence
3.7 Data Collection Procedures enhance reliability (Kombo & Tromp, 2006).
Data was collected by use of questionnaires Cronbach Alpha formula in the SPSS computer
(Appendix II). The questionnaires were programme will be used to calculate the correlation
administered to the respondents through drop and coefficient. Sekeran and Bougie (2010) highlighted
pick technique by the researcher and collected 2 that Cronbach’s alpha coefficient ranges between 0
days after administration. The respondents were the and 1 with higher alpha coefficient values of 0.7
staff, directors and agents of the various insurance and above being more reliable. In this study, a
companies. The data collection tools enabled a threshold of 0.7 will be used to establish the
trade-off between cost, speed, accuracy, detail, reliability of the data collection instrument.
comprehensiveness, response rate, clarity and
anonymity which was useful for validity and

3.9 Data Analysis and Presentation β2SLS = Change in financial performance resulting
The questionnaires used for the survey will be pre- from influence in operational risk
coded to facilitate easy analysis of data and the management
responses from each questionnaire input into a β3GP = Change in financial performance resulting
spreadsheet for tabulation. The Statistical Package from influence in enterprise risk
for Social Science (SPSS) version 24 software management
package will be used for further analysis of the β1 –β5 = Regression coefficient for each
data. The responses will be coded with numbers Independent variable
including open questions as data will be analyzed β0 = Constant or intercept (value of dependent
using quantitative techniques. Once the data will be variable when all independent variables are zero)
analysed the findings will be generalized in order ε = Stochastic Error Term.
to determine patterns of behavior and particular
outcomes. The questionnaire will then be checked
for completeness and consistency before the DATA ANALYSIS RESULTS AND
processing of the responses. Pearson’s correlation DISCUSSION
analysis will be conducted at 95% confidence
interval and 5% confidence level 2-tailed to 4.1 Introduction
determine the strength of the variable. An analysis This chapter presents analysis of the data on the
of Variance (ANOVA) will also be done to effects of risk management on financial
establish the relationship between variables. In performance of Insurance Companies in Mombasa
addition, a multiple regression will be used to County, Kenya. The chapter also provides the
measure the quantitative data and the relationship major findings and results of the study and
of the variables. The regression equation is: discusses those findings and results against the
literature reviewed and study objectives. The data
Regression equation is mainly presented in frequency tables, means and
FP= β0+ β1SC + β2 SLS+ β3 GP + ε standard deviation.
Where:-
FP = Dependent variable (Financial 4.2 Response Rate
Performance) The study targeted 45 employees of insurance
β1SC = Change in financial performance resulting companies operating in Mombasa County, Kenya.
from influence in Financial risk From the study, 41 out of the 45 sample
management respondents filled-in and returned the
questionnaires making a response rate of 91.1% as
per Table 4.1 below.
Table 4.1 Questionnaire Response Rate
Frequency Percentage
Response 41 91.1%
Non- Respondents 4 8.9%
TOTAL 100 100
According to Kothari and Gang, (2014) a response important role for accepting the sample adequacy.
rate of 50% is adequate for analysis and reporting; While the KMO ranges from 0 to 1, the world-over
a rate of 60% is good and a response rate of 70% accepted index is over 0.5. Also, the Bartlett’s Test
and over is excellent; therefore, this response rate of Sphericity relates to the significance of the study
was adequate for analysis and reporting. and thereby shows the validity and suitability of the
responses collected to the problem being addressed
4.2.1 Validity through the study. For Factor Analysis to be
Factor analysis was used to check validity of the recommended suitable, the Bartlett’s Test of
constructs. Kaiser-Mayor-Oklin measures of Sphericity must be less than 0.05.
sampling adequacy (KMO) & Bartlett’s Test of
Sphericity is a measure of sampling adequacy that The study applied the KMO measures of sampling
is recommended to check the case to variable ratio adequacy and Bartlett’s test of sphericity to test
for the analysis being conducted. In most academic whether the relationship among the variables has
and business studies, KMO & Bartlett’s test play an been significant or not as shown in below in table

4.2. Factor 1 was based on six items that sampling adequacy shows the value of test statistic
represented liquidity risk management; Factor 2 as 0.794, which is greater than 0.5 hence an
was based on six items that represented operational acceptable index. While Bartlett’s test of sphericity
risk management, Factor 3 was based on six items shows the value of test statistic as 0.000 which is
that represented enterprise risk management, Factor less than 0.05 acceptable indexes. This result
4 was based on two items that represented financial indicates a highly significant relationship among
performance. The Kaiser-Mayor-Oklin measures of variables.
Table 4.2 KMO and Bartlett’s Test
KMO and Bartlett's Test

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .794
Bartlett's Test of Sphericity Approx. Chi-Square 7.021
df 6
Sig. .319
collected using the questionnaire. The pilot study

4.2.2 Reliability Analysis allowed for pre-testing of the research instrument.
Prior to the actual study, a pilot study was carried The results on reliability of the research
out to pre-test the validity and reliability of data instruments are presented in Table 4.3
Table 4.3 Reliability Analysis
Scale Cronbach’s Alpha Number of Items Remarks

Liquidity Risk Management 0.813 6 Accepted
Operational Risk Management 0.797 6 Accepted
Enterprise Risk Management 0.883 6 Accepted
Financial Performance 0.798 3 Accepted
The overall Cronbach's alpha for the four 4.3.1 Number of branches
categories which is 0.792. The findings of the pilot The stud sought to establish the number of
study showed that all the four scales were reliable branches an insurance company has. The study
as their reliability values exceeded the prescribed results revealed that insurance companies that have
threshold of 0.7 (Bryman and Bell, 2015). between 0 – 10 branches were 48.1%, between 11 –
20 branches were 31.7% and between 21 – 30
4.3 Background Information branches were 19.5% with a mean score of 1.71
The background information gathered was based and a standard deviation of 0.782 as shown in
on how many branches an insurance company has Table 4.4. This shows that the majority of
and how long an insurance company has been in respondents that participated in the study revealed
operation. that many insurance companies have between 0 –
10 branches.
Table 4.4 Number of Branches
Branches Frequency Percentage

Between 1 – 10 Branches 20 48.8
TOTAL 41 100
4.3.2 Experience of Insurance Company 26.8% and more than 30 years were 29.3% with a
The study sought to establish the experience of the mean score of 2.71 and a standard deviation of
insurance company. The study results revealed that 1.055 as shown in Table 4.5. This shows that the
insurance companies that have an experience of majority of insurance companies that participated
between 0 – 10 years were 14.6%, between 11 – 20 in the study have an experience of between 11 – 20
years were 29.3%, between 21 – 30 years were years and more than 30 years.

Table 4.5 Experience of Insurance Companies
Years Frequency Percentage

Between 1 – 10 Years 6 14.6
More than 30 Years 12 29.3
TOTAL 41 100
4.4 Analysis of Objectives 4.4.1 Liquidity Risk Management

In the research analysis the researcher used a tool The study sought to establish the effect of liquidity
rating scale of 5 to 1; where 5 were the highest and risk management on financial performance of
1 the lowest. Opinions given by the respondents insurance firms in Kenya. The study results
were rated as follows, 5= Strongly Agree, 4= revealed that 73.2% believe that liquidity risk
Agree, 3= Neutral, 2= Disagree and 1= Strongly management has an effect on financial performance
Disagree. The analyses for mean, standard of insurance firms in Kenya and 26.8% had a
deviation were based on this rating scale. contrary opinion with a mean score of 1.27 and a
standard deviation of 0.449 as shown in Table 4.6.
Table 4.6 Effects of Liquidity Risk Management on Financial Performance
Response Frequency Percentage

Yes 30 73.2
No 11 26.8
TOTAL 41 100
Further, the study sought to establish whether management increases financial performance and
liquidity risk management increases or decreases 31.7% believe it decreases financial performance
financial performance. Results revealed that 68.3% with a mean score of 1.32 and a standard deviation
of the respondents believe that liquidity risk of 0.471 as shown in table 4.7.
Table 4.7 Whether Liquidity Risk Management increases or decreases financial performance
Increases Financial Performance 28 68.3
Decreases Financial Performance 13 31.7
TOTAL 41 100
Table 4.8 Liquidity Risk Management
Descriptive Statistics
Std.
N Mean Deviation
Liquidity risk management have a favorable effect on the financial
41 3.44 1.050
performance of insurance companies
Cash flow projection is one of the major factors affecting financial
41 4.29 .782
Appropriate liquidity risk management practices are likely to enhance
41 4.59 .547
the financial performance of insurance companies
Valid N (listwise) 41
The statement that liquidity risk management have companies had a mean score of 4.29 and a standard
a favorable effect on the financial performance of deviation of 0.782. The statement that appropriate
insurance companies had a mean score of 3.44 and liquidity risk management practices are likely to
a standard deviation of 1.050. The statement that enhance the financial performance of insurance
cash flow projection is one of the major factors companies had a mean score of 4.59 and a standard
affecting financial performance of insurance deviation of 0.547.

The study further, sought to establish the average study results revealed that 70.7% believe that
number of new clients. The study results revealed operational risk management affects financial
that there has been a steady increase in the number performance of insurance firms in Kenya and
of new clients from 2011 with between 5,000 – 10, 29.3% believe that operational risk management
000 and more than 10,000 new clients for 2012, does not affect financial performance of insurance
2013, 2014 and 2015 respectively. firms in Kenya with a mean score of 1.29 and a
standard deviation of 0.461 as shown in Table 4.9.
4.4.2 Operational Risk Management This shows that majority of respondents believe
The study sought to establish the effect of that operational risk management affects financial
operational risk management on financial performance of insurance firms in Kenya.
performance of insurance firms in Kenya. The
Table 4.9 whether operational risk management affects financial performance of insurance firms in
Kenya
State Frequency Percent

Yes 29 70.7
No 12 29.3
TOTAL 41 100
The study sought to establish whether operational performance of insurance firms and 31.7%
risk management has an effect on financial decreases financial performance with a mean score
performance of insurance firms in Kenya. The of 1.32 and a standard deviation of 0.471 as shown
study results revealed that 68.3% believe that in Table 4.10.
operational risk management increases financial
Table 4.10 whether operational risk management increases or decreases financial performance of
Insurance Firms in Kenya
Frequency Percent
TOTAL 41 100
Table 4.11 Operational Risk Management
Std.
N Mean Deviation
Operational risk management have a favorable effect on the financial
41 3.54 1.027
Management Information System is one of the major factors affecting
41 4.56 .634
financial performance of insurance companies
Appropriate operational risk management practices are likely to enhance
41 4.41 .670
the financial performance of insurance companies
The statement operational risk management have a The study sought to establish the number of new
favorable effect on the financial performance of premiums on average that insurance firms have
insurance companies had a mean score of 3.54 and gained. The study results revealed that majority of
a standard deviation of 1.027. The statement in insurance firms gained less than 1 billion in 2011,
agreement that management information system is KES 1 – 3 billion between 2012 and 2013 and KES
one of the major factors affecting financial 3 – 5 billion to KES more than 10 billion in 2014
performance of insurance had a mean score of 4.56 and 2015.
and a standard deviation of 0.634. The statement
that appropriate operational risk management 4.4.3 Enterprise Risk Management
practices are likely to enhance the financial The study sought to establish the effect of
performance of insurance companies had a mean enterprise risk management on financial
score of 4.41 and a standard deviation of 0.670. performance of insurance firms’ in Kenya. The

study results revealed that 97.6% believe that deviation of 0.156 as shown in Table 4.12. This
enterprise risk management has an effect on shows that majority of respondents believe that
financial performance and 2.4% believe that it does enterprise risk management has an effect on
no with a mean score of 1.02 and a standard financial performance of insurance firms in Kenya.
Table 4.12 Effect of Enterprise Risk Management on Financial Performance of Insurance Firms
Yes 40 97.6
No 1 2.4
TOTAL 41 100
The study sought to establish whether enterprise management decreases financial performance with
risk management increases or decreases financial a mean score of 1.17 and a standard deviation of
performance of insurance firms in Kenya. The 0.381 as shown in Table 4.13. This shows that the
study results revealed that 82.9% believe that majority of respondents believe that enterprise risk
enterprise risk management increases financial management increases financial performance.
performance and 17.1% believe that enterprise risk
Table 4.13 whether enterprise risk management increases or decreases financial performance of
insurance firms’ in Kenya
TOTAL 41 100
Table 4.14 Enterprise Risk Management

Std.
N Mean Deviation
Enterprise risk management have a favorable effect on the financial
41 3.71 1.146
performance of insurance companies in Kenya
Governance and supervision is one of the major factors affecting financial
41 4.44 .594
performance of insurance companies in Kenya
Appropriate enterprise risk management practices are likely to enhance the
41 4.66 .575
financial performance of insurance companies in Kenya
The statement that enterprise risk management claims ranged between KES 1 – 3 billion for the
have a favourable effect on the financial years 2013, 2014 and 2015.
performance of insurance companies in Kenya had
a mean score of 3.71 and a standard deviation of 4.4.4 Financial Performance
1.146. The statement that governance and The study sought to establish the average amount
supervision is one of the major factors affecting of money that the insurance firms made in total as
financial performance of insurance companies in profits. The study results revealed that majority of
Kenya had a mean score of 4.44 and a standard insurance companies earned profits of more than
deviation of 0.594. The statement that appropriate KES 1 billion.
enterprise risk management practices are likely to
enhance the financial performance of insurance The study sought to rate the financial performance
companies in Kenya had a mean score of 4.66 and of the respondents insurance company in relation to
a standard deviation of 0.575. variance analysis. The study results revealed that
4.9% unfavorable, 9.8% moderate, 29.3%
The study sought to establish the average amount favorable and 56.1% most favorable with a mean
of money that insurance companies paid in total in score of 3.37 and a standard deviation of 0.859 as
terms of claims received. The study results shown in Table 4.15. This shows that the majority
revealed that majority of claims were less than of respondents believe that financial performance
KES 1 billion between 2011 and 2012 whereas

of insurance companies in Kenya were most favorable.
Table 4.15 Rating of Financial Performance
Frequency Performance
0 – 1 Unfavorable 2 4.9
2 – 3 Moderate 4 9.8
3 – 4 Favourable 12 29.3
4 – 5 Most Favorable 23 56.1
TOTAL 41 100
variable (Financial Performance) and the

4.5 Correlation Analysis independent variables (Liquidity Risk
To establish the relationship between the Management, Operational Risk Management and
independent variables and the dependent variable Enterprise Risk Management). According to
the study conducted correlation analysis which Sekaran, (2015), this relationship is assumed to be
involved coefficient of correlation and coefficient linear and the correlation coefficient ranges from -
of determination. 1.0 (perfect negative correlation) to +1.0 (perfect
positive relationship). The correlation coefficient
4.5.1 Coefficient of Correlation was calculated to determine the strength of the
Pearson Bivariate correlation coefficient was used relationship between dependent and independent
to compute the correlation between the dependent variables (Kothari and Gang, 2014).
Table 4.16 Pearson Correlation
Correlations
Financial Liquidity Risk Operational Risk Enterprise Risk
Performance Management Management Management
Financial 1
Performance
41
Liquidity Risk Management .240 1
.000
41 41
Operational Risk Management .048 .097 1
.000 .000
41 41 41
Enterprise Risk Management .061 .322 *
.005 1
.000 .000 .000
41 41 41 41
*. Correlation is significant at the 0.05 level (2-tailed).
In trying to show the relationship between the equal to 0.240, 048, and 0.061 for liquidity risk
study variables and their findings, the study used management, operational risk management and
the Karl Pearson’s coefficient of correlation (r). enterprise risk management respectively. This
This is as shown in Table 4.16 below. According to indicates positive relationship between the
the findings, it was clear that there was a positive independent variable namely liquidity risk
correlation between the independent variables, management, operational risk management and
liquidity risk management, operational risk enterprise risk management and the dependent
management and enterprise risk management and variable financial performance.
the dependent variable financial performance. The
analysis indicates the coefficient of correlation, r

4.5.2 Coefficient of Determination (R2) predict causal relationship between independent

variables Liquidity risk management, operational
To assess the research model, a confirmatory risk management and enterprise risk management),
factors analysis was conducted. The three factors and the dependent variable (Financial
were then subjected to linear regression analysis in Performance).
order to measure the success of the model and
Table 4.17 Coefficient of Determination (R2)
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .751a .564 .550 .66679
a. Predictors: (Constant), Enterprise Risk Management, Operational Risk Management, Liquidity Risk
Management
The model explains 56.4% of the variance 4.6 Regression Analysis
(Adjusted R Square = 0.550) on financial
performance. Clearly, there are factors other than 4.6.1 Analysis of Variance (ANOVA)
the four proposed in this model which can be used The study used ANOVA to establish the significance
to predict financial performance. However, this is of the regression model. In testing the significance
still a good model as Cooper and Schinder, (2013) level, the statistical significance was considered
pointed out that as much as lower value R square significant if the p-value was less or equal to 0.05.
0.10-0.20 is acceptable in social science research. The significance of the regression model is as per
Table 4.13 below with P-value of 0.00 which is less
This means that 56.4% of the relationship is than 0.05. This indicates that the regression model is
explained by the identified three factors namely statistically significant in predicting factors of
Liquidity risk management, Operational Risk logistics service delivery. Basing the confidence level
Management. The rest 43.6% is explained by other at 95% the analysis indicates high reliability of the
factors in the financial performance not studied in results obtained. The overall Anova results indicates
this research. In summary the three factors studied that the model was significant at F = 12.833, p =
namely, or determines 56.4% of the relationship 0.000.
while the rest 43.6% is explained or determined by
other factors.
Table 4.17 ANOVA
ANOVAa
Model Sum of Squares df Mean Square F Sig.
1 Regression 1.111 3 .370 12.833 .000b
Residual 16.450 37 .445
Total 17.561 40
a. Dependent Variable: Financial Performance
b. Predictors: (Constant), Enterprise Risk Management, Operational Risk Management, Liquidity Risk
Management
4.6.2 Multiple Regression

The researcher conducted a multiple regression analysis as shown in Table 4.18 so as to determine the
relationship between value chain and the four variables investigated in this study.
Table 4.18 Multiple Regression
Coefficientsa
Standardized
Unstandardized Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 4.103 1.611 2.546 .000
Liquidity Risk Management .104 .069 .254 1.503 .000
Operational Risk
.036 .079 .073 .455 .002
Management

Enterprise Risk
.008 .066 .021 .123 .003
Management
a. Dependent Variable: Financial Performance
The regression equation was:

Y = 4.103 + 0.104X1 + 0.036X2 + 0.008X3
Where;
Y = the dependent variable (Financial Performance)
X1 = Liquidity Risk Management
X2 = Operational Risk Management
X3 = Enterprise Risk Management
The regression equation above has established that researcher used a structured questionnaire that was
taking all factors into account (Financial personally administered to the respondents. The
performance as a result of Liquidity Risk questionnaire constituted 20 items. The
Management, Operational Risk Management and respondents were the employees of various
Enterprise Risk Management) constant at zero insurance companies in Mombasa County. In this
financial performance will be 4.103. The findings study, data was analyzed using frequencies, mean
presented also shows that taking all other scores, standard deviations, percentage, Correlation
independent variables at zero, a unit increase in and Regression analysis.
Liquidity risk management will lead to a 0.104
increase in the scores of financial performance; a The study results revealed that majority of the
unit increase in operational risk management will insurance companies have between 1 – 10 branches
lead to a 0.036 increase in financial performance; a with an operational experience of between 11 – 20
unit increase in enterprise risk management will years and more than 30 years respectively. Further,
lead to a 0.008 increase in the scores of financial the study revealed that the coefficient of
performance. This therefore implies that all the determination was 56.4 and that there was a
three variables have a positive relationship with positive correlation between the independent
liquidity risk management contributing most to the variable and the dependent variable.
dependent variable.
This therefore implies that all the three variables 5.2.1 Liquidity Risk Management
have a positive relationship with financial The study revealed that liquidity risk management
performance with liquidity risk management affects financial performance of insurance
contributing most to the dependent variable. From companies in Kenya. Further the study revealed
the table we can see that the predictor variables of that there is a direct relationship between the
liquidity risk management, operational risk liquidity risk management and the financial
management and enterprise risk management got performance of insurance companies in Kenya such
variable coefficients statistically significant since that when there is high liquidity risk financial
their p-values are less than the common alpha level performance reduces and when the liquidity risk
of 0.05. reduces there is an increase in financial
performance. The study showed that there was an
increase in the number of new clients to the
SUMMARY OF THE FINDINGS, insurance companies in Kenya.
CONCLUSION AND RECOMMENDATIONS
5.2.2 Operational Risk Management
5.1 Introduction The study revealed that operational risk
The chapter provides the summary of the findings management affects financial performance of
from chapter four, and it also gives the conclusions insurance firms in Kenya. The study results also
and recommendations of the study based on the revealed that when operational risk is high financial
objectives of the study. The chapter finally presents performance of insurance companies reduces and
the limitations of the study and suggestions for when the operational risk is low there is an increase
further studies and research. in the financial performance of insurance
companies in Kenya. That management
5.2 Summary of the Findings information systems is one of the major factors
The objectives of this study was to examine the affecting financial performance of insurance
effects of risk management on financial companies in Kenya. Maintenance of operational
performance of insurance companies in Mombasa. risks within manageable limits improves financial
The study was conducted on 41 out of 45 that performance of insurance companies in Kenya. The
constituted the sample size. To collect data the study showed with decreased operational risks

there was an increase in the amounts of premiums 3. That insurance companies should employ
paid to the insurance companies in Kenya. mush of the enterprise risk management in
order to be able to diversify into other
5.2.3 Enterprise Risk Management products that improve on the revenue
The study revealed that enterprise risk management streams
affects financial performance of insurance firms in
Kenya. The study also revealed that when the 5.5 Suggestion for Further Studies
enterprise risk management is high there was a This study focused on the effects of risk
decrease in financial performance of insurance management on financial performance of insurance
companies in Kenya and the converse was found to companies in Mombasa County Kenya. Since only
be true. Governance and supervision affects 56.4% of results were explained by the independent
financial performance of insurance companies in variables in this study, it is recommended that a
Kenya. study be carried out on other effects of risk
management on financial performance in the
5.3 Conclusion banking industry. The research should also be
From the research findings, the study concluded all done in government owned insurance companies
the independent variables studied have significant and the results compared so as to ascertain whether
effect on logistics service delivery as indicated by the there is consistency on financial performance of
strong coefficient of correlation and a p-value which insurance companies.
is less than 0.05.The overall effect of the analyzed
factors was very high as indicated by the coefficient
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Imperial Journal of Interdisciplinary Research (IJIR)

Vol-3, Issue-5, 2017

Effects of Risk Management on

Imperial Journal of Interdisciplinary Research (IJIR) Page 259

In recent years, insurance companies have of risk management on financial performance of

According to Saleem & Abideen (2011), risk 1.1.2 Financial Performance

Imperial Journal of Interdisciplinary Research (IJIR) Page 260

Imperial Journal of Interdisciplinary Research (IJIR) Page 261

Imperial Journal of Interdisciplinary Research (IJIR) Page 262

1.4 Research Questions 2.2Theoretical Review

Imperial Journal of Interdisciplinary Research (IJIR) Page 263

that better services and greater satisfaction are

Imperial Journal of Interdisciplinary Research (IJIR) Page 264

Imperial Journal of Interdisciplinary Research (IJIR) Page 265

Liquidity Risk Management

.Cash flow projections

.Effective cash management

.Governance and supervision

Figure 2.1: The Conceptual Framework

Imperial Journal of Interdisciplinary Research (IJIR) Page 266

Imperial Journal of Interdisciplinary Research (IJIR) Page 267

Imperial Journal of Interdisciplinary Research (IJIR) Page 268

Imperial Journal of Interdisciplinary Research (IJIR) Page 269

Table 3.1 Target population

Imperial Journal of Interdisciplinary Research (IJIR) Page 270

for small populations. Stratified random sampling reliability. Permission to disseminate

Imperial Journal of Interdisciplinary Research (IJIR) Page 271

Non- Respondents 4 8.9%

TOTAL 100 100

Imperial Journal of Interdisciplinary Research (IJIR) Page 272

KMO and Bartlett's Test

collected using the questionnaire. The pilot study

Scale Cronbach’s Alpha Number of Items Remarks

Branches Frequency Percentage

Imperial Journal of Interdisciplinary Research (IJIR) Page 273

Table 4.5 Experience of Insurance Companies

Years Frequency Percentage

4.4 Analysis of Objectives 4.4.1 Liquidity Risk Management

Response Frequency Percentage

Table 4.8 Liquidity Risk Management

Imperial Journal of Interdisciplinary Research (IJIR) Page 274

State Frequency Percent

Table 4.11 Operational Risk Management

Imperial Journal of Interdisciplinary Research (IJIR) Page 275

Table 4.14 Enterprise Risk Management

Imperial Journal of Interdisciplinary Research (IJIR) Page 276

of insurance companies in Kenya were most favorable.

Table 4.15 Rating of Financial Performance

variable (Financial Performance) and the

Imperial Journal of Interdisciplinary Research (IJIR) Page 277

4.5.2 Coefficient of Determination (R2) predict causal relationship between independent

Table 4.17 ANOVA

4.6.2 Multiple Regression

Table 4.18 Multiple Regression

Imperial Journal of Interdisciplinary Research (IJIR) Page 278

The regression equation was:

Imperial Journal of Interdisciplinary Research (IJIR) Page 279

1. That insurance companies should be as Banks, E. (2004). Alternative Risk Transfer:

Imperial Journal of Interdisciplinary Research (IJIR) Page 280

Imperial Journal of Interdisciplinary Research (IJIR) Page 281

Okotha, H. (2006). Corporate Risk

Pagach, D. P. & Warr, R.S. (2010). The Effects of

Pagano, M.S. (2001). How Theories of Financial

Quach, M. (2005). Problems in Managing Internal