CHAPTER ONE

INTRODUCTION

1.1 Introduction

In order to improve performance and exploit opportunities brought about by different factors

like globalization, regulatory and technological changes, organization across sectors in

Kenya, have been embracing different measures. These measures helps the organizations to

optimize on the resources and capabilities to exploit opportunities and deal with challenges in

a given business domain

1.2 Background of the study

Due to the high competency requirements, most organizations aim to generate the kind

of performance that can bring the most profit (Kami and Shakiba, 2015). Performance is

termed as the organization’s ability to properly utilize the available resources, both physical

and human capabilities in achieving the set organization’s goal and targets. There are

various factors which have been established to highly determine how organizations

internally and externally. This also relates to the insurance companies that operate by

providing protections to both individuals and organizations regarding certain speculated

risks that are prone to happen. They thus have to ensure that they remain profitable while still

catering for their customers’ wellbeing(Baltensperger et al., 2016).Resource based view (RBV)

advocate the use internal resources to achieve sustained competitive advantage instead of

focusing on competitive environment. Also RBV connects the organization’s exhibitions on

enhancement and item advancement strategy. Whereas, the Dynamic Capabilities Theories

hold that organizations should understand the capabilities which they are best in and maximize
them. Resource base view as a method is used to analyze firm’s strategic advantage based

on unique combination of resources and capabilities that the firm controls (Pearce and

Robinson, 2011). The proponents of this view focuse’s on a company’s internal resources to

generate assets, competencies and capabilities with the aim to derive competitive advantage

against other firms. Organizations are seeking to create much competition between them,

taking more market, more customers, more sales, etc. (Gupta,2018).Various theoretical

frameworks available try to bring out the determinants of performance in

organizations and how to manage them. The Open Systems Theory depicts the concept of a

system as a situation where all are characterized by an assemblage or combination of parts

whose relations make them interdependent.

A report by IRA insurance industry shows that Kenyan insurance industry has a total of 54

insurance companies already operating. Among these companies half of them underwriting

general/property business while the other half operating in Life insurance business. APA

insurance company is among those which operate in general/property insurance. According to

the APA company’s premium income, it registered a strong performance in the year 2018

increasing to shs.9.559 billion from shs.8.303 billion from 2017, an impressive 15 % growth in

the market during the year.

In Kenya, the insurance sector plays an important role in enhancing economic growth and

development. The sector has grown drastically in the past two decades to become a leading

GDP contributor. However, the impressive growth in premiums and incomes has not been

matched with penetration into the potential market(Olima, 2015).This shows that the sector

may be improved even further if much emphasis is given towards the underlying factors that

determine how the insurance companies perform.

1.2.1 Organization performance

Performance is described as how well a firm is able to utilize its available resources in

accomplishing its set targets and goals (Odemba, 2016). It can also be described as the ability of

an organization to gain and manage itos resources in a way to develop competitive

advantage. Similarly, Kaplan and Norton, (2018) described performance as a comparison of

returns of a particular organization against the returns of similar organizations in the same

field. Kaplan and Norton (2015) designed the balance scorecard as a framework for organization

to measure their performance from wider perspectives than the traditional financial

measures. The Balance scorecard fills gaps in financial ratios analysis which is based on past

firm financial performance. The four perspectives covered by the balance scorecard are

financials, customer, innovation and learning and Internal perspective. The four perspectives

provide a holistic approach to how organization measure performance by requiring firms to

address four basic questions: How customer perceives them, what the firm must excel at, how

they can continue and create value, and how the firm want to be perceived by shareholders?

According to APA insurance company’s accounting books 2018,with better and effective claims

management, the company has been able to control loss ratios in the face of declining premiums

rates 2018.The overall loss ratio improved marginally from 67% to 66% while the medical loss

ratio also declined to 77% from 79% over the period of one year.

1.2.2 Concept of Insurance

Insurance is a financial institution that serves as an insurance agency or risk management.

Similarly, Baltensperger et al., (2016) defines insurance as a platform collector of funds

and can be used to finance economic development. This entails providing protection to the
policy holders against certain risks that they are vulnerable to such as damage to their

property, loss of their property, health and casualties. In return for the risk protection, the

companies receive premiums from the policy holders which are used to cover for their operating

expenses and cater for these expected risks (Kazemi and Shakiba, 2015). Currently, the sector is

among the leading in terms of both attractiveness and growth in the potential. This has seen

investors both locally and internationally to enter in the market to buy stakes in the already

existing local insurance companies and also invest in future ventures (AKI, 2016). The sector is

among the leading contributors to the GDP contributing to a gross written premium of over

Ksh.160 billion in 2014 which is an increase from Ksh.130 billion in the year 2013 translating to

a 23% increase.

However, the insurance sectors’ penetration still remains relatively low with the penetrations still

being less than 5%. But the insurance penetration in Kenya is better compared to the rest of the

countries in Africa which have an average penetration of 2%. The low penetration levels imply

that the sector still has a huge potential of improving. This can be realized by venturing into new

markets such as the oil and real estates, while addressing the challenges facing the sector

(Chache, 2016).

1.2.3 Insurance companies in Kenya

Kenya insurance industry which is regulated by Insurance Regulatory Authority (IRA).IRA had

a strategic plan 2013-2018 which indicated that Insurance industry in Kenya plays an important

role in the Kenyan economy through contributing to the national development agenda through

providing broader financial solutions and services, nurturing entrepreneurial attitudes, boosting

investment, innovation, market dynamism and competition, offering social protection alongside
the state, releasing pressure on public sector finance; enhancing financial intermediation,

creating liquidity and mobilizing savings.

The main players in the Kenyan insurance sector are insurance companies, risk managers,

brokers, insurance agents, re-insurance companies and other service providers (Insurance

Regulatory Authority, 2010). There were over 5000 insurance companies as at the end of 2015

(AKI, 2014). Out of these insurance companies, only 54 had been registered by the end of 2016;

27 being under the non-life insurance sector, 16 under the life insurance sector and 11 under the

composite sector which is both life and non-life segment (AKI, 2016).

1.2.4: APA insurance

APA Insurance was established in 2013 after the merger between Pan Africa Insurance and

Apollo Insurance general business. APA Insurance began operations in 2014 and in less than

15years the Company has become a dominant player in the Insurance industry with a market

share 8.5% in 2015.In 2018 ,the IMF forecast Gross Domestic Product (GDP) will expand to

5.7% in 2018 compared to 4.9% growth recorded in 2017.The fund’s forecast was supported by

data from Kenya National Bureau of Statistics(KNBS) ,which showed that GDP has expanded by

6.3% in the first three quarters of 2018.

The company has been doing reasonably well considering the challenging scenarios experienced

in the country. Against a budgeted growth rate of 17% ,it grew with 15% registering a gross

premium income of Kshs.9.5 billion in 2018 compared to a gross premium of Kshs.8.3 billion in

the previous
 KENMAC-55%

MINORITIES-
APOLLO INVESTIMENT
SWISS RE-27%
18%

100%

APOLLO ASSET
APA INSURANCE APA LIFE APA
MANAGEMENT
ASSURANCE(LIFE
(ASSET & INSURANCE-
(GENERAL
INSURANCE &
INSURANCE) WEALTH
PENSION) (UGANDA)
MANAGEMENT)

GORDON COURT-

(PROPERTY MGT)
RELIANCE INSURANCE

LTD-(TANZANIA)- (KENYA)

GENERAL INSURANCE

APA Insurance group structure.

Source: APA Insurance 2018 Annual Report and Financial Statements.

APA Insurance limited is owned by Apollo Investments limited (Holding Company) which is

owned partly by Kenyans who control 60% of stake and while the other 40% is owned by Swiss

Re and multinational reinsurance company from Switzerland. APA Insurance has presence in

Tanzania where it has 34% stake in Reliance Insurance Tanzania Limited. APA has presence in
each and every County and offices in all major towns in Kenya. APA Insurance Limited is a

market leader and pioneer in innovative solutions having been the first Insurer to offer financial

solution to people living with HIV Aids when all other Insurers had avoided this category of

persons from financial protection. APA specializes in general and health solutions. In 2014 APA

paid one the biggest claim for KES. 1.97 billion to JKIA for fire claim. The biggest class of

business is motor followed by health and non-motor business.

1.2 Statement of the problem

In the past decade, the number of players in the insurance sector has increased significantly with

currently 54 insurance companies offering services nationwide. However, this has changed the

dynamics of operations in this sector as the companies are faced with an even harder task in

attaining competitive advantage. This has seen various insurance companies that were not

meeting the stakeholder’s expectations or experiencing huge losses seeking for other alternatives.

The study revealed that insurance products acceptance in Kenya was influenced by poor

customer service and complicated nature of the life insurance products. Miyienda (2015) on the

impact that mergers and acquisitions have in insurance organizations. The study established that

mergers and acquisitions positively affect performance of Kenyan insurance companies,

especially after the merger and acquisition take place.

Under these study its is evident that insurance companies may perfume better through imposition

of different mechanism that the research has studied.

1.3 Objectives of the Study.

The objective of the study was to establish the determinants of performance of Insurance

Companies in Kenya in a case of APA insurance.

1.3.1 General Objective.

The study is of great importance to the insurance companies in Kenya. It will enable the

understanding on the factors that determine how these companies perform. This will be of great

help to the managers in these companies in formulating various strategies to address these

factors. By being aware of these factors, they will be able to maximize them and utilize them in

gaining competitive advantage. The study will be of importance to the regulatory and policy

bodies and will provide valuable information concerning the determinants of performance of

insurance companies. Understanding the exact factors that determine the performance of

insurance companies will enable them in formulating appropriate policies that will enhance the

growth of the sector. As such, the Insurance Regulatory Authority (IRA) may use the findings to

be obtained in the study to improve the industry’s performance.

1.3.2 Specific objectives

1.To help understand how the insurance companies will boast their performance.

2.To enable the managers formulate the key strategies that will maximize their performance

3.Enable the companies to gain strong competitive advantage in the industry.

4.Help the regulatory and policy bodies to formulate and implement policies to grow the sector.

1.4 Research Questions

1.How will the research help understand how the insurance companies will boast their

performance?

2. How will the managers formulate the key strategies that will maximize their performance by

the use of the research?

3.How will the research help the companies to gain strong competitive advantage in the

industry?

4.How will the research be of help to regulatory and policy bodies in formulating and

implementing policies to grow the sector?

1.5 Justification

This proposal will be of great help to various beneficiaries in the insurance sector.

1.5.1 Management

The proposal will be of great importance to managers as they will be able to gather eans and

strategies that can be used to increase their performance. Also it helps the management to

identify their strengths and weaknesses by knowing what they are already doing right and what

they have to improve.

1.5.2 Regulatory and Policy bodies.

Insurance regulatory law is primarily enforced through regulation, rules and directives by state

insurance departments as authorized and directed by statutory law enacted by state legislatures.

Therefore, the bodies will be able to regulate and standardize insurance policies and products in

the whole industry. Also, it will control market conduct and prevent unfair trade practices and

regulate other aspects of the insurance industry.

1.5.3 Government
In a broad aspect the government will find answers, by filling gaps in knowledge and changing

the way that insurance companies perform. Also, it will offer foundation for government policies

for instance, government’s budgets may be channeled to improve the insurance sector to fulfill or

help the accomplishment of these requirements.

1.6 Scope

The aim of this work is to determine the various factors that may help the insurance companies

perform much better, by taking a case of APA ltd company. The research was conducted around

Nairobi county where APA ltd company has its headquarters.

1.7 Limitations

Its obviously expected that several hinderances will be encountered during the research conduct.

Some of them include;

 Financial crunch-the cost that will be incurred during the research will surely be a

burden. Travelling costs from one area of research to another, the cost involved in

questionnaires preparation and more

 Lack of adequate information-sometimes the people we fetch information from don’t

give the accurate information or even gives misleading facts leading to wrong conclusion.

 Too much stress, too little time- The time given to prepare the proposal is too limited

considering the work and time it requires to be worked on.

1.8 Definition of Terms

 Holistic approach-
 Gross Domestic Product-Measure of a country’s economy. The total market values of goods

and services produced by citizen and capital within a given country’s borders during a given

period.

 Brokers-A dealer who buys or sells for another in exchange of a commission.

 Liquidity-Being in cash or easily convertible to cash; debt paying ability.

 Holding Company-It’s a company which is controlling shares in other companies.