Underwriting risk, firm size and financial performance of insurance firms in Kenya

Abstract

The purpose of this study was to investigate moderating effect of firm size on the relationship between underwriting risk and the financial performance of insurance firms in Kenya anchored on agency theory. Panel data was collected from 54 insurers that operated in Kenya for the ten years (2010-2018). The unbalanced panel data was analyzed using Random and Fixed effect model where Hausman test select model for testing the hypotheses. The study found that underwriting risk had a significant negative effect on financial performance. firm size negatively moderated the relationship between; underwriting risk and financial performance. High underwriting risk reduce financial performance, the situation is worse in larger firms than small firms. The study recommends that insurance firms should divert their focus towards increasing premium to reduce underwriting risk and enhance their financial performance. Finally, it is crucial for the insurance firms to utilize Equity Capital optimally such that it does not become a liability as a consequence of the interest paid.