Determinants of Profitability in the Insurance Sector in Kenya: A Case of Composite Insurance Companies

Abstract

The main objective of this study was to establish the determinants of profitability in the insurance sector in Kenya. In spite of the sector recording significant growth in gross written premium during the period 2010 to 2014, the state of profitability remained a matter of concern. Low solvency and liquidity ratios could mean that the financial health of the sector was in doubt. Hence, the sector’s ability to meet both short-term and long-term financial commitments and obligations could be called into question. Moreover, this could be an indicator that while companies endeavoured to expand their market shares, they gave little attention to profitability objectives. So, it was important to identify the determinants of profitability in the insurance sector. This study was an attempt to explore factors that had direct significant influence on the companies’ profitability for the period 2014 and 2015. The study drew the sample of the study from 10 insurance companies out the possible11 composite insurance companies. Qualitative primary data was collected using questionnaires administered through a combination of judgemental and snowball sampling methods and the response rate achieved was 65% (or 28 respondents out of the possible 43). Quantitative secondary data was obtained from annual financial statements of the insurance companies and the success rate achieved was 90.9% (or 10 companies out possible 11). Collected data was processed and analysed by descriptive statistical techniques such as frequency distribution tables, descriptive summary statistics, and scatter plots derived with the help of Statistical Package for Social Sciences (SPSS version 20) to explain the nature and extent of relationship between the dependent variable, profitability, and the independent variables: claim costs, commission expenses, reinsurance costs, and market penetration. From the Ordinary Least Squares (OLS) econometric regression analysis, the research study demonstrated that the independent variables were important and significant predictors of profitability ratio by 90.1% which implied that on a one to one relationship between the variables, the regression model was very well defined and that linearity between the dependent and independent variables existed at a significant level. The study established that claims costs, reinsurance cost, and market penetration were negatively related to profitability whilst commission expenses were positively related to profitability