Asset diversification, managerial efficiency and financial stability of insurance companies in Kenya,moderating role of managerial efficiency

Abstract

Where insurance companies are stable, the stability of entire financial system is robust as there is an interlink between insurance business and prowess of other sectors in the financial system such as banks and financial markets. However, in Kenya, a number of insurance companies have collapsed, put under receivership or are under liquidation. Studies done to provide the nexus between asset diversification and stability of companies and more so in insurance industry are not exhaustive. The general objective of the study was to assess asset diversification and stability of insurance companies in Kenya. The study’s specific objectives were: to determine the effect of government securities on stability of insurance companies in Kenya, to find out the effect of investment property on stability of insurance companies in Kenya, to find out the effect of term deposits on stability of insurance companies in Kenya, to determine the effect of ordinary shares securities on stability of insurance companies in Kenya and to evaluate the moderating effect of managerial efficiency on the relationship between asset diversification and stability of insurance companies in Kenya. The study was based on three theories: modern portfolio theory, efficiency theory and prospect theory. The study adopted descriptive research design. The study population comprised all 34 general insurance companies in Kenya. Secondary data was collected from annual reports of the companies and panel data regression was used. The data and output were examined for existence of multicollinearity, heteroscedasticity and first order serial correlation. Model specification was done using Hausman test. The software that was used was STATA version 16. Results showed that asset diversification significantly accounted for variations in financial stability of insurance companies (R2=.566, X2=116.329, p<0.005). The study found that there was a positive significant effect of government securities on financial stability (β=12.206, p=0.000). Investment property also had positive significant effect on financial stability (β=7.22, p<0.05). Additionally, results indicated that there was a positive and significant effect on term deposits on financial stability (β=15.220, p<0.05) Lastly, the findings show that there was positive effect of ordinary share investments on financial stability of insurance companies (β=57.64, p<0.05). The study found that managerial efficiency moderated the relationship between investment property and ordinary shares securities and financial stability but did not moderate the link between both government securities and term deposits. The study recommended that insurance companies need to diversify more in order to create an optimum portfolio that may improve financial returns and boost financial stability of insurance companies in Kenya.