Effect Of Asset Allocation Strategies On Financial Performance Of Insurance Companies In Kenya

Abstract

Asset allocation is an important aspect in financial planning and if ignored it can prove fatal to an investment portfolio. Asset allocation strategies tend to balance returns and risks in an organization by making adjustments in the mix between cash, equities and bonds. In the insurance industry, the process of asset allocation is complicated given that the core business of insurers is settlement of claims to policyholders and yet at the same time, maximization of investment returns is crucial as investment income acts as a buffer from underwriting losses characteristic of the industry. Therefore, this study sought to determine the relationship between asset allocation and financial performance. A descriptive research design was used for the study. The study‟s target population was all 165 heads of finance, investment and risk departments in the 55 insurance companies in Kenya. Stratified random sampling technique was used to select 50% of the target population. The study‟s sample therefore was 83 respondents. The research primary data was collected by use of semi-structured questionnaires. Both quantitative and qualitative data was generated from the collected questionnaires. Thematic analysis was used to analyze the quantitative data and the result communicated in prose form. Analysis of quantitative data was based on descriptive and inferential statistics through the help of statistical package known as STATA 12. Descriptive statistics included percentages, frequencies, mean and standard deviation. The results were provided in terms of figures and tables. Inferential statistics entails regression and correlation analysis. The study also used correlation analysis and multiple regression analysis to determine the relationship existing between the independent variables and dependent variable. The study found that integrated asset allocation strategy positively influences the Kenyan insurance companies‟ financial performance. The study also found that strategic asset allocation strategy has a positive influence on financial performance of Kenyan insurance companies. Further, the study established that tactical asset allocation strategy influences financial performance of insurance companies in Kenya. The study further revealed that dynamic asset allocation strategy influences financial performance of insurance companies. According to the findings, there was a positive relationship between integrated asset allocation strategy and financial performance (r=0.6492, p=0.000). The results indicated a positive relationship between strategic asset allocation strategy and performance (r=0.6574, p-0.000). In addition, there was a positive association between tactical asset allocation strategy and financial performance (r=0.6455, p=0.000). Further, there was a positive relationship between dynamic asset allocation strategy and financial performance (r=0.5602, r-0.000). The F-calculated (26.82) was greater than the F-critical (2.46), which showed that the model can be used in predicting the influence of the independent variables on the dependent variable. This study recommends that insurance companies should only use integrated asset allocation strategy when they have enough resources. In addition, insurance companies should only use strategic allocation strategy in the achievement of long-term goals. Tactical asset allocation strategy should be used in achieving the short-term goals is an organization. It should be avoided in volatile markets as changes in the allocation of assets can underperform the averages of the market.