RISK MITIGATION STRATEGIES AND PERFORMANCE OF INSURANCE …

RISK MITIGATION STRATEGIES AND PERFORMANCE OF INSURANCE

INDUSTRY IN KENYA: A CASE OF MOTOR INSURANCE COMPANIES

JANET MAKOKHA OKUMU

D53/OL/CTY/24244/2014

A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF

THE REQUIREMENTS THE DEGREE OF MASTER OF BUSINESS

ADMINISTRATION (STRATEGIC MANAGEMENT OPTION)

OF KENYATTA UNIVERSITY

November, 2017

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DECLARATION

This research project is my original work and to the best of my knowledge has not

been submitted for a degree in any other university. No part of this Project should be

reprinted without permission from the Kenya University.

Signature: ____________________________ Date___________________________

Student: Janet Makokha Okumu

Declaration by the Supervisor

This research Project has been submitted for examination with my approval as the

University Supervisor.

Dr Jane Wanjira

Lecturer, Department of Business Administrations

Signature: ___________________________________ Date______________

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DEDICATION

This Project is dedicated to my parents Mr & Mrs Okumu and to my siblings.

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ACKNOWLEDGEMENTS

I am grateful to God Almighty for seeing me through this Project. I acknowledge my

supervisor, Dr. Jane Wanjira who mentored me throughout this journey. I must

confess that through your input, I have managed to reach this far it is very true that it

is good to be mentored by experts. I would also like to thank my friends, relatives,

and classmates for their support throughout the project work. May God bless you.

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TABLE OF CONTENTS

DECLARATION........................................................................................................... ii

DEDICATION.............................................................................................................. iii

ACKNOWLEDGEMENTS ........................................................................................ iv

TABLE OF CONTENTS .............................................................................................. v

LIST OF TABLES ....................................................................................................... ix

LIST OF FIGURES ...................................................................................................... x

ABBREVIATIONS AND ACRONYMS .................................................................... xi

OPERATIONAL DEFINITION OF TERM ............................................................ xii

ABSTRACT ................................................................................................................ xiii

CHAPTER ONE: INTRODUCTION ......................................................................... 1

1.1 Background of the Study .......................................................................................... 1

1.1.1 Risk Mitigation Strategies...................................................................................... 3

1.1.2 Organization Performance ..................................................................................... 3

1.1.3 Key Performance Indicators of Insurance Companies in Kenya ........................... 4

1.1.4 Insurance Companies in Kenya ............................................................................. 4

1.1.5 Motor Insurance ..................................................................................................... 5

1.2 Statement of the Problem .......................................................................................... 6

1.3 Research Objectives .................................................................................................. 7

1.3.1 General Objective .................................................................................................. 7

1.3.2 Specific Objectives ................................................................................................ 7

1.4 Research Questions ................................................................................................... 7

1.5 Research Hypotheses ................................................................................................ 8

1.6 Significance of the study ........................................................................................... 8

1.7 Scope of the Study .................................................................................................... 9

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1.8 Limitations of the Study............................................................................................ 9

1.9 Organization of the Study ....................................................................................... 10

CHAPTER TWO: LITERATURE REVIEW .......................................................... 11

2.1 Introduction ............................................................................................................. 11

2.2 Theoretical Framework ........................................................................................... 11

2.2.1 Agency Theory..................................................................................................... 11

2.2.2Contingency Planning Theory .............................................................................. 12

2.2.3 Arbitrage pricing theory ....................................................................................... 12

2.2.4 Resource Based Theory ....................................................................................... 13

2.3 Conceptual literature ............................................................................................... 13

2.3.1 Risk controlling Strategy ..................................................................................... 13

2.3.2 Risk Avoidance Strategy...................................................................................... 13

2.3.3 Risk based audit strategy ..................................................................................... 14

2.4 Empirical Review.................................................................................................... 15

2.4.1 Risk Control Strategy and Performance .............................................................. 15

2.4.2 Risk Avoidance Strategy and Performance ......................................................... 16

2.4.3 Risk based audit strategy and Performance ......................................................... 16

2.4.4 Product Mix Strategy and Performance ............................................................... 18

2.5 Summary of Research Gaps .................................................................................... 18

2.6 Conceptual Framework ........................................................................................... 23

CHAPTER THREE: RESEARCH METHODOLOGY ......................................... 25

3.1 Introduction ............................................................................................................. 25

3.2 The Research Design .............................................................................................. 25

3.3 Population of the study ........................................................................................... 25

3.4. Data sources and collection instruments ................................................................ 27

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3.5 Validity and reliability of Research instrument ...................................................... 27

3.5.1 Pilot Study…… ................................................................................................... 27

3.5.2 Validity………. ................................................................................................... 28

3.5.3Reliability……… .................................................................................................. 28

3.6 Data Collection Procedure ...................................................................................... 28

3.7 Data analysis and Presentation................................................................................ 28

3.8 Ethical considerations ............................................................................................. 29

CHAPTER FOUR: DATA ANALYSIS, INTERPRETATION AND

DISCUSSION OF THE FINDINGS.......................................................................... 31

4.1 Introduction ............................................................................................................. 31

4.2 Response Rate ......................................................................................................... 31

4.3 Reliability Test of the Instrument ........................................................................... 31

4.4 Demographic Characteristics of the Respondents .................................................. 32

4.4.1 Gender and Age of the respondents ..................................................................... 32

4.4.2 Period of Work and Department .......................................................................... 33

4.5 Descriptive Statistics ............................................................................................... 34

4.5.1 Risk Controlling Strategy .................................................................................... 34

4.5.2 Risk Avoidance Strategy...................................................................................... 36

4.5.3 Risk based audit strategy ..................................................................................... 40

4.5.4 Product Mix Strategy ........................................................................................... 41

4.5.5 Performance of Regulated Motor Insurance Companies ..................................... 44

4.6 Inferential Statistics ................................................................................................ 45

4.6.1 Correlation Analysis ............................................................................................ 45

4.6.1.1 Diagnostic test ................................................................................................... 47

4.6.1.2 Test for Multicollinearity .................................................................................. 47

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4.6.1.3 Test for Normality............................................................................................. 47

4.6.1.4 Heteroskedasticity test ...................................................................................... 48

4.7 Regression Analysis ................................................................................................ 49

CHAPTER FIVE: SUMMARY OF THE FINIDNGS, CONCLUSIONS AND

RECOMMENDATIONS ............................................................................................ 53

5.1 Introduction ............................................................................................................. 53

5.2 Summary of the findings ......................................................................................... 53

5.3 Conclusion .............................................................................................................. 54

5.4 Recommendations ................................................................................................... 55

5.4 Areas for Further Research ..................................................................................... 56

REFERENCES ............................................................................................................ 57

APPENDICES ............................................................................................................. 60

Appendix I: Questionnaire for Employees ................................................................... 60

Appendix II: List of Registered Insurance Companies ................................................ 69

Appendix III: Nacosti Permit Letter ............................................................................ 71

Appendix IV: Data Collection Authorization ............................................................. 72

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LIST OF TABLES

Table 2.1 Summary of Literature and Research gaps ................................................20

Table 3.1: Distribution of Target Population of the companies and Employees .........26

Table 3.2: Distribution of the sample size ...................................................................27

Table 4.1 Reliability of Risk Mitigation Strategies and Performance of Insurance

Industry ........................................................................................................................32

Table 4.2 Gender and Age of Respondents .................................................................32

Table 4.3 Period of Work and Department ..................................................................33

Table 4.4 Risk Controlling Policy ...............................................................................34

Table 4.5: Risk Controlling Strategy and Performance of Motor Insurance

Companies....................................................................................................................35

Table 4.6: Types of Risks ............................................................................................37

Table 4.7: Risk Avoidance Strategy and Performance of Motor Insurance

Companies....................................................................................................................38

Table 4.8: Risk-based Auditing Strategy and Performance of Motor Insurance

Companies....................................................................................................................40

Table 4.9: Effectiveness of Product Mix Strategies in Mitigating Risks ....................42

Table 4.10: Product Mix Strategy and Performance of Motor Insurance Companies ....43

Table 4.11 Performance of Regulated Motor Insurance Companies ...........................44

Table 4.12: Correlation Matrix ...................................................................................46

Table 4.13: Multicollinearity results using VIF ...........................................................47

Table 4.15: Model Fitness............................................................................................49

Table 4.16: Analysis of Variance.................................................................................50

Table 4.17: Regression Coefficients ............................................................................50

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LIST OF FIGURES

Figure 2.1: Conceptual Framework ......................................................................................... 24

Figure 4.1: Test for Normality ................................................................................................. 48

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ABBREVIATIONS AND ACRONYMS

AKI: Association of Kenya Insurance

CEOs: Chief Executive Officers

MBO: Management by Objectives

GDP: Gross Domestic Product

MIP: Medical Insurance Providers

IRA: Individual Retirement Account

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OPERATIONAL DEFINITION OF TERM

Performance: The process of executing a task against a set standard.

Product mix strategy: Its determined by the size and growth of the market

products a company sells. Product mix entails the total

number of product lines that a firm offers to its clients.

Risk avoidance: It is the elimination of hazards, activities and exposures

that can negatively affect an organization.

Risk control strategy: Risk control is the method by which firms measure

potential losses and take action to reduce or eliminate

such threats.

Risk management: This is the human activity which integrates

identification of risk, risk assessment measurement,

monitoring, developing strategies to manage it, and of

those risks which can threaten firm achieving

Performance.

Risk mitigation strategy: It is a structured and coherent approach to identifying,

assessing, and managing project risk

Risk transfer strategy: An act of moving losses, damage to another

organisation or person.

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ABSTRACT

Effective risk mitigation strategies are the key to achieve performance in the Motor

insurance industry. This involves knowing and analysing risks, making, and

reviewing risk handling techniques and checking the progress of these to avoid and/or

reduce the impact of risk on the performance of the firm. It is against this background

that this Project assessed risk mitigating strategies on performance of motor insurance

companies. The study’s general objective was to establish the effects of risk

mitigation strategies on performance of insurance industry in Kenya: a case of motor

insurance companies. Specifically, the Project focused on the Risk control, risk

avoidance, risk transfer and product mix strategies on performance of the insurance

industry. The study was anchored on Agency theory which is based on the outreach as

a way of mitigating risks. The research used descriptive survey research designs. The

target population of this study was the management and the other employees of all the

18 Motor insurance companies, the sample size of the study was54.The sampling

procedure was both simple random sampling and purposive sampling. Primary data

entailed using of questionnaires. Content validity was ensured by asking questions

that are relevant and captured the research objectives, reliability was measured with

the help of cronbach’s alpha (α). Descriptive statistics such as means, standard

deviation and frequency distribution tables were used to analyse the data. Qualitative

data was analyzed using content analysis to generate qualitative report which were

presented in a continuous prose. Inferential statistics such as regression and

correlation analysis were used to establish the effects of risk mitigation strategies on

performance of insurance industry in Kenya, a case of motor insurance companies.

Data presentation was done by the use of bar charts and graphs, percentages and

frequency tables for ease of understanding and interpretation. The study found out

that risk control strategy and performance of regulated motor insurance companies in

Kenya are positively and significantly related. The results further indicate that risk

avoidance strategy and the performance of regulated motor insurance companies were

positively and significantly related. It was further established that product mix

strategy and performance of regulated motor insurance companies were positively and

significantly related while risk based audit strategy and performance of regulated

motor insurance companies were also positively and significantly related. The study

concluded that risk controlling strategy, risk avoidance strategy, risk based audit

strategy and product mix Strategy have a positive and significant effect on

performance of Motor Insurance Companies. Based on the findings and conclusions

that risk controlling, risk avoidance Strategy, risk based audit strategy and product

mix strategy has a positive and significant effect on performance of Motor Insurance

Companies, the study recommends motor insurance companies should work toward

investing more on risk reduction strategies in order to improve their performance.

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CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Today’s world presents serious challenges. Fundamental changes in natural,

economic, social, and political spheres, shifting stakeholder expectations and wide-

reaching technological innovations lead to a perpetually changing and demanding risk

environment. This calls for continuous adaptation from businesses around the globe.

(The Geneva Papers on Risk and Insurance, 2013).

External forces must be death within the insurance industry and continuation of

growth of the frontiers of risk mitigation. Law frameworks and procedures too must

adapt. It is important that the Law responses to the new challenges be made to support

the economy.

Insurers have expanded into new geographic markets and developing a greater range

of insurance product offerings and services to improve on their performance in that

some insurers and non-insurance are engaging in activities such as banking and asset

management services.

Affordability of insurance products is low in Africa due to poor standards of living in

that only upper and middle income earners can access the insurance products.

Nevertheless, the relatively unexplored insurance industry is expected to be resilient

thanks to consistent GDP growth, rapid urbanization and increases in the working

aged population across the continent.

South Africa, one of the region’s most advanced, is currently troubled, economies,

unsurprisingly accounted for almost 75 percent, or $51.6bn, of all insurance premiums

on the continent in 2013 according to global reinsurance firm Swiss Re. According to

South African Insurance Association report (2015), However South Africa’s

dominance is set to be challenged by a number of promising countries.

MsMaïdou also points to Kenya and Ethiopia as significant up-and-coming insurance

markets, “especially due to the size of their population and growing middle class”.

Although the penetration rate for insurance in Kenya stood at only 2.75 percent in

2013, the market has grown by just over 15 percent each year from 2010 to 2013.

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Premiums reached $1. 5bn.The recent $350m investment partnership between

Prudential Financial and Leapfrog Investments, which targets high-growth insurance

markets in Africa, is a clear sign that global companies are keen to tap this potential.

In 2015 Group Jubilee Holdings Limited (JHL) achieved a turnover of Kshs 30.16

Billion hence increase in growth by 25 percent to Ksh. 1.72 Billion in 2015. In recent

years Jubilee Holdings, a strategy was implemented to expand investments to reduce

the risk of volatility from stock market movements. This strategy entailed increasing

investments in government bonds and diversifying into investments in the energy

sector, such as Tsavo power and Bujagali, and in other infrastructure projects such as

SEACOM, that are giving returns in dollar terms (Abuogi, 2014).

Kenya being developed has the best insurance markets although the competition is

tough. Currently, according to the Association of Kenyan Insurers (AKI), Kenya

represents 70% of the East African insurance market, which also includes Tanzania,

Uganda, Rwanda and Burundi. Insurance penetration and accessibility have been

improving steadily in Kenya. There is a potential for increase in demand for insurance

as middle class is growing, more Kenyans have disposable income. Increase in

urbanisation, giant infrastructure projects, new energy schemes and growing industry.

Huge infrastructure plans have made investment opportunities in insurance. Some of

the main ventures include the construction of the second runway and new terminal at

Jomo Kenyatta International Airport, the Lamu Transport Corridor project, and the

Standard Gauge Railway (SGR) project (Abuogi, 2014).

Life insurance penetration is 1.2% of GDP and general insurance about twice that,

bringing the total to 3.44% in 2013, according to AKI figures. This measure of

insurance penetration dropped to 2.93% in 2014 after GDP was rebased with a 25%

increase. Now 4% penetration by year-end looks possible; this compares favourably

to the majority of Africa’s markets, although it is slightly down from the 2010 target

of 5% by 2015. Worldwide insurance penetration is about 6.5% of GDP, so Kenyan

insurers say there is great room for growth. William Maara, managing director of

Barclays Life Assurance Kenya, told OBG that, “Given low penetration rates, the

Kenyan insurance sector has significant growth potential. This is particularly true

following the expansion of the branch network into previously untapped markets;

expansion was further supported by the introduction of new products to the market.”

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1.1.1 Risk Mitigation Strategies

Risk mitigation strategy is the method of evaluating, knowing, and determining the

behaviour risks that arises during the course of the project lifecycle (Chacko and

Harris, 2006). It entails a series of steps to support better decision making through

good understanding of the risks inherent in a Project and their likely impact.

The risk management planning describes risk identification, risk analysis and risk

handling. The plan should illustrate the role of risk evaluation in design reviews,

technical outcome, observing and changing control processes. The strategies to

mitigate risks entail moving the risks to another party, avoiding the risks, minimising

the negative effect or probability of the risk, or even accepting some or all of the

potential or actual consequences of a particular threat, and the opposites for

opportunities.

Controlling asset quality is only guaranteed when the credit risk department has

strong policies and risk systems. The optimal control risk strategy is the one that is in

line with the business strategy. It is not the one that minimizes losses, but the one that

provides a good policy value in line with the insurance business objectives.

1.1.2 Organization Performance

Organizational performance constitutes of the actual output of an organization as

measured against its intended outputs (or goals and objectives). Performance can be

assessed through evaluating a firm’s profitability, solvency, and liquidity. The

performance of a company can be measured by monitoring the firm’s profitability

levels. The return on equity (ROE) and the return on assets (ROA) are the used as

measures of profitability. By monitoring a firm’s profitability levels, one can measure

its financial performance.

Organizational performance is therefore the ability of an organization to fulfil its

mission through sound management, strong governance, and a persistent rededication

to achieving results. Organization performance measurement is considered a

multifaceted concept that occurs at different of levels for industry, corporate and

business sectional unit.

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1.1.3 Key Performance Indicators of Insurance Companies in Kenya

A Key Performance Indicator (KPI) is used by an organization to evaluate its success

in reaching its strategic objectives by measuring the performance of the critical

activities towards an objective examples are financial ratios and sales growth rates.

Key among the indicators in insurance company are: Net income ratio, policy sales

growth, percentage of sales growth, claims ratio, and quotas-to-production are all

commonly used key performance indicators, or KPIs, in the insurance industry.

Insurance premiums represents total sales in the insurance industry. The net income

ratio is calculated by dividing net income by the total of earned premiums for a given

period. It measures the effectiveness of the company at generating profits with each

dollar of earned premium. A net income ratio of 10 percent is worse than a net income

ratio of 20 percent. The latter is 10 percent more efficient at creating net income out

of earned insurance premiums and is considered more profitable.

The claims ratio is an insurance KPI that measures how well your sales are covering

the cost of claims. It is calculated by dividing total claims per period by the total

earned premium per period. It is often used as an auditing KPI -- a high metric could

be a sign of fraud. The average time to settle a claim can be used in conjunction with

the claims ratio. It is calculated by dividing the total number of days taken to settle a

claim by the total claim. A high time to settle and a high claims ratio is cause for

concern.

1.1.4 Insurance Companies in Kenya

The insurance sector in Kenya is divided into two broad sub sectors namely; General

and Life insurance. The general insurance sector is by far the larger of the two in

terms of size and market penetration. The main players in the Kenyan insurance

company are insurance companies, reinsurance companies, insurance brokers,

insurance agents and the risk managers. The statute regulating the companies is the

insurance Act; Laws of Kenya, Chapter 487. The office of the commissioner of

insurance was established under its provisions to strengthen the government

regulation under the Ministry of Finance. There is also self-regulation of insurance by

the Association of Kenya Insurers (AKI). The professional body of the industry is the

Insurance Institute of Kenya (IIK), which deals mainly with training and professional

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education. There were 49 operating insurance companies as at the end of 2015. 25

companies wrote non-life insurance business only, 13 wrote life insurance business

only while 11were composite (both life and non-life). There were 198 licensed

insurance brokers, 29 medical insurance providers (MIPs) and 5,155 insurance agents.

Other licensed players included 133 investigators, 108 motor assessors, 25 loss

adjusters and 24insurance surveyors (Ernst & Young, 2012)

Kenyan insurance industry consist of insurance companies, reinsurance companies,

intermediaries such as insurance brokers and insurance agents, risk managers or loss

adjusters and other service providers (Insurance Regulatory Authority, 2010). The

statute regulating the industry is the insurance Act; Laws of Kenya, Chapter 487. The

office of the commissioner of insurance was established under its provisions to

strengthen the government regulation under the Ministry of Finance. There is also

self-regulation of insurance by the Association of Kenya Insurers (AKI) established in

1987 as a consultative and advisory body to insurance companies and registered under

the Society Act Cap 108 of Kenyan law (AKI, 2010).

In Kenya Insurance availability and affordability are both policy concerns, as

evidenced by government’s many regulations of the insurance market. Legislation of

any country creates an enabling environment and business opportunities for all

entrepreneurs. Insurance service providers were 21 loss adjusters, 2 claims settling

agents, 193 loss assessors/investigators, 26 insurance surveyors, and 8 risk managers

during the year. The gross written premium by the industry was Kshs76.9 billion

compared to Kshs65.0 billion in 2006 representing a growth of 18%. The gross

written premium from General insurance was Kshs49.76 billion while that from long

term business was Kshs23.1 (AKI, 2014).

1.1.5 Motor Insurance

Level of risk determines insurance premiums. Generally, insurance policy with

increase of risk in claims insurance leads to higher rates (Gollier, 2003). With much

information at hand, insurers can evaluate risk of insurance policies at much higher

accuracy. To this end, insurers collect a vast amount of information about

policyholders and insured objects.

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Due to increase in completion and dynamic change, a firm ought to have effective risk

mitigation strategies such as risk avoidance, risk reduction, risk retention and risk

transfer for a firm to excel (Olsson, 2008).

1.2 Statement of the Problem

Insurance companies are the backbone for most small business development of any

country and as such several studies have been carried out in line with this. Several

empirical studies have been carried out in this area of organizational performance;

Tripp, M., and Bradley, H., (2004). Conducted study on How to Quantify Operational

Risk in General Insurance Companies. Belasco, E. (2008). Conducted a study on ‘The

Role of Price Risk Management in Mitigating Risks in profits of Motor Insurance’.

Faure, M. (2006). Did a study on the Economic Criteria for Compulsory

Insurance. The Geneva Papers on Risk and insurance: Issues and practice. However

none of these studies seem to address comprehensively the issue of Risk mitigating

strategies and performance in motor insurance therefore that is the concern for this

paper.

Locally, Essendi (2013) examined the effects of risk management on the performance

of insurance companies. Results showed that formulation of new motor policy is

based on the existing credit policy of the insurance companies. Wanja (2013)

investigated the effects of credit policy used by commercial banks on their

performance.

These studies failed to indicate the extent to which risk mitigation strategies such as

risk control, risk limitation, risk auditing strategy influence performance in motor

vehicle insurance companies. Despite the significant role played by risk mitigation

strategies on performance in insurance companies, this has not attracted attention of

many authors. This study therefore sought to fill the existing knowledge gap by

determining the effects of risk mitigation strategies on performance of motor

insurance companies in Kenya

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1.3 Research Objectives

1.3.1 General Objective

The general objective of this study was to establish the effects of risk mitigation

strategies on performance of Insurance Industry, a case of Motor Insurance

Companies

1.3.2 Specific Objectives

The specific objectives of this study were;

i. To determine the effects of risk controlling strategy on performance of Motor

Insurance Companies.

ii. To establish the extent to which risk avoidance influences performance of

Motor Insurance Companies.

iii. To establish influence of risk based audit strategy on performance of Motor


iv. To determine influence of product mix strategy on performance of Motor


1.4 Research Questions

This study sought to answer the following research questions:

i. How does risk controlling affect performance of Motor Insurance Companies?

ii. To what extent does risk acceptance strategy influences performance of Motor

Insurance Companies?

iii. To what extent does risk transfer strategy affects performance of Motor

Insurance Companies?

iv. How does product mix strategy affect performance of Motor Insurance

Companies?

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1.5 Research Hypotheses

i) H0: Risk controlling does not affect performance of Motor Insurance

Companies.

ii) H0: Risk acceptance strategy does not affect performance of Motor Insurance

Companies.

iii) H0: Risk transfer strategy does not affect performance of Motor Insurance

Companies.

iv) H0: Product mix strategy does not affect performance of Motor Insurance

Companies.

1.6 Significance of the study

This study is significant to insurance companies, general public, students and the

insurance regulators as it offers valuable contributions from both a theoretical and

practical perspective.

Theoretically, the study shows to the general understanding of risk management

practices and their effect on financial performance. The study shall enable Insurance

companies in Kenya to improve their risk management process and to adopt efficient

strategies to improve firm financial performance through the risk management

processes.

This shall enable the insurance companies to perform better and to grow their

businesses and maintain a competitive advantage. Apart from benefiting the insurance

companies, the general public will also benefit from the study through improved

insurance services and better management of risks. This will result to affordable rates

of insurance premiums and reduction in levels of non-payment and fraud.

The study will be helpful to the government in setting regulations on insurance

practices in Kenya through the IRA and safeguarding the resources of the country. It

will also be helpful to the government in the developing policy papers, policy making

regarding risk mitigation strategy and other regulatory requirements of insurance

companies in Kenya may also benefit from the findings of this study. The policy

makers may gain insight on how well to incorporate the sector effectively to ensure

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effective mitigation of risks for the insurance industry to achieve high company

performance.

The study shall also add value to the existing body of knowledge on risk management

to benefit academicians and aid further research on risk management in the insurance

sector and the financial sector. The findings of the study shall be relevant to scholars

and researchers as it may provide information regarding effects of risk mitigation

strategies on insurance company performance in Kenya.. This may aid further research

on risk management in the insurance sector and the financial sector.

1.7 Scope of the Study

The study sought to investigate the effects of risk mitigation strategies on

performance of insurance industry with special focus on Motor Insurance Companies

in Nairobi. The study focused on risk controlling strategy, risk avoidance, risk based

audit strategy and product mix strategy as independent variables. Legislation and

inflation as moderating variables and performances dependent variables. The study

covered all the branches in Nairobi. The study adopted descriptive research. The area

of the study was done in Nairobi as this is the location of the Motor Insurance

Companies are. The study considered a study period of 5 year from 2011 to 2015.

1.8 Limitations of the Study

There was a shortage of literature on the relationship between risk mitigation and

employee productivity. Majority of the studies within the risk mitigation sector have

focused on the relationship between risk and productivity and not performance. This

study focused on obtaining additional information from the respondents by

conducting informal discussions.

The study encountered unwillingness by respondents to reveal information, which

may be thought confidential. However, the researcher assured the respondents that the

information they offered held confidentially and might be used for academic purposes

only in seeking to establish the effects of risk mitigation strategies on performance of

Motor Insurance Companies

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1.9 Organization of the Study

This document was organized into five chapters. Chapter one presented the

background of the study, the motor insurance companies in Kenya, statement of the

problem, objectives of the study, significance of the study, delimitations, and

limitations of the study.

Chapter two outlined theoretical review, empirical review, and conceptual framework.

Chapter three focused on methodology which included the research design, empirical

model, target population, sampling design and procedure, data collection instrument,

validity of the instrument, reliability of the instrument, data collection procedure and

data analysis. Chapter four presents the findings, interpretation, and discussion of the

data, while chapter five, made a conclusion and recommendations of the study.

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CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter critically reviewed the available literature on risk management and

performance. It began by reviewing theories underpinning this study, then an

overview of the empirical studies and literature on the risk mitigation and

performance. It also presented the summary of knowledge gaps and conceptual

framework.

2.2 Theoretical Framework

The following theories guided it: Agency theory, contingency planning theory

arbitrage pricing theory and results based theory.

2.2.1 Agency Theory

Agency theory extends the analysis of the firm to include separation of ownership and

control, and managerial motivation. Theory also elaborates differences on interest

between shareholders, management, and debt holders due to variance in earning

distribution, which can result in the firm taking too much risk or not engaging in

positive net value projects (Mayers and Smith, 1987).

Stulz (1984) asserts that managers are presumed to be working on behalf of firm

owners and concern themselves with both expected profit and the distribution of firm

returns around their expected value. They have an obligation to avoid risk in so as to

minimize the variability of firm returns and hence achieve it

Agency theory provides strong support for risk management as a response to

mismatch between managerial incentives and shareholder interests. Shareholders and

managers have different interests to the firm and risk management objectives vary for

the different stakeholders. While shareholders may require high risk – high return

investments, management prefer low risk and return investments. The agency theory

emphasizes the need for risk controlling in the firm to align the interests of mangers

and shareholders and to contribute to the performance of the firm.

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2.2.2 Contingency Planning Theory

Contingency planning (CP) also known as is an important element in risk

management since a risks cannt be fully eliminated despite organization efforts to

avoid, mitigate or prevent them.Entails making major plans for preparation of

distaters incidents and availing resources to be used in such events when they occur.

This theory support risk acceptance strategies as in Contigency planning the firm

indentify the risks and determine the response to specific risks. Due to change in the

external enviroment, firm would mitigate risk through acceptance strtaegies . The

study focused on determining the effect of risk acceptance strategy on performance of

the motor insurance companies.

2.2.3 Arbitrage pricing theory

The Arbitrage Pricing Theory (APT) was developed primarily by Ross (1976). It is a

one-period model that has the stochastic properties of returns of capital assets are

consistent with a factor structure. The Arbitrage Pricing Theory (APT) describes the

price where a mispriced asset is expected to be.

It is often viewed as an alternative to the capital asset pricing model (CAPM), since

the APT has more flexible assumption requirements. Whereas the CAPM formula

requires the market's expected return, APT uses the risky asset's expected return and

the risk premium of a number of macro-economic factors. Arbitrageurs use the

APT model to profit by taking advantage of mispriced securities. A mispriced security

has a price that differs from the theoretical price predicted by the model.

The theory states that price of a security is driven by factors which are divided into

two groups: macro factors, and company specific factors. Linear pricing relation is a

must for equilibrium in a market where agents maximize certain types of utility. It

derives that either from the assumption of the preclusion of arbitrage or the

equilibrium of utility-maximization.

Expected returns and the betas helps identification of the stochastic discount factor.

APT relates to the price of the security to the fundamental factors driving it. The

theory does not show the factors hence need to be determined empirically which may

include economic growth and interest rates.

13

2.2.4 Resource Based Theory

According to the Resource Based Theory all inputs that allow the firm to function and

to implement its strategies are firm resources.

There are input factors which are generic resources that can be acquired in the market

and logistics input factors which include raw skills loading skills, driving skills,

picking skills, computer operating skills factors forklift trucks, warehouse racking,

packaging materials, and inventory. When input factors are transformed they become

part of the firm’s assets, hence contributing to the outputs of the firm (Grant, 2002).

When resources enable a firm to implement product mix strategy that improves

performance and exploit market opportunities or neutralizes risks only then is when

they are considered valuable (Barney, 2001).

The theory stipulates clearly that through utilization of the organization resources,

insurance will be in a position to consider its assets and its financial capability to

evaluate and produce product based on the need in the market.

2.3 Conceptual literature

2.3.1 Risk controlling Strategy

The method by which firms evaluate potential losses and take action to reduce or

eliminate such threats is called Risk control .It is a technique that uses findings from

risk assessments and implements changes to reduce risk in these areas.

The expected amount of loss is inversely related to its corresponding likelihood that

risks that will cause a high damage to corporation like earthquakes or fire as

compared to risks that occur daily such as interest rate risks or foreign exchange risks

which often cause relatively minor losses only, (Fatemi and Glaum 2000).

2.3.2 Risk Avoidance Strategy

Risk Avoidance strategy involves taking some action hence limiting the firms

exposure. For example a company should have backups as a disk drive may fail. A

situation is often intensified by lack of clearly defined risk limits, deliberately

misleading reports, lack of intra-organizational communication concerning risk

vulnerability, poor knowledge of the business environment and lack of timely

decision making.

14

Some risk events can be dealt with by obtaining information, improving

communication, clarifying requirements, or acquiring expertise. Usage of a familiar

approach, reduction of scope, increase of resources may be examples of avoidance

(Meinhard, 2006).

2.3.3 Risk based audit strategy

Accountability in corporate has been raised in various developed nations hence the

need of an appropriate Risk Based Audit.

By issuance of qualified opinions to firms with unreliable financial statements could

improve the precision of financial statement information investor’s screen out such

firms by the help of auditors.

Life insurance companies and intermediaries understand the risks and are able to

exercise sound judgment on implementation of rick based strategy. This is done

through training, recruitment, taking professional advice and learning by doing, good

practice guidance is also valuable.

2.3.4 Product Mix Strategy

The rate of transparency of insurance products is low taking into account of a larger

risk orientation in product design and pricing as compared to the past might hence

resulting in more complexity.

Diversification of products within each product line, makes it hard for the company

to know the required effort and timing for experience monitoring a product level

hence making it a challenge to set a risk limit .

Different product mix results to rise of exposures to risk hence insurance companies

provide protection at price exposures. An insurance company may opt to drop one or

more product lines or product items resulting into increase in profits from fewer

products. Modification product of already established is more profitable than making

a new product.

15

2.4 Empirical Review

This section reviewed literature from past studies which were related to this study.

2.4.1 Risk Control Strategy and Performance

A study by Yusuwan, Adnan & Omar, (2008) carried out the level of awareness,

policies used when encountering risks and problems faced when implementing risk

management in a construction project

A conclusion was carried out that risk management affects project finances

production, outcome, and efficiency and that risk management is conducive for

project with specific characteristics such as new technology.

A research carried out by Manabet al., (2010) focused on the drivers: mandate from

board of directors globalization, shareholders pressure, technology, improved decision

making, competitive pressure, good business practice catastrophic event and good

business practices which contributes to the success of Enterprise Wide Risk

Management (EWRM) implementation with corporate governance compliance and

improvement in for profit companies in Malaysia. Only 85 participated in this study

two types of companies were chosen that is financial companies and non-financial

companies. The conclusion of the study corporate governance, mandate from board of

directors, shareholder value, improved decision making and good business practices

results to success of Enterprise Wide Risk Management (EWRM).

Strutt (1993) conducted a study on impact of risk management on financial

performance of banking industry in US. The study used panel-corrected covariance

matrix of the coefficient estimates and uses panel-corrected standard errors. The

program used in the study can show unbalanced panel data. The main of this research

was to investigate the relationship between prepayment risk and credit union

performance. Results show that credit was significantly related to return on loans

(RETLNS) for the Controlling of all credit unions thus borrowers can either refinance

or default on a loan and therefore incorporate the risk premium into the required rate

of return on loans. It was evident that the relationship between risk and return on

loans was consistent for all but one credit controlling.

16

2.4.2 Risk Avoidance Strategy and Performance

A study by Eisenmann (2002) found that the Managerial risk connects with

organizational risk and further showed that the risk taking and risk avoidance

behaviour was dependend on the ownership structure. They analysed whether to

diversify their assets or not under increasing perishable business environment. Bettis

and Mahajan (1985) found that diversification minimises risk and enhances

performance. Diversification is the best way for minimising risks to target level

among the securities and in firm assets.

Kor and Leblebici (2005) & Hamilton and Shergill (1993) finds that managing

resources will results to higher outcome under diversification. Minimisation of risks

and attainment of high firm size will lead towards achievement of goals

Ruefli, Collins & Lacugna (1999), illustrates that diversification of products and

systematic risks of pricing are related to the Monopolistic market power. Risk is

inappropriately measured if the focus is on the distribution of outcomes. Risk

measurement assumes losses that might occur throughout an investment period, hence

investor ought to use the methods best related to project of their investment,

(Kritzman and Rich, 2002).

Laurentis and Mattei (2004) conducted a research on Lessors’ recovery risk

management capability and found that the development of modern reliable systems of

risk management can enhance even more those management capabilities. This means

that credit firms should invest resources in projects aimed at correctly implementing

rating systems and risk models, and highlights once more the importance of these

tools well beyond the scope of regulatory compliance. The research method used is

that mixed research method.

2.4.3 Risk based audit strategy and Performance

Empirical studies on effect of risk assessment on financial performance are reviewed

in this section. According to McCord (2002), risk evaluation of material misstatement

at the financial statement level and also at the planning stage, shows the way on

17

performing a combined assessment of inherent and control risk, hence making room

for the auditors to evaluate other risk factors in an audit.

A study on the impact of risk-based audit on financial performance in Kenya’s

insurance companies conducted by Kasiva (2012) found out that risk-based auditing

through risk management should be enhanced to enable the organization concerned to

detect risks on time.

A survey was carried out of internal auditors’ risk management practices in the

Kenya’s banking sector, Kibaara (2007) concluded that, most banks in Kenya were in

the process of making the ERM process and strategies in line with risk assessment.

Implementing a risk-based strategy requires that life insurance companies and

intermediaries have a good understanding of the risks and are able to exercise sound

judgment. This requires the building of expertise within life insurance companies and

intermediaries, including for example, through training, recruitment, taking

professional advice and learning by doing.

According to Momo and Ukpong (2013), Equitable Life Assurance Society of United

Kingdom collapsed in the year 2000 due to mismanagement of funds by the directors

subsidize current annuity rate policies instead of the guaranteed annuity rate policies.

Skandia, Sweden's largest insurance company which leads in providing variable

annuities and other savings products also ruined its reputation in 2003 when three of

its top executives were investigated on misuse of firms assets.

The Kenyan insurance industry was mainly found to be vulnerable to economic risks

and legal risks. However, the industry was also affected by political risks,

technological risks, socio- cultural risks, geographical risks, management risks and

personnel risks to a moderate extent. These were mainly mitigated using, risk

avoidance, risk retention, risk transfer and risk reduction techniques. Towards

ensuring sustainability in the industry, there is an urgent need for the insurance firms

to frequently train their staff on risk mitigation, empower risk managers, identify and

train internal risk experts, and provide adequate budgetary allocations for risk

mitigation.

18

2.4.4 Product Mix Strategy and Performance

The indirect resource demand in addition to the effort involved in direct

implementation and maintenance with respect to product design and pricing processes

is considered to be rather significant. This product mix strategy concerns with finding

and communicating new uses of products. Lundholm, (2012) in their study using a

sample of 51,866 firms from 69 countries, found that credit facilities influence a

company’s profitability in that profitability negatively by leverage hence making

highly profitable firms to raise their capital through internal financing.

Memba (2015) evaluated the impact of risk management practices on financial

performance of life assurance firms in Kenya. The study found that adaptation of

premium valuation should be considered by the management on insurance firms to

enable financial performance of life assurance firms in Kenya.

Linbo & Sherril (2004) assessed the efficiency in relation to risk in large domestic

USA banks. They found that profit efficiency is related to credit risk and insolvency

risk but not to liquidity risk or to the mix of loan products..

2.5 Summary of Research Gaps

The empirical studies were reviewed in the preceding section focused on the different

credit institutions issues that affect the financial performance of credit unions. Much

has not been done on the financial performance of insurance firms in Kenya.

According to Boadi, et al. (2013), studies on profitability of Insurance industry have

not carried out especially in emerging and developing markets. Cagil and Karabay

(2010) assert that most of the studies on insurance industry have used Data

Envelopment Analysis to assess their financial performance with a few studies using

multivariate analysis. It is because of this reason that the present research used

multivariate analysis to study the influence of risk management practices on financial

performance of life assurance firms in Kenya with a concentration on adverse

selection problem. As a result, this study is designed to fill the aforementioned gaps

and provide concluding recommends having the main objective of analyzing.

However, these studies failed to whether there is a significant relationship between

risk mitigation strategies which as risk control strategy, risk limitation strategy,

19

product mix strategy has significant impact on performance of motor insurance

companies on the performance of motor insurance companies in Nairobi.

20

Table 2.1 Summary of Literature and Research gaps

Author Focus of the study Findings Research gaps Focus of the current study

Laurentis and

Mattei (2004

The study focused on Lessors’

recovery risk management

capability

The study found that

the development of

modern reliable

systems of

risk management can

enhance even more

those management

capabilities

The study failed to determine

influence of risk management

on performance specifically in

motor insurance companies

The current study focused on the effect of

risk mitigation strategies on performance

of motor insurance companies

Carey (2001) A survey of risk management

practices


on average the lowest

percentage is on the

measuring, mitigating

and monitoring risk

that is 69% score as

compared to risk

management policies

and procedures that is

82.4%, and internal

control of banks that

is 76%.

The study failed to establish

whether risk management

practices impacted on

performance of the organization

The current study focused on the extent to

which risk mitigation strategies would

impact on organization performance

focusing on motor insurance companies

21

Liewellyn,

(1998

Effects of risk management

practices on Value Creation in

credit unions in Slovenia


risk management

practice influence

Performance in

respect to ,efficiency

, productivity , capital

structure and liquidity

ratio



strategies had significant

influence on performance

The current study focused on the extent to

which risk mitigation strategies would

impact on organization performance

focusing on motor insurance companies

Kiragu (2014) The study focus on management

of change


management of

change influence

growth in size and

profits and reduction

in the cost of

products

The study was limited to

establishing effects of change

management on performance of

insurance companies

The current study focused on the effects of

risk mitigation strategies on performance

of the motor insurance companies

Ndungu and

Gekara (2014

Impact of risk management

practices on performance of

insurance companies in Kenya


risk avoidance,

transfer, control and

most importantly

accepting influence

performance



strategies impacted significantly

on performance

The current study filled the gap by

focusing on Risk control Strategy, Risk

limitation Strategy, Product Mix Strategy

and Risk Based Auditing Strategy.

22

Memba (2015 Assessment the influence of risk

management practices on

financial performance of life

assurance firms in Kenya

The study revealed

that underwriting

practices, claims

adjustment provisions

and premium

valuation methods

influence the

financial performance

of life assurance

firms in Kenya.

The study focus on underwriting

practices, claims adjustment

provisions and premium

valuation methods as risk

management practices

influencing performance in life

insurance firms

This study focused on risk mitigation

strategies, product mix, risk control, and

Risk limitation Strategy

Karabay (2010 The study focus on determining

influence of risk management

practices on financial

performance of life assurance

firms in Kenya with a

concentration on adverse

selection problem


risk management


performance of life

assurance

This study sought the extent to

which risk management


performance of life assurance

firms in Kenya

However, this study found out that there

is a significant relationship between risk

mitigation strategies on the performance of

motor insurance companies in Nairobi

Source: (Author, 2017

23

2.6 Conceptual Framework

Conceptual framework is a schematic presentation which shows variables that when

combined together explains the issue of concern. The conceptual framework is a set of

ideas used to show the relationship between the independent variables (factors) and

the dependent variables (outcome). Conceptual framework creates a link between the

research title, the objectives, the study methodology and the literature review

(Coulthard, 2004). Conceptual framework explaining the relationship between risks

mitigation strategies as the independent variable andperformance of insurance firms

as the dependent variable is presented in Figure 2.1.

24

Figure 2.1: Conceptual Framework

Source: (Author, 2017)

Risk Mitigation strategies seek to reduce the probability and consequences of an

adverse risk event to an acceptable threshold in insurance firms. Taking early action

to reduce the probability of a risk´s occurring or its impact on the company is more

effective in improving organizational performance. The conceptual framework

exhibits the link between risk control strategy,risk limitation strategy, product mix

strategy, risk based auditing strategy is an important action taken by firms that is

intended to proactively identify, manage and reduce or eliminate risks to achieve high

performance. Different risk strategies are used to reduce or enhance the probability

and impact on performance in the firm.

Risk Avoidance Strategy

Risk Acceptance

Defined Risk Limits

Risk Avoidance

Insurance Company

performance

-Market share

-Customer base

-Quality of products

-Profitability Product Mix Strategy

New Products

Pricing

Differentiation

Risk based audit strategy

Defined Risk Limits

Risk Classification

Risk Assessment

Risk control Strategy

Identifying Risks

Risk Assessment

Risk Classification

Dependent Variable

Independent Variable

25

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

The chapter presents the research design and methodology of the study. The chapter

therefore entails the way the study was designed, the data collection techniques and

the data analysis procedures.

3.2 The Research Design

The research used descriptive research design. This research design involves

collection of data that illustrates events and then organizes, tabulates, depicts, and

describes the data. (Onen & yuko, 2011). The descriptive survey research design

refers to a set of methods and procedures that describe variables. According to

Kothari (2004), a descriptive design involves execution of a plan, re-arranging,

collecting and analysis of data so as to provide information being sought.

This design is also used in collecting qualitative data to provide a great depth of

responses resulting in a better and elaborate understanding of the phenomenon under

study. Descriptive survey design portrays the variables by answering who, what, and

how questions. According to Mugenda and Mugenda (2003), descriptive design is a

procedure of acquiring quantitative and qualitative data so as to test hypotheses or to

answer the questions of the current status of the subject under study. Descriptive

research is used to illustrate the general characteristic of the study population and

show the relationship between the dependent and independent variables. The research

design was deemed fit to establish the effects risk mitigation strategies on

performance of motor insurance companies in Kenya.

3.3 Population of the study

According to Ngechu (2004), a population is a set of people, services, elements, and

events, group of things or households that are being investigated. This definition

ensures that population of interest is homogeneous. The study targeted all the 18

Motor insurance companies. The study population comprised of staff working in

motor insurance companies namely: the management, the staff at the corporate level

and the functional level who were credit officer, operation managers, finance officer,

26

chief auditors and chief IT officers and human resource directors making a total of

108 staff. Association of Kenya Insurers (2016).

Table 3.1: Distribution of Target Population of the companies and Employees

Population Category per Company Frequency

Operation Officers 18

Chief Auditors 18

Financial managers 18

Chief Accountants 18

Human resource directors 18

Chief IT officers 18

Total 108

Source: Association of Kenya Insurers (2016)

Cooper and Schinder (2003) defines sampling as a selection of a few items (a sample)

from a bigger group (population) to used on estimation on the relevance of an

unknown piece of information or outcome regarding the bigger group. A sample is a

representative part of the population that the researcher is interested in (Kumar, 2005).

Stratified sampling was used to select the sample of the study the method assures the

researcher that the sample was representative of the population in terms of certain

critical factors that had been used as a basis for stratification. Stratified samplings as

noted by Neuman (2003) is a procedure in which the population from which a sample

is to be drawn does not entail an identical group and hence requires comparisons

between various sub-groups. Kothari (2004) indicated that a minimum sample size of

20% or 30% of a large study population is sufficient for a study. Therefore the study

adopted a stratified random sampling and adopted a sample proportion of 50% as

indicated by Kothari (2004) to determine a sample size of 54 respondents.

27

Table 3.2: Distribution of the sample size

Strata Frequency Sample

Proportion

Sample

Size

Chairman of Audit Committee 18 0.5 9

Chief Auditors 18 0.5 9

Financial managers 18 0.5 9

Chief Accountants 18 0.5 9

Human Resource directors 18 0.5 9

Chief IT officers 18 0.5 9

Total 108 54

Source: Researcher 2016

3.4. Data sources and collection instruments

The main sources of data for this study were primary and secondary sources. This

data was collected using the questionnaires. Questionnaires ensured that details and

relevant information on the subject of study was collected. Questionnaires were used

in collecting data and consisted of a mixture of open ended and close ended questions.

According to Babbie, (1998), questions ought to be open ended and closed ended in a

questionnaire give room for intensity and richness of individual perceptions in

respondent responses.

The study used questionnaires because it is flexible and facilitates the capture of in-

depth knowledge of the respondents, promotes respondent cooperation and allows the

interviewer to probe further for clarification of issues. As a method of data collection

questionnaires are appropriate because of ease to analysis and is cost friendly

(Andersn, 2003).

3.5 Validity and reliability of Research instrument

3.5.1 Pilot Study

Piloting was carried out before the questionnaires are administered to the participants,

to certify that the questions are relevant, made sense and are clearly understandable.

The pilot study involved (10% of the sample size). The respondents were randomly be

selected to form the requisite sample size in the pilot study.

28

3.5.2 Validity

Creswell (2003) emphasizes that validity is the extent to which results are obtained

from data analysis of the data actually under study. There are two kinds of validity.

These include content validity and face validity. Face validity refers to the probability

that a question is misinterpreted or misunderstood. According to Cooper and

Schindler (2006) pre-testing is an efficient way to increase the chances of face

validity. Alternatively, content validity, also called logical validity, refers to the

degree to which a measure depicts all facets of a given social construct. This study

ensured both the face validity and the content validity.

3.5.3 Reliability

Reliability is the extent to which research instruments come up with consistent results.

The questionnaires reliability was statistically established by measuring the internal

consistency. In turn, internal consistency was measured by the use of Cronbach’s

Alpha (α). The alpha value ranges between 0 and 1 with reliability increasing

consistently with increase in value. Coefficient of 0.6-0.7 is a normally accepted rule

of thumb that designates acceptable reliability and 0.8 or higher indicates good

reliability (Greener, 2008). This study used cronbach’s Alpha test for the reliability of

the data collection tools, this was generated electronically with the help of SPSS.

3.6 Data Collection Procedure

The researcher sought a letter of introduction from Kenyatta University to be

presented to the motor insurance companies’ management. This may help the

researcher to gather information easily and the respondents involved in the study were

to be informed through writing. The researcher also obtained consent to collect data

through a letter to companies for the study and to be permitted to collect data and be

accorded assistance during collection of data. How the questionnaires were

distributed and how you ensured you collected appropriate data.

3.7 Data analysis and Presentation

The collected data was well examined and checked for completeness and

comprehensibility. Data was then summarized, coded and tabulated. Qualitative data

was analysed using content analysis to generate qualitative report which were

29

presented in a continuous prose. Quantitative data was analysed using descriptive

statistics such as means, standard deviation and frequency distribution were used to

analyse the data to establish the effects of risk mitigation strategies on performance of

insurance industry in Kenya: a case of motor insurance companies

Inferential statistics such as regression and correlation analysis was used to establish

the effects of risk mitigation strategies on performance of insurance industry in

Kenya: a case of motor insurance companies.The response on risk mitigation

strategies were measured by computing indices based on the responses derived from

the Likert-Scaled questions. The study adopted linear equation model as presented.

Y = α+ βX1 + β2X2 + β3X3 + β4X4+ є

Y= Performance

X1 = Risk Controlling Strategy

X2= Risk Avoidance Strategy

X3= Risk based audit strategy

X4= Product Mix Strategy

α = Constant

β= Coefficient factor

β1-4 = the regression coefficient or change included in Y by each χ,

є = error term

3.8 Ethical considerations

The ethical principle of confidentiality and respect are relevant and important in this

study. This is because slum upgrading project has encountered enough shares of

political witch hunt and envy. In this regard, informed consent of the respondents

were sought before recruitment into the study. Confidentiality and anonymity were

ascertained by using codes to represent the respondents instead of names and data was

collected in private and secure environment, only the people involved in collecting the

data had access to it.

30

Plagiarism which is an academic theft was avoided at all cost. With the help of

incitation and reference list, the researcher honestly acknowledged borrowed

resources from other previous scholars and authors. The study adopted APA 6th

edition to help evade plagiarism and any other form of academic dishonesty.

31

CHAPTER FOUR

DATA ANALYSIS, INTERPRETATION AND DISCUSSION OF THE

FINDINGS

4.1 Introduction

This section presents and discusses the findings on Risk mitigation strategies and

performance of insurance industry in Kenya. The findings are presented according to

the research objectives. The demographic characteristics were presented first,

followed by findings based on the objectives of the study.

4.2 Response Rate

The study targeted 54 respondents from the insurance sector and managed to get data

from all of them, this was a response rate of (100%), which was a sufficient response

rate for a valid scientific generalization. Onen and Yuko (2011) recommend a

response rate of above 80% as good enough for a scientific study.

4.3 Reliability Test of the Instrument

Five questionnaires were piloted by giving to individuals who were not included in

the final study sample. The 5 questionnaires were coded and responses input into

SPSS which was used to generate the reliability coefficient. The researcher used the

most common internal consistency measure known as Cronbach’s Alpha (α) which

will be generated by SPSS. It indicates the extent to which a set of test items can be

treated as measuring a single latent variable (Cronbach, 1951). The recommended

value of 0.7 was used as a cut–off of reliability for this study. All the variables were

found to be reliable since their Cronbach alpha was above 0.7 which was used as a

cut-off of reliability for the study. Table 4.1 shows the reliability results.

32

Table 4.1 Reliability of Risk Mitigation Strategies and Performance of Insurance

Industry

Variable No of Items Respondents α=Alpha Comment

Risk Control Strategy 8 5 0.723 Reliable

Risk Avoidance Strategy 6 5 0.758 Reliable

Risk-based audit Strategy 8 5 0.777 Reliable

Product Mix Strategy 7 5 0.764 Reliable

Performance 5 5 0.795 Reliable

Source: Survey Data (2016)

4.4 Demographic Characteristics of the Respondents

This section consists of information that describes the basic characteristics of the

respondents such as their gender, department of their work, the years of working in

the current company as well as their age brackets. These variables were carefully

selected as they were deemed to add more value to the findings and were in line with

the objectives.

4.4.1 Gender and Age of the respondents

The respondents were asked to indicate their age and gender. The findings are

presented in Table 4.2

Table 4.2 Gender and Age of Respondents

Count

Age

Total

Percent

(gender)

21-25 26-30 31-35 36-40 41-45 46-50

Gender

Male 0 2 8 14 5 4 33 61.1

Female 1 4 5 7 3 1 21 38.9

Total

1 6 13 21 8 5 54 100.0

Percent

(age) 1.90% 11.10% 24.1% 38.9% 14.8% 9.30% 100.0%


The findings presented in Table 4.2 reveals that 61.1% of the respondents were male

while 38.9% were female, implying that most of the employees in the insurance

33

industry are male. 21 employees were aged between 36 to 40 years; 13employees

were aged between 31to 35 years, 8 employees aged between 41 to 45 years, 6

employees aged between 26 to 30 years, 5 employees aged between 46 to 50 years

and only one employee aged between 21 to 25 years implying that motor insurance

industry has more middle aged employees.

4.4.2 Period of Work and Department

The respondents were asked to indicate the period they had worked in the

organisation and the departments they were in. The findings are presented in Table

4.3.

Table 4.3 Period of Work and Department

Count

Department

Total

Percent

(Period

of

service)

Risk Finance Audit

Human

resource Operations

Years of

service in

the current

company

Less

than 1

year 1 0 2 0 2 5

9.3

1-2years 3 0 3 1 6 13 24.1

2-5years 4 1 2 1 0 8 14.8

5-

10years 0 6 5 4 6 21

38.9

Over

10years 3 4 0 0 0 7

13.0

Total

11 11 12 6 14 54 100

Percent

(Departme

nt) 20.4 20.4 22.2 11.1 25.9 100.0


The findings presented in Table 4.3 reveals that Majority of the respondents, 51.9%,

had been in their organization for more than five years, this added a lot of value to the

study because of the wealth of information they provided and experience they brought

to the study. The results in Table 4.3 further show that organizations tend to entrust

those who are well grounded in sensitive issues like the finances and risk mitigation

departments. According to one of the human resource officers from one of the motor

34

vehicle insurance companies sampled, this was because; those who had been in the

organization for long period had better understanding of issues and work ethics.

4.5 Descriptive Statistics

This section presents the descriptive results based on the research objectives of this

study. It presents the descriptive results on risk control strategy, risk limitation

strategy, product mix strategy, risk based auditing strategy and performance of

insurance industry in Kenya.

4.5.1 Risk Controlling Strategy

Risk control is the method by which firms evaluate potential losses and take action to

reduce or eliminate such threats. Risk control is a method that uses findings from risk

assessments such as knowing potential risk factors in a company’s operations

originating from technical and non-technical aspects of the business, financial

policies, and other policies that may affect the well-being of the company, and

implementing changes to reduce risk in these areas. Descriptive Results for Risk

Controlling strategy are presented in table 4.4

Table 4.4 Risk Controlling Policy

Descriptive Statistics

Risk controlling

Total

N Mean Standard Deviation

Assessing risks 54 3.833 1.270

Overhead cost 54 3.370 1.405

General risk control 54 3.907 1.217

Operating efficiency 54 3.407 1.339

Policy controlling indicators 54 2.833 1.424

Valid N


Results in table 4.4 shows that, a mean of 3.833 and standard deviation of 1.270, the

findings showed that a majority of the respondents felt that assessing risks was

considered to a great extent in their company. Similarly, overhead costs were also

35

considered to a great extent in risk controlling given a mean of responses of 3.370 and

a standard deviation of 1.405 implying that the responses were varied.

The findings also showed that general risk control and operating efficiency were also

considered to a great extent in the risk control process as shown by average of

responses of 3.907 and 3.407 respectively and that these responses were varied from

the mean as indicated by standard deviation of 1.217 and 1.339 respectively.

However, the findings showed that policy controlling indicators were used to a less

extent in risk controlling as indicated by a majority of the respondents with a mean of

responses of 2.833 and a standard deviation of 1.424 indicating variation in the

responses.

The study further assessed the effects of risk control strategy on the performance of

regulated motor insurance companies in Kenya. Results are presented in table 4.5.

Table 4.5: Risk Controlling Strategy and Performance of Motor Insurance

Companies

Risk controlling


Total

N Mean

Standard

Deviation

Risk assessment 54 3.981 1.189

Identification of potential risk 54 3.759 1.258

The speed of responding to the potential risk 54 4.130 1.100

Physical changes of the firms 54 3.352 1.456

The company carries out external and internal

audit of the business activities to determine

how to respond to risks 54 3.611 1.323

The company vets clients before approving

policy facility to reduce occurrence of risk 54 4.241 0.867

The company adopts legal department checks

such as signing of a binding policy contract to

ensure premium repayment without defaults. 54 3.963 1.098

The company imposes penalties on policy

defaulters 54 4.056 1.089

Valid N


36

Results presented in table 4.5 showed that risk assessment influenced performance of

motor insurance companies to large extent as shown by a mean of responses of 3.981

and a standard deviation of 1.189 meaning that the responses were varied

Majority of the respondents also indicated that identification of potential risk

influenced the performance of the companies to a great extent as shown by a mean of

responses of 3.759 and a standard deviation of 1.258. Similarly, the speed of

responding to potential risk also influenced their performance to a great extent as

indicated by a mean of responses 4.130 and standard deviation of 1.100. Physical

changes of the firms were also stated as influencing performance to a great extent

given a mean of responses of 3.352 and standard deviation of 1.456.

The results further showed that conducting external and internal audit of the business

activities to determine how to respond to risks and vetting of before approving policy

facility to reduce occurrence of risk influenced the performance of motor insurance

companies to a great extent as indicated by means of responses of 3.611 and 4.241

respectively and the responses were varied given standard deviations of 1.323 and

0.867 respectively.

Adopting legal department checks such as signing of a binding policy contract to

ensure premium repayment without defaults and imposing penalties on policy

defaulters were also found to influence the performance of the companies to a great

extent given mean of responses of 3.963 and 4.056 respectively and standard

deviation of 1.098 and 1.089 respectively

4.5.2 Risk Avoidance Strategy

The study sought to find out the extent to which motor insurance companies focused

on various types of risks in the risk identification step. The results are as presented in

Table 4.6.

37

Table 4.6: Types of Risks


Types of risks

Total

Mean Standard Deviation

Interest rate risks 3.852 0.899

Liquidity risks 3.778 1.176

Political risks 3.019 1.325

Market risks 3.741 1.152

Credit risk 3.667 0.911

Technological risks 3.093 1.444

Valid N


Results in table 4.6 revealed that these companies focused to a great extent on interest

rate risks, liquidity risks, market risks and credit risks as shown by the mean of

responses of 3.852, 3.778, 3.741 and 3.667 respectively and these responses were

varied. The companies also focused on political risks and technological risks but on a

moderate extent given the mean of responses of 3.019 and 3.093.

It is important to clarify the different risks in relation to the amount of damage they

possibly cause (Fuser, Gleine, & Meier, 1999). This ensures division of risks by the

management that are threatening the existence of the corporation from those which

can cause slight damages. There is a relationship between the expected amount of loss

and its corresponding likelihood that risks that will cause a high damage to a

corporation like earthquakes or fire occur seldom, while risks that occur daily such as

interest rate risks or foreign exchange risks often cause relatively minor losses only,

(Fatemi & Glaum, 2000).

The study further sought to assess the influence of risk limitation strategy on the

performance of regulated motor insurance companies in Kenya. The respondents were

therefore asked to rate the importance of various aspects of risk limitation in

influencing the performance of the companies. The results are as presented in Table

4.7.

38

Table 4.7: Risk Avoidance Strategy and Performance of Motor Insurance

Companies


Total

Risk limitation N Mean

Standard

Deviation

Adequate intra company

communication 54 3.574 1.283

Realistic risk control 54 3.778 1.254

Reducing scope to avoid high-risk

activities 54 3.370 1.186

Use of expertise in assessing risk 54 4.019 1.205

Adopting a familiar approach

instead of an innovative risk

measures 54 3.815 1.245

Avoidance of risk 54 3.889 1.127

Valid N 54


The results presented in Table 4.7 showed that adequate intra company

communication was important in influencing the performance of these companies as

indicated by a majority of the respondents where the mean of responses was 3.574

and a standard deviation of 1.283 implying that the responses were varied. Realistic

risk control was also stated by a majority of the respondents as important in

influencing the performance of motor insurance companies as portrayed by a mean of

responses of 3.778 and standard deviation of 1.254 showing that there was variation

in the responses.

In addition, reducing scope to avoid high-risk activities was also noted as important

factor influencing the performance of these companies as shown by a mean of

responses of 3.370 and a standard deviation of 1.186. The findings further showed

that a majority of the respondents asserted that the use of expertise in assessing risk

39

was very important in influencing the performance of these companies as shown by a

mean of responses of 4.019 and a standard deviation of 1.205 which showed that the

responses from the respondents were varying.

Similarly, adopting a familiar approach instead of an innovative risk measures and

avoidance of risks were important influencers of the companies’ performance given a

mean of responses of 3.815 and 3.889 respectively and these responses were also

varied as portrayed by the standard deviations.

These findings are in line with that of Kieyah (2011) who found that lack of clearly

defining limits, misguiding report, inadequate communication concerning risk

sensitivity, unrealistic risk control, inefficient knowledge of the business environment

and lack of timely decision making. As a result, various interested parties such as

shareholders and other corporate entities are deprived of valuable information, which

could lead to the formulation of more comprehensive and reliable risk systems,

particularly as they relate to information systems.

The findings are also in line with the traditional risk limitation strategies which

suggest that risk evaluation process may allow individual biases to affect the

assessment. Assessments by unknowledgeable participants get in the way often

skewing the results.

Second, the process is doesn’t address the unique characteristics of the company’s

risks. While using a common analytical framework to assess risks with different

characteristics and time horizon considerations may make the process easier to

execute, it is not robust enough to add value continuously over time, may ignore the

interplay among related risks and does not alleviate the fundamental problem of

limited information.

The integrity of the risk assessment process can be impaired by the overconfidence

that can be bred by an overly simplified view of the future. Overconfidence is often

driven by the degree of success managers have experienced in the past and the quality

and coherence of the story line managers construct regarding the future, rather than by

business realities

40

Fourth, the process does not give clarity on measures to take at extreme resulting to

emphasis on high impact, low likelihood risk because of low probabilities involved

false sense of security caused by lack of historical precedence.

Events that occur unexpectedly in a firm due to lack of preparedness cause huge

damages. Therefore, the process needs considerations as the speed to impact, the

persistence of the impact over time and the firms response readiness even though the

specific cause of the loss may not be known.

4.5.3 Risk based audit strategy

The study sought to establish the respondents’ opinion on the extent to which the

following risk based audit strategies affected the performance of their companies. The

findings are as portrayed in Table 4.8.

Table 4.8: Risk-based Auditing Strategy and Performance of Motor Insurance

Companies


N Mean

Standard

Deviation

Reception of risk based audit reports in time 54 3.963 1.243

Assessment of risks with the management 54 4.037 1.165

Discussion of risk based audit annual plans with

the management 54 3.704 1.253

Discussion of audit draft reports with management 54 3.611 1.265

Company annual audit planning 54 3.685 1.301

Management response to audit queries on time 54 3.796 1.219

Implementation of audit recommendation by the

management 54 4.185 1.100

Reception of adequate resources for risk based

audit 54 3.852 1.393

Valid N


The results presented in Table 4.8 showed that a majority of the respondents noted

that reception of risk based audit reports in time; assessment of risks with the

management; discussion of risk based audit annual plans with the management;

discussion of audit draft reports with management company annual audit planning;

management response to audit queries on time; implementation of audit

41

recommendation by the management and reception of adequate resources for risk

based audit affected the performance of the regulated insurance companies to a great

extent as given by mean of responses of 3.963, 4.037, 3.704, 3.611, 3.685, 3.796,

4.185 and 3.852 respectively. The standard deviations which were greater than 1

implied that the answers given were varied.

Based on the findings above, the respondents felt reception of risk based audit reports

on time and timely assessment of the risk may significantly reduce and mitigate risk.

The mean responses of the above data indicated that the companies had succeeded in

mitigating risks based on the two strategies. This confirms the findings of an earlier

study by Ochome (2011) that implementing a risk-based strategy requires that life

insurance companies and intermediaries have a good understanding of the risks and

are able to exercise sound judgment.

4.5.4 Product Mix Strategy

The study assessed the effectiveness of use of various product mix strategies in

mitigating risk in regulated motor insurance companies. The respondents were

therefore asked to rate the extent to which the use of these product mix strategies were

effective. The findings are as shown in Table 4.9.

42

Table 4.9: Effectiveness of Product Mix Strategies in Mitigating Risks


Product Mix Strategies Total

N Mean

Standard

Deviation

Number of total products 54 3.815 1.214

Number of new product lines that your

company sells 54 2.852 1.595

Total number of variations for each product 54 3.685 1.286

Valid N


Results presented in table 4.9 shows that a majority of the respondents were of the

opinion that the number of total products provided by a company was effective to a

great extent in mitigating risks as shown by a mean of responses of 3.815 and

standard deviation of 1.214 meaning that the responses were varied.

Similarly, the findings showed that the total number of variations for each product

was effective to a great extent in mitigating risks in these companies as supported by a

mean of responses of 3.685 and standard deviation of 1.286. However, the number of

new product lines that a company sold was found to be effective to a less extent in

risk mitigation as illustrated by a mean of responses of 2.852 and standard deviation

of 1.595.

These findings support that of Amonde (2013) who found that diversification of

products in a company featured even within each product line, may create challenges

regarding the required efforts and timing for experience monitoring at the product

level. In addition its not to set assumptions and a risk limit for new products. From

this perspective, it may be more valuable as a tool to identify risks and adverse trends

than to set a limit (Shang & Chen, 2012).

43

Insurance companies manage to provide protection from insured risk at a reasonable

price developing different product mix and due to the pooling of individual exposures.

Sometimes, an insurance company contracts its product mix. Contraction consists of

dropping or eliminating one or more product lines or product items. This strategy

results into more profits from fewer products. Instead of developing completely a new

product, marketer may improve one or more established products. Improvement or

alteration can be more profitable and less risky compared to completely a new

product.

The study further assessed the influence of product mix strategy on the performance

of regulated motor insurance companies in Kenya. The findings are as show in Table

4.10.

Table 4.10: Product Mix Strategy and Performance of Motor Insurance

Companies


Total

Product mix strategies N Mean

Standard

Deviation

Product designing of the motor policy 54 3.852 1.106

Pricing of the motor vehicle policy premium 54 3.741 1.2

Communication of new product to clients 54 3.537 1.37

Saving features attached to motor policy 54 3.574 1.326

Channel for premium pay 54 3.519 1.059

Implementation and maintenance with respect

to motor vehicle policy 54 3.648 1.334

Premium payment process 54 3.722 1.295

Valid N 54


From results in table 4.10, it was found that product designing of the motor policy;

pricing of the motor vehicle policy premium and communication of new product to

clients were found to influence the performance of motor insurance companies to a

44

great extent as shown by a mean of responses of 3.852, 3.741 and 3.537 respectively.

The standard deviation showed that the responses given were varied.

The findings also showed that the saving features attached to motor policy, channel

for premium pay; implementation and maintenance with respect to motor vehicle

policy and premium payment process also contributed to a great extent to the

performance of the companies as depicted by the mean of responses of 3.574, 3.519,

3.648 and 3.722 respectively where the standard deviations showed that the answers

given were spread from the mean.

4.5.5 Performance of Regulated Motor Insurance Companies

The study further sought to establish the measures of performance that motor

insurance companies used in assessing the impact of risk management strategies. The

findings are as shown in Table 4.11.

Table 4.11 Performance of Regulated Motor Insurance Companies


Total

Performance indicators N Mean

Standard

Deviation

Increasing savings 54 3.556 1.538

Improve Motor Insurance Wealth 54 3.852 1.352

Development of alternative investment

products e.g. insurance 54 3.722 1.14

Increase in shareholders of the Motor

Insurance 54 3.704 1.327

Improved reduction of defaults 54 3.759 1.427

Valid N


45

The study findings in Table 4.11 reveal that increasing savings; improved motor

insurance wealth; development of alternative investment products e.g. insurance;

increase in shareholders of the motor insurance and improved reduction of defaults

were used to a great extent as performance indicators in the motor insurance

companies. This is supported by mean of responses of 3.556, 3.852, 3.722, 3.704 and

3.759 respectively and these responses were varied.

The findings also imply that improved motor insurance wealth was the highest

indicator for success in this industry as a majority of the respondents felt that it was

the most measurable indicator. Business entities exist for profits, profits are then

supposed to translate to growth in asset base and wealth for the organization. In the

industry of motor vehicle insurance industry, the fewer the number of reported cases

the better for the company in terms of business and profits.

4.6 Inferential Statistics

Inferential analysis was conducted to generate correlation results, model of fitness,

and analysis of the variance and regression coefficients.

4.6.1 Correlation Analysis

Table 4.12 presents the results of the correlation analysis.

46

Table 4.12: Correlation Matrix

Correlations

Risk

Control

Strategy

Risk

Avoidance

Strategy

Product

Mix

Strategy

Risk

based

Audit

Strategy Performance

Risk

Control

Strategy

Pearson

Correlation 1.000

Sig. (2-tailed)

Risk

Limitation

Strategy

Pearson

Correlation 0.235 1.000

Sig. (2-

tailed) 0.088

Product Mix

Strategy

Pearson

Correlation 0.276* 0.340* 1.000

Sig. (2-

tailed) 0.044 0.012

Risk based

Audit

Strategy

Pearson

Correlation 0.273* 0.211 0.299* 1.000

Sig. (2-

tailed) 0.046 0.126 0.028

Performance

Pearson

Correlation 0.514** 0.494** 0.547** 0.482** 1.000

Sig. (2-

tailed) 0.000 0.000 0.000 0.000

* Correlation is significant at the 0.05 level (2-tailed).

** Correlation is significant at the 0.01 level (2-tailed).


The results in table 4.12 revealed that risk control strategy and performance of

regulated motor insurance companies were positively and significantly

associated(r=0.514, p=0.000). The results further indicated that risk avoidance

strategy and performance of regulated motor insurance companies were positively and

significantly associated (r=0.494, p=0.000). It was further established that product

mix strategy had a positive and significant association with the performance of

regulated motor insurance companies (r=0.547, p=0.000). Similarly, the results

showed that risk based audit strategy and performance of regulated motor insurance

companies were positively and significantly related (r=0.482, p=0.000). This implies

47

that an increased usage of any of these risk mitigation strategies leads to an increase

in the performance of regulated motor insurance companies in Kenya.

4.6.1.1 Diagnostic test

Prior to running a regression model pre-estimation and post estimation tests were

conducted. The pre-estimation tests conducted in this case were the multicollinearity

test while the post estimation tests were normality test and test for heteroskedasticity.

This is usually performed to avoid spurious regression results from being obtained.

4.6.1.2 Test for Multicollinearity

According to William et al. (2013), multicollinearity refers to the presence of

correlations between the predictor variables. In severe cases of perfect correlations

between predictor variables, multicollinearity can imply that a unique least squares

solution to a regression analysis cannot be computed (Field, 2009).

Multicollinearity inflates the standard errors and confidence intervals leading to

unstable estimates of the coefficients for individual predictors (Belsleyet al., 1980).

Multicollinearity was assessed in this study using the variance inflation factors (VIF).

According to Field (2009) VIF values in excess of 10 is an indication of the presence

of Multicollinearity. Results are presented in Table 4.13.

Table 4.13: Multicollinearity results using VIF

Variable VIF 1/VIF

Risk Control Strategy 1.31 0.764558

Risk avoidance Strategy 1.23 0.812079

Risk based audit strategy 1.14 0.880611

Product Mix Strategy 1.08 0.926855

Mean VIF 1.19

The results in Table 4.13 present variance inflation factors results and were

established to be 1.19 which is less than 10 and thus according to Field (2009)

indicates that there was no Multicollinearity.

4.6.1.3 Test for Normality

The test for normality was examined using the graphical method approach as shown

in the Figure 4.1 below.

48

Figure 4.1: Test for Normality

The results in figure 4.1 indicate that the residuals are normally distributed.

4.6.1.4 Heteroskedasticity test

The error process may be Homoskedastic within cross-sectional units, but its variance

may differ across units: a condition known as group wise Heteroscedasticity. The

hettest command calculates Breuch Pagan for group wise Heteroscedasticity in the

residuals. The null hypothesis specifies that σ2

i =σ2 for i =1...Ng, where Ng is the

number of cross-sectional units. Results are presented in table 4.14.

Table 4.14: Heteroskedasticity Results

Breuch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance

Variables: fitted values of Growth

chi2(1) = 83.66

Prob> chi2 = 0.0710

The results in Table 4.14 indicate that the null hypothesis of Homoskedastic error

terms is not rejected as supported by a p-value of 0.0710.

0

.05

.1.1

5.2

.25

Den

sity

-5 0 5 10 15Residuals

49

4.7 Regression Analysis

The results presented in Table 4.15 present the fitness of model used of the regression

model in explaining the study phenomena.

Table 4.15: Model Fitness

Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

1 .756a 0.572 0.537 0.459866

a Predictors: (Constant), Risk based audit strategy, Risk avoidance Strategy, Risk

Control Strategy, Product Mix Strategy


Results in table 4.15 revealed that Risk control strategy, risk avoidance strategy,

product mix strategy and risk based audit strategy were found to be satisfactory

variables in explaining the performance of regulated motor insurance companies in

Kenya. This is supported by coefficient of determination also known as the R square

of 57.2%.This means that risk control strategy, risk avoidance strategy, product mix

strategy and risk based audit strategy explained 57.1% of the variations in the

dependent variable which is the performance of regulated motor insurance companies

in Kenya. These results also imply that the model applied to link the relationship of

the variables was satisfactory.

In statistics, significance testing using the p-value indicates the level of relation of the

independent variable to the dependent variable. If the significance number is found to

be less than the critical value also known as the probability value (p) which is

statistically set at 0.05, then the conclusion would be that the model is significant in

explaining the relationship; otherwise the model would be regarded as non-

significant. Table 4.16 provides the results on the analysis of the variance (ANOVA).

http://en.wikipedia.org/wiki/Significance_testing

50

Table 4.16: Analysis of Variance

ANOVA

Model

Sum of

Squares Df

Mean

Square F Sig.

1 Regression 13.839 4 3.46 16.36 .000

Residual 10.362 49 0.211

Total 24.201 53

a Dependent Variable: Performance

b Predictors: (Constant), Risk based audit strategy, Risk avoidance Strategy, Risk

Control Strategy, Product Mix Strategy


The results in table 4.16 indicate that the overall model was statistically significant.

Further, the results imply that the independent variables are good predictors of

performance of regulated motor insurance companies in Kenya. This was supported

by an F statistic of 16.36 and the reported p value (0.000) which was less than the

conventional probability of 0.05significance level.Table 4.17 shows results of

Regression of coefficients.

Table 4.17: Regression Coefficients

Coefficients

Model

Unstandardized

Coefficients

Standardized

Coefficients t Sig.

B

Std.

Error Beta

1 (Constant) -2.098 0.723

-2.901 0.006

Risk

Control

Strategy 0.431 0.144 0.299 2.983 0.004

Risk

Limitation

Strategy 0.370 0.139 0.269 2.658 0.011

Product

Mix

Strategy 0.429 0.15 0.297 2.855 0.006

Risk

based

Audit

Strategy 0.323 0.127 0.255 2.536 0.014

a Dependent Variable: Performance


51

Hence, the optimal model for this study was as shown;

Performance of regulated motor insurance companies = -2.098+ 0.323Risk based

Audit Strategy + 0.370Risk Limitation Strategy + 0.429Product Mix Strategy +

0.431Risk Control Strategy

Results in Table 4.18 shows that risk control strategy and performance of regulated

motor insurance companies in Kenya are positively and significantly related (r=0.431,

p=0.004). An increase in the unit change in risk control strategy would lead to an

increase in the performance of regulated motor insurance companies by 0.431 units.

The results further indicate that risk avoidance strategy and the performance of

regulated motor insurance companies were positively and significantly related

(r=0.370, p=0.011). These results imply that an increase in the unit change in risk

limitation strategy would lead to an increase in the performance of regulated motor

insurance companies by 0.370 units.

It was further established that product mix strategy and performance of regulated

motor insurance companies were positively and significantly related (r=0.429,

p=0.006) while risk based audit strategy and performance of regulated motor

insurance companies were also positively and significantly related (r=0.323,

p=0.014). This shows that an increase in the unit change in product mix strategy and

risk based audit strategy would lead to an increase in the performance of regulated

motor insurance companies by 0.429 and 0.323 units respectively.

The findings are consistent with that of Yusuwan, Adnan & Omar, (2008) who

studied on the risk management practices on construction project companies

specifically in Klang Valley, Malaysia and found out that risk management affects

production, outcome, efficiency and project finances and that risk management is

suitable to apply for project with certain characteristics such as new technology.

The finding is also consistent with that of Salesio,(2013) who carried out a study with

an aim of identifying the types of risks mitigated by the Kenyan insurers, mitigation

strategies and. techniques adopted, and the challenges facing the insurers in risk

mitigation process and found out that the Kenyan insurance industry was mainly

found to be vulnerable to economic risks and legal risks.

52

However, the industry was also affected by political risks, technological risks, socio-

cultural risks, geographical risks, management risks and personnel risks to a moderate

extent. These were mainly mitigated using, risk avoidance, risk retention, risk transfer

and risk reduction techniques. Towards ensuring sustainability in the industry, there is

an urgent need for the insurance firms to frequently train their staff on risk mitigation,

empower risk managers, identify and train internal risk experts, and provide adequate

budgetary allocations for risk mitigation.

53

CHAPTER FIVE

SUMMARY OF THE FINIDNGS, CONCLUSIONS AND

RECOMMENDATIONS

5.1 Introduction

This chapter deals with the summary of the findings, the conclusion and

recommendations. This was done in line with the objectives of the study. Areas of

further research were suggested and limitations of the study were taken into account.

5.2 Summary of the findings

The study targeted 54 respondents from the insurance sector and managed to get data

from all of them, this was a response rate of (100%), which was a sufficient response

rate for a valid scientific generalization. Five questionnaires were piloted by issuing to

individuals who were not included in the final study sample. The 5 questionnaires

were coded and responses input into SPSS which was used to generate the reliability

coefficient. The researcher used the most common internal consistency measure

known as Cronbach’s Alpha (α) which will be generated by SPSS. All the variables

were found to be reliable since their Cronbach alpha was above 0.7 which was used as

a cut-off of reliability for the study.

The first objective of the study was to determine the effects of risk controlling

strategy on performance of Motor Insurance Companies. Correlation analysis revealed

that risk control strategy and performance of regulated motor insurance companies

were positively and significantly associated(r=0.514, p=0.000). Further, regression

analysis shows that risk control strategy and performance of regulated motor

insurance companies in Kenya are positively and significantly related (r=0.431,

p=0.004). An increase in the unit change in risk control strategy would lead to an


The second objective of the study was to establish the extent to which risk avoidance

influences performance of Motor Insurance Companies.Correlation analysis revealed

that risk avoidance strategy and performance of regulated motor insurance companies

were positively and significantly associated (r=0.494, p=0.000). Further, regression

analysis shows that risk avoidance strategy and the performance of regulated motor

54

insurance companies were positively and significantly related (r=0.370, p=0.011).

These results imply that an increase in the unit change in risk limitation strategy

would lead to an increase in the performance of regulated motor insurance companies

by 0.370 units.

The third objective of the study was to establish influence of risk based audit strategy

on performance of Motor Insurance Companies. Correlation analysis showed that risk

based audit strategy and performance of regulated motor insurance companies were

positively and significantly related (r=0.482, p=0.000). This implies that an increased

usage of any of these risk mitigation strategies leads to an increase in the performance

of regulated motor insurance companies in Kenya. Further, regression analysis shows

that risk based audit strategy and performance of regulated motor insurance

companies were also positively and significantly related (r=0.323, p=0.014). This

shows that an increase in the unit change in risk based audit strategy would lead to an


The fourth objective of the study was determine influence of product mix strategy on

performance of Motor Insurance Companies .Correlation analysis revealed that

product mix strategy had a positive and significant association with the performance

of regulated motor insurance companies (r=0.547, p=0.000). Further, regression

analysis shows that product mix strategy and performance of regulated motor

insurance companies were positively and significantly related (r=0.429, p=0.006).

This shows that an increase in the unit change in product mix would lead to an


5.3 Conclusion

The study concluded that when proper Risk Controlling Strategies are adopted, it

leads to an improvement in performance of Motor Insurance Companies. Risk control

uses information gained during risk assessments and develops and applies changes to

control the risks. Risk control can involve the implementation of new polices and

standards, physical changes and procedural changes that can reduce or eliminate

certain risks within the business.

55

The study concluded that an improvement in Risk avoidance Strategy translates to an

improvement in performance of Motor Insurance Companies. Risk avoidance strategy

is modification of the project plan to eliminate the risk or condition or to protect the

project objectives from its impact. Although the management team can never

eliminate all risk events, some specific risks may be avoided. Some risk events that

arise early in the company can be dealt with by clarifying requirements, obtaining

information, improving communication, or acquiring expertise.

In addition, the study concluded that adoption of proper Risk based audit leads to an

improvement in performance of Motor Insurance Companies. Increased concerns

regarding corporate accountability in insurance companies have been associated with

the need for appropriate Risk Based Audit which involves risk management and

internal control systems. This has been reflected through recent voluntary corporate

governance guidelines.

Lastly, the study concluded that the adoption of proper product mix Strategy leads to

an improvement in performance of Motor Insurance Companies.Insurance Company

selling costly, prestigious, and premium insurance quality products can opt to add

lower- priced items in its costly and prestigious product lines. This is a unique product

mix strategy which eventually translates to better performance.

5.4 Recommendations

The study recommends that the motor insurance companies should work toward

investing more on risk controlling, risk avoidance, risk based audit and product mix

strategies in order to improve their performance. This because the study found out

that risk controlling, risk avoidance strategy, risk based audit strategy and product mix

strategy has a positive and significant effect on performance of Motor Insurance

Companies

The study recommends for insurance companies to deal with some risk events that

arise early in the company by identifying requirements, acquiring information,

improving communication, or acquiring expertise. Minimisation of scope to avoid

high-risk activities, increasing resources or time, using a familiar approach instead of

an innovative one, or avoiding an unfamiliar subcontractor may be examples of

avoidance.

56

Lastly the study recommends that the Project stakeholders should use multiple models

for estimating motor vehicle insurance companies in Kenya and duration rather than

relying on past experience and cost data from consultants. Lastly, motor vehicle

insurance companies in Kenya stakeholders should improve on performance of

projects by introducing a risk management models in each projects execute.

5.4 Areas for Further Research

This study made the following suggestions for further study; Effect of Credit risks

practices on the performance of insurance companies and the role of financial

facilities on risk mitigation in insurance companies.

57

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APPENDICES

Appendix I: Questionnaire for Employees

Dear Respondent,

I am Janet Makokha Okumu, a student at Kenyatta University Reg no.

D53/OL/CTY/24244/2014, pursuing Master Degree in Strategic Management. In

order to achieve this, I am supposed to conduct a study on the Risk Mitigation

Strategies and Performance of Insurance Industry: Case of Motor Insurance. I

therefore request you to assist me with any information on this topic. Your responses

will be treated with utmost confidentiality for purposes of this academic report only.

I thank you most sincerely for your participation.

Signature: ------------------------------------------- Date: ----------------------------

Section A: Socio-Demographic Information. Indicate with a (tick) in the spaces

provided

1. Indicate department you work in

Credit [ ]

Finance [ ]

Audit [ ]

Human resource [ ]

Operation [ ]

2. Kindly state your age bracket

18-30 years [ ]

30- 40 years [ ]

40-50 years [ ]

Above 50 years [ ]

3. Years of service in your current company?

Less than 1 year

1-2 years [ ]

2-5 years [ ]

5-10 years [ ]

61

Over 10 years [ ]

4. Gender of the Respondents Male ( ) Female ( )

SECTION B: RISK CONTROL STRATEGY Indicate with a (tick) in the

spaces provided

4 How would you rate the following Risk control strategies involved in risk control

for the policies in your regulated Motor Insurance? Use a scale of 1 to 5 where 1

is to a great extent and 5 is to no extent.

Risk Controlling Strategies 1 2 3 4 5

Termination of Risk

Treatment of the Risk

Transfer

Tolerate

6. Indicate the rating on how regulated Motor Insurance considers the following

risk\control measures in establishing a policy Controlling policy? Where 1 is to a very

great extent and 5 is to no extent.

Risk Controlling 1 2 3 4 5

assessing risks

Overhead cost

General risk control

Operating efficiency

Policy Controlling indicators

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7. To what extent do the following Risk Control strategies influence performance in

Your Company?.Use a scale of 1 to 5 where:

1. No extent at all 2. No extent 3. Little extent 4. Great extent 5. Very great extent

Credit Risk Control 1 2 3 4 5

Risk assessment

Identification of potential risk

The speed of responding to the potential risk

Physical changes of the firms

The company carries out external and internal audit of the business

activities to determine how to respond to risks.

The company vets clients before approving policy facility to reduce

occurrence of risk.

The company adopts legal department checks such as signing of a

binding policy contract to ensure premium repayment without defaults.

The company imposes penalties on policy defaulters

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5 Risk Avoidance Strategy

8. Rate the extent to which this Motor Insurance companies focuses on the types of

risks in the risk identification step. Use a scale of 1 to 5 where 1 is to a great extent

and 5 is to no extent.

Risk identification 1 2 3 4 5

Interest rate risks

Liquidity risks

Political risks

Market risks

Credit risk

Technological risks

9. Rate the extent of use of the risk limitations in managing risks in Motor vehicle

influence performance? Use a scale of 1 to 5 where, 1-No Extent, 2- Less extent, 3-

Moderate, 4- Great Extent and 5- Very Great Extent.

Where 1 represents means not used at all and 4 most used means.

Means Not At All least Moderate Most used

Regular meetings

Regular training

Using supervision on one to one basis

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10. Rate the importance of risk limitation in risk management in Motor Insurance

influence performance? Rate using a scale of 1 to 5 where 1 is Not Importance2= Less

Importance. 3= Moderately Importance, 4= Importance and 5 =Very importance,

Risk limitation in risk management 1 2 3 4 5

Adequate intra company communication

Realistic risk control

Reducing scope to avoid high-risk activities

Use of expertises in assessing risk

Adopting a familiar approach instead of an innovative risk measures

Avoidance of risk

Ensure accurate reporting

Provision of knowledge

Making timely decisions in risk management

65

6 PRODUCT MIX STRATEGY

11. How effective is the use of the following product mix strategies in mitigating risk

in your company? In a scale of 1-5, where: 1. No Extent at All 2. No Extent 3. Little

Extent 4. Great extent 5. Very Great Extent

1 2 3 4 5

Number of total products

Number of product lines that your company sells

Total number of variations for each product

12. Rate the extent to which the following product mixes strategy influence

performance in Motor Insurance companies? Use a scale of 1 to 5 where, 1-No

Extent, 2- Less extent, 3-Moderate, 4- Great Extent and 5- Very Great Extent.

Product mix in risk management 1 2 3 4 5

Product designing of the motor policy

Pricing of the motor vehicle policy premium

Communication of new product to clients

Saving features attached to motor policy

Channel for premium pay

Implementation and maintenance with respect to motor vehicle

policy

Premium payment process

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8. RISK BASED AUDITING STRATEGY

13.To what extent do you agree with the statement, risk auditing influence financial

performance in the company?

i. No extent at all [ ]

ii. Little extent [ ]

iii. Moderate extent [ ]

iv. Great extent [ ]

v. Very great extent [ ]

14. To what extent do the following risk based audit services affect performance at

your company?

Risk Based Services Very

great

extent

Great

extent

Average

extent

Low extent Very

low

extent

Reception of Risk Based

Audit Reports in time

Assessment of risks with the

management

Discussion of Risk Based

audit Annual plans with the

Management

Discussion of audit draft

reports with Management

Company annual audit

planning

Management response to

audit queries on time

Implementation of audit

recommendation by the

Management

Reception of adequate

resources for Risk Based

Audit

67

15. To what extent does risk based audit planning contribute to performance in your

company? Use a scale of 1 to 5 where: 1 = No extent at all; 2 = little extent; 3 =

Moderate extent; 4 = Great extent; 5 = A very great extent

5 4 3 2 1

Accuracy

Completeness

Clarity

Timeliness

Convenience

16. To what extent are the following auditing standards affect the performance in

your company?

Very

great

extent

Great

extent

Averag

e extent

Low

extent

Very

low

extent

Company Auditors

technical and professional

skills

Company Auditors

Readiness to embrace

change

Quality audit reports

Quality criteria to measure

internal auditors

performance

68

9. PERFORMANCE INDICATORS

17. Which measures of performance does your Motor Insurance use in assessing the

impact of risk management? Use a scale of 1 to 5 where 1 is to a great extent and 5 is

to no extent.

1 2 3 4 5

Increasing savings

Improve Motor Insurance Wealth

Development of alternative investment products e.g. insurance

Increase in shareholders of the Motor Insurance

Improved reduction of defaults

Other (specify............................................)

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Appendix II: List of Registered Insurance Companies

No. Company Address

1. AAR Insurance Kenya Limited P.O Box 41766 00100, NAIROBI

2. A P A Insurance Limited P.O Box 30065 00100, NAIROBI

3. Africa Merchant Assurance Company Limited P.O Box 61599 –00200, NAIROBI

4. Apollo Life Assurance Limited P.O Box 30389 00100, NAIROBI

5. AIG Kenya Insurance Company Limited P.O. Box 49460 00100, NAIROBI

6. British American Insurance Company (Kenya) Limited P.O Box 30375

7. Cannon Assurance Limited P. O. Box 3021600100, NAIROBI

8. Capex Life Assurance Company Limited P. O. Box 12043 00400, NAIROBI

9. CFC Life Assurance Limited P.O. Box 30364 00100, NAIROBI

10. CIC General Insurance Limited P.O. Box 59485 00200, NAIROBI

11. CIC Life Assurance Limited P.O. Box 59485 00200, NAIROBI

12. Continental Reinsurance Limited P.O. Box 76326-00508, NAIROBI

13 Corporate Insurance Company Limited P.O. Box 34172 00100, NAIROBI

14 Direct line Assurance Company Limited P.O. Box 40863 00100, NAIROBI

15 East Africa Reinsurance Company Limited P.O. Box 20196 00200, NAIROBI

16 Fidelity Shield Insurance Company Limited P. O. Box 47435 00100, NAIROBI

17 First Assurance Company Limited P.O. Box 30064–00100, NAIROBI

18 G A Insurance Limited, P.O. Box 42166–00100, NAIROBI

19 Gateway Insurance Company Limited P.O. Box 60656 00200, NAIROBI

20 Geminia Insurance Company Limited P.O. Box 61316 00200, NAIROBI

21 ICEA LION General Insurance Company Limited P.O. Box 30190 00100, NAIROBI

22 ICEA LION Life Assurance Company Limited P.O. Box 46143 00100, NAIROBI

23 Intra Africa Assurance Company Limited P.O. Box 43241 00100, NAIROBI

24 Invesco Assurance Company Limited P.O. Box 5296400200, NAIROBI

25 Kenindia Assurance Company Limited P.O. Box 44372 00100, NAIROBI

26 Kenya Orient Insurance Limited P.O. Box 3453000100, NAIROBI

27 Kenya Reinsurance Corporation Limited P.O. Box 30271 00100, NAIROBI

28 Madison Insurance Company Kenya Limited P.O. Box 47382 00100, NAIROBI

29 Mayfair Insurance Company Limited P.O. Box 45161 00100, NAIROBI

30 Mercantile Insurance Company Limited P.O. Box 20680 00200, NAIROBI

31 Metropolitan Life Insurance Kenya Limited P.O. Box 46783 00100, NAIROBI

32 Occidental Insurance Company Limited P.O. Box 39459 00623, NAIROBI

33 Old Mutual Life Assurance Company Limited P.O. Box 30059 00100, NAIROBI

34 Pacis Insurance Company Limited P.O. Box 1870 00200, NAIROBI

35 Pan Africa Life Assurance Limited P.O. Box 44041 00100, NAIROBI

36 Phoenix of East Africa Assurance Company Limited P.O. Box 30129

37 Pioneer Assurance Company Limited P.O. Box 20333 -00200, NAIROBI

38 Real Insurance Company Limited P.O. Box 4000100100, NAIROBI

39. Resolution Insurance Company Limited P.O Box 4469 00100, NAIROBI

40. Shield Assurance Company Limited P.O. Box 25093, 00100, NAIROBI

41. Takaful Insurance of Africa Limited P.O Box 1811 00100, NAIROBI

42. Tausi Assurance Company Limited P.O. Box 2888900200, NAIROBI

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43. The Heritage Insurance Company Limited P. O. Box 30390 00100, NAIROBI.

44. The Jubilee Insurance Company of Kenya Limited P.O. Box 3037600100, NAIROBI

45 The Monarch Insurance Company Limited P.O. Box 44003 00100, NAIROBI

46 Trident Insurance Company Limited P.O. Box 55651 00200, NAIROBI

47 UAP Insurance Company Limited P.O. Box4301300100, NAIROBI

48 UAP Life Assurance Limited P.O. Box 23842 00100, NAIROBI

49 Xplico Insurance Company Limited P.O Box 38106 00623, NAIROBI

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Appendix III: Nacosti Permit Letter

72

Appendix IV: Data Collection Authorization

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