Risk Management Practices and Financial Performance of Medical Insurance Companies in Kenya

Insurance companies in Kenya serve as essential financial safeguards, offering individuals and businesses protection against unforeseen risks. However, in recent years, the industry’s performance has been challenged. According to the Insurance Regulatory Authority (IRA), the industry’s overall claims ratio has been rising, increasing from 61.5% in 2017 to 65.6% in 2019, indicating deteriorating underwriting performance. Moreover, the Return on Equity (ROE) for Kenyan insurers fell from 7.6% in 2017 to 6.3% in 2019, while the Return on Assets (ROA) dropped from 1.6% to 1.4% over the same period. The industry’s investment performance has also weakened, with the average Return on Investment (ROI) decreasing from 4.9% in 2017 to 4.5% in 2019. Empirical research on the link between risk management and performance has remained inconclusive. The general objective of the study was to determine the effect of risk management practices on the financial performance of medical insurance companies in Kenya. The study was guided by the following specific objectives: to determine the effect of financial risk management practices, actuarial risk management practices, liquidity risk management practices, and operating risk management practices on the performance of medical insurance providers in Kenya and to determine the moderating effect of firm size on the relationship between management practices and performance of medical insurance providers in Kenya. The study was anchored by four theories: Risk Management Theory, Financial Risk Theory, White-collar Fraud Theory and Stakeholders Theory. The positivist research approach was used in this study, following an explanatory research design approach. The study targeted 32 medical insurance providers in Kenya and utilized secondary data, which was evaluated using descriptive statistics, including means, standard deviation and inferential statistics entailing correlation and regression analysis. The audited reports of the insurance firms for the ten-year period between 2013 and 2022 served as the study’s secondary data source (both years inclusive). The data analyzed was presented in tables and figures. The findings indicate that for H01, financial risk management practices were found to have a significant effect on the financial performance of medical insurance companies in Kenya (P=0.002, <0.05), leading to the rejection of the hypothesis. Similarly, H02 revealed that actuarial risk management practices significantly impact financial performance (P=0.000, <0.05), resulting in the rejection of the hypothesis. In the case of H03, liquidity risk management practices also showed a significant effect on financial performance (P=0.000, <0.05), leading to the rejection of the hypothesis. H04 concluded that operating risk management practices significantly affect the relationship between management practices and financial performance (P=0.000, <0.05). Additionally, the study revealed that firm size moderates the relationship between management practices and financial performance, showing significant influence (P=0.000, <0.05). The study concludes that there is a strong positive relationship between risk management practices and the financial performance of medical insurance companies in Kenya. The study recommends that medical insurance companies in Kenya establish comprehensive risk management frameworks, invest in analytical capabilities, and foster a culture of risk awareness. Regular review and updating of risk management practices, along with collaboration with stakeholders, are also recommended for effective implementation. Furthermore, the study recommends that regulatory bodies promote sound risk management practices and transparency within the industry while incentivizing capacity-building initiatives.