MACROECONOMIC DYNAMICS AND PROFITABILITY OF INSURANCE FIRMS LISTED AT NAIROBI SECURITIES EXCHANGE, KENYA

Abstract

Kenya’s insurance industry has been growing steadily since 2013, with premium revenue and capital investment increasing. However, Return on Assets has declined over the past four years and reached an all-time low in 2022 compared to the previous five years which was partly attributed to the reforms introduced to cater the impact of Corona virus pandemic on and the need to close infrastructure gaps. As a result, as gross domestic product grows, firm deposits and loans rise along with interest income and loan losses. This study focused on understanding how macroeconomic dynamics affect the profitability of insurance companies listed on NSE in Kenya. It particularly looked into how changes in exchange rates, interest rates, and the overall price rise in the economy (inflation) influence these companies' profits. The study was guided by the theoretical frameworks of purchasing power parity, deflation, the balance of payment, the classical theory of interest, and the balance scorecard model. The study adopted an explanatory research design and targeted the six insurance firms listed on the NSE. The secondary data collection for this study involved the utilization of secondary data sheets. Data was obtained from the official audited financial statements of the insurance firms for the fiscal years 2016 through 2022. Data analysis involved both descriptive and inferential analysis. Inferential analysis incorporated both correlation analysis and panel regression analysis. The study found that key macroeconomic dynamics had significant impact on the profits of insurance companies listed on the NSE, explaining 57.71% of the changes in profits (R-squared = 0.5771). It discovered that while changes in the exchange rate do not significantly affect profits (β = 0.0761, p = 0.5358), higher interest rates lead to higher profits (β = 2.1647, p = 0.0233), and inflation negatively impacts profits (β = -0.3447, p = 0.0011). The study's validity is supported by strong statistical evidence (F-statistic = 21.0100, p-value = 0.0000). It suggests that insurance companies in Kenya should focus on managing risks related to economic changes to improve their financial performance. This research adds to the understanding of how macroeconomic dynamics affect the profitability of insurance firms in the context of the NSE.