Unravelling the Dynamics: The Effects of Leverage on the Financial Stability of Insurance Firms in Kenya

Abstract

Despite the crucial part that the insurance industry plays, firms operating in this sector have been having trouble maintaining their financial stability. The insurance industry has faced considerable volatility in profitability, resulting in some firms being placed under receivership or even going out of firm. The purpose of this study was to analyse the effect of leverage on financial stability of insurance firms in Kenya. The study was informed by Pecking Order Theory. The research was conducted using an explanatory research design, and the positivist philosophical approach was utilized. The target population for this study consisted of the 46 insurance firms that held IRA licenses and were operating during the time period under consideration (2014-2021). The census method was utilized for the research thesis, which focused on all 46 insurance firms in Kenya. The study used secondary data obtained from audited financial statements, which were publicly available on the websites of individual insurance firms. To gather panel data for the study, a secondary data collection template was employed. In order to draw conclusions from the data that was gathered, this study employed both descriptive and inferential statistical methods. The study employed a generalized method of moments modelling guided by static panel regression. The data processing was done using the Stata software. The research findings were presented through the use of tables, figures, and graphs. The findings of this study showed that leverage significantly and negatively impacted the financial stability of Kenyan insurance firms (β = -3.513831, p = 0.000 < .05). The study concludes that if leverage challenges are not adequately managed, they can have a detrimental influence on the profitability and capital of a particular insurance sector, and in the worst case scenarios, they can even force insurance sectors that are otherwise financially secure to fail. The study recommends that the general insurers in Kenya should enhance their leverage in order to strengthen the financial stability of their firms. However, insurance firms should be careful not to leverage themselves too much, since this can also be damaging to their long-term sustainability. Keywords: Unravelling Dynamics, Financial Leverage, Financial Stability, Insurance Firms, Insurance Industry Stability, Kenya