THE INFLUENCE OF RISK FACTORS ON FINANCIAL PERFORMANCE IN KENYA'S INSURANCE INDUSTRY

The financial performance of Insurance firms plays a vital role in increasing the sector's market value and leads to the economy's overall growth. There exists substantial empirical literature on fundamental risk factors and the financial performance of commercial banks and microfinance institutions. However, few studies have delved much into the relationship between fundamental risk factors and the financial performance of Insurance firms. The downward financial performance trend of the Insurance firms in Kenya is a cause for concerns among various stakeholders. The financial performance has shown a downward trend from 2011 to 2018 before a little bullish movement in 2019. The study investigates the effect of fundamental risk factors on the financial performance of Insurance firms in Kenya. Operating ratio measured financial performance for the Insurance firms as applied by the Insurance regulatory authority. The study's specific objectives are to determine the effect of inflation, exchange rates, and interest rates on the financial performance of Kenya's insurance firms. The study further establishes the moderating effect of capital adequacy on the relationship between fundamental risk factors and the financial performance of the Insurance firms in Kenya. This study adopts Positivism philosophy and an Explanatory research design. The study the Modern portfolio theory, expectations, and the Liquidity preference theory. The study uses quarterly data obtained from the insurance firms in Kenya and uses STATA software to analyze. Data analysis through Descriptive statistics, Pearson's simple correlation, Time-series regression analysis over a time scope of 10 years, Interest rates have a positive but not statistically significant effect on operating ratio as indicated by the p value (P = 0.081 < 0.05). Furthermore, Inflation rates have positive but statistically insignificant effect on Fundamental risk factors with p value (P = 0.863 < 0.05), exchange rate has a positive statistically significant effect on operating ratio (P = 0.000 < 0.05). rom 2014-2021. The hypothesis was tested at the 0.05 level of significance; findings reveal that Interest rates have a positive but statistically insignificant effect on operating ratio at p value of 0.081. Furthermore, Inflation rates have positive but statistically insignificant effect on financial performance with p value (P=0.863), exchange rate has a positive statistically significant effect on operating ratio (P = 0.000). Therefore, the research suggests the insurance firms should be keen to quantify and control the effect of foreign exchange gain or loss on their financial performance The firms should also take into account the impact of interest and exchange rates to mitigate the impact of their volatility on financial performance