Influence of Liquidity Risk on Investment Decisions of Insurance Firms in Kenya

Abstract

Insurance firms generally undertake underwriting and investment activities. They complement profits from underwriting activities with their investment income. Therefore, access to liquid cash and highly liquid assets remains a major concern. The general objective of the study was to determine the influence of liquidity risks on investment decisions of insurance firms in Kenya. The study was anchored on the liquidity preference theory and the modern portfolio theory. The study adopted an explanatory research design, which examined how one variable influences another. The target population of the study was the 66 insurance firms as listed by the Insurance Regulatory Authority. Primary data was collected from the heads of the underwriting and finance departments using structured questionnaires and analyzed using SPSS v.27. Data analysis, including descriptive and inferential statistics, was performed to examine relationships and test the direction and strength of associations between the variables. Findings of the analysis established that the liquidity risks had a positive and significant influence on investment decisions. The study concluded that assessment and careful analysis of liquidity risks was critical to making sound investment decisions since liquidity risks influenced the availability of funds available for investment. The study further recommended that insurance firms strengthen financial risk management and integrate risk management into investment decision-making while regulators reinforce policies and guidelines to support prudent underwriting practices and investment choices. Finally, the study proposed that future studies examine additional financial risks such as credit, solvency, operational, and insurance fraud risks, as well as factors including firm size, technology, corporate governance, management expertise, ownership structure, and other macroeconomic conditions.