Effect of Risk Profile Diversification on Financial Performance of Insurance Companies in Kenya

Purpose: Effect of risk profile diversification on financial performance of insurance companies in Kenya. Methodology: The study employed a descriptive research design targeting all 108 senior managers from 36 licensed general insurance firms in Kenya. Using a census approach, data were collected via structured questionnaires. A pilot study ensured reliability and validity. Analysis involved descriptive and multiple regression statistics, with diagnostic tests conducted to confirm the model’s robustness and validity. Findings: The study found a statistically significant positive relationship between risk profile diversification and financial performance in Kenyan insurance firms. A correlation coefficient (R) of 0.512 indicated a moderate association, while an R² of 0.262 showed that diversification explained 26.2% of performance variance. The adjusted R² of 0.255 confirmed model reliability. A regression coefficient (B = 0.594) suggested substantial impact, and an F-statistic of 71.200 (p = 0.000) affirmed model significance, highlighting risk profile diversification as a strategic driver of financial performance. Unique Contribution to Theory, Policy and Practice: This study contributes uniquely to theory, policy, and practice by affirming the Risk-Return Tradeoff Theory, showing that balancing high-, medium-, and low-risk assets enhances financial performance in Kenyan insurance firms. Theoretically, it demonstrates that risk-diversified portfolios improve resilience and profitability. For policy, it advises regulators like the IRA and National Treasury to integrate risk diversification into investment guidelines, promote financial literacy, and strengthen performance monitoring tools. Practically, the study urges insurers to adopt dynamic, data-driven risk management strategies that align investments with liability structures and liquidity needs. It also recommends upskilling investment teams to evaluate market shifts and optimize asset allocation. As competition grows, firms that effectively diversify risk are more likely to achieve financial stability and gain a competitive edge.