Agency Costs and the Financial Performance of Insurance Firms in Kenya

Abstract

The insurance industry supports economic development by facilitating corporate operations, risk protection, and capital formation. Despite growth in gross premiums, declining profitability in Kenya necessitates an examination of agency costs stemming from conflicts between principals and agents. This study assessed the impact of agency costs—monitoring costs, bonding costs, and residual loss—on the financial performance of Kenyan insurance firms, while also exploring the moderating role of board gender diversity.

Grounded in free cash flow, agency costs, and stakeholder theories, the study adopted a positivist philosophy and causal research design. Using secondary data from audited financial statements submitted to the Insurance Regulatory Authority (2018–2022), panel data from 48 insurance firms were analyzed via STATA. Descriptive statistics, correlation, and linear panel regression analyses were conducted, with diagnostic tests ensuring data suitability. Hypotheses were tested at a 0.05 significance level.

Findings indicated that monitoring costs had a negative but statistically insignificant impact on financial performance, while bonding costs positively and significantly influenced profitability, highlighting the role of performance-based incentives in mitigating agency conflicts. Residual loss had a negative but insignificant effect. Although board gender diversity correlated positively with financial performance, it did not significantly moderate the agency costs-financial performance relationship. The study recommends balancing resource allocation for agency cost management, strengthening governance mechanisms, and enhancing risk management. Policymakers should refine monitoring procedures to ensure compliance and financial stability. Future research could integrate qualitative methods for deeper insights.

Keywords: Agency Costs, Financial Performance, Insurance Firms, Kenya, Board Gender Diversity.

DOI: 10.7176/RJFA/17-1-02

Publication date: January 30th 2026