NIYONSENGA Jean Pierre's MBA Finance THESIS

104 Pages·2015·1.38 MB·English

INDEPENDENT INSTITUTE OF LAY ADVENTISTS OF KIGALI
(INILAK)

EFFECT OF RISK MANAGEMENT ON FINANCIAL
PERFORMANCE WITHIN RWANDAN AUTOMOBILE
INSURANCE MARKET
A Case Study of SORAS Rubavu Branch 2010-2013

A Thesis submitted to the Coordination of MBA Program, Faculty of Economic Sciences
and Management in Partial Fulfillment of the Requirements for the Degree of Master of
Business Administration, Option of Finance

NIYONSENGA Jean Pierre

Reg No: MBAKG/00118

DECEMBER, 2014
i
DECLARATION AND COPYRIGHT

I, NIYONSENGA Jean Pierre, hereby declare that this thesis is my own original work.
To the best of my knowledge it contains no materials previously published or written by another
person, nor material which to a substantial extent has been accepted for the award of any other
degree or diploma at the INILAK or any other institution, except where due acknowledgement is
made in the thesis. Any contribution made to the research by others, with whom I have worked at
INILAK or elsewhere is explicitly acknowledged in the thesis.

I also declare that the intellectual content of this thesis is the product of my own work,
except to the extent that assistance from others in the thesis’s design and conceptions or in style,
presentation and linguistic expression is acknowledged.

Signature: …………………………..

Date……………………………………

No part of this thesis may be reproduced, stored in any retrieval system, or transmitted in any
form or by any means without prior written permission of the author or the INILAK.
ii
ACCEPTANCE SHEET

This thesis entitled «EFFECT OF RISK MANAGEMENT ON FINANCIAL
PERFORMANCE WITHIN RWANDAN AUTOMOBILE INSURANCE MARKET»
written and submitted by NIYONSENGA Jean Pierre in partial fulfillment of requirements for
the degree of Master of Business Administration (Finance) is hereby accepted and approved.

Dr. Gervais NDAYIZEYE
Supervisor

Date signed

Dr. Faustin GASHEJA Dr. Edison BUTERA
Examiner Examiner

Date signed Date signed

Professor Dr. BIDERI ISHUHERI NYAMULINDA
MBA Program Coordinator

Date signed

Dr. Augustin RUTAMU
Dean of Faculty of Economic Sciences and Management

Date signed
iii

DEDICATION

To
My wife: SHYIRAMBERE Florentine
My friends and Sponsors: Steve ROBERTS and Janet ROBERTS
My Mum and my Kids.
iv
ABSTRACT

The purpose of this research is to analyze the effect of risk management on financial
performance within Rwandan automobile insurance market based on the case of SORAS/Rubavu
branch. The problem is that insurance companies, some time, either do not maximize their profit
or loose a lot of money in paying those who make claims. Therefore, they need to use both the
quantitative and qualitative approaches in order to adjust premium pricing in incorporating all
risk variables as well as their respective reasonable ratings.
The sample size was derived from 16 employees of SORAS/Rubavu branch and all of
them were included in the sample as their number is limited. After documentation, interviews
and analysis of both reports and financial statements of SORAS/Rubavu. It was revealed that:
Physical characteristics of the vehicle influencing the level of risk include the monetary value of
the insured vehicle, the brand and type of vehicle, the year of manufacturing, the power of the
vehicle and the safety device on the car; Environmental factors influencing the level of risk
include the place of living or working, the place where the vehicle is parked and the vehicle use;
Human factors that influence the level of risk include the age of the driver, its accident record,
the number of claims previously filed and the his/her driving Experience; The results showed
that the highest frequency of accident was 11.21%, in 2011; highest severity was 1,353,197 in
2010; whereas the highest ratio of accident was 11.25% in 2012 The results then showed that the
highest risk ratio was 31.25% in 2012. The questionnaire, interview and observation, were used
to collect primary data while secondary data were collected by the use of financial statement of
SORAS/Rubavu. The risk severity in SORAS/Rubavu Branch is given by the following
equation=133,630,151+847,577x which is not high. The information obtained confirms the
hypotheses of the study and allow the researcher to achieve his objectives.
v
ACKNOWLEGEMENTS

At the end of this study, I would like to express my deep gratitude to all who in one way
or another have contributed to the completion of this work.
My thanks go first to the Almighty God. I also thank the administrative and academic
authorities of INILAK, particularly, those working in MBA program. Without their support I
would not have produced this research project to the quality it deserves. Special thanks go to my
Supervisor who instructed and guided me throughout the writing of the research. His advice has
been of a great help. I extend my greatest thanks to my wife SHYIRAMBERE Florentine, My
friends and Sponsors Steve ROBERTS and Janet ROBERTS, My Mum, my Kids, and others
who did their best for their valuable moral and financial supports and pieces of advice. Thanks to
all my classmates and colleagues with whom I shared everything during my academic studies.

NIYONSENGA Jean Pierre
vi
TABLE OF CONTENTS

DECLARATION AND COPYRIGHT .........................................................................................i
ACCEPTANCE SHEET .............................................................................................................. ii
Dr. Gervais NDAYIZEYE............................................................................................................ ii
Professor Dr. BIDERI ISHUHERI NYAMULINDA ................................................................ ii
DEDICATION.............................................................................................................................. iii
ABSTRACT ...................................................................................................................................iv
TABLE OF CONTENTS .............................................................................................................vi
LIST OF TABLES ........................................................................................................................ix
LIST OF ACRONYMS .................................................................................................................x
CHAPTER 1 ...................................................................................................................................1
GENERAL INTRODUCTION .....................................................................................................1
1.1. Background of the study .....................................................................................1
1.2. Statement of the Problem ....................................................................................5
1.3. Research Questions ...........................................................................................8
1.4. Objectives of the Study.......................................................................................8
1.5. Hypotheses ......................................................................................................9
1.6. Significance of the Study ....................................................................................9
1.7. Justification of the study ...................................................................................10
1.8. Conceptual framework .....................................................................................11
1.9. Scope ...........................................................................................................11
1.10. Definitions of terms .......................................................................................12
CHAPTER 2 .................................................................................................................................15
LITERATURE REVIEW ...........................................................................................................15
2.1. Introduction ...................................................................................................15
2.2. Overview on Insurance .....................................................................................15
2.2.1. How Insurance Works................................................................................................. 15
2.2.2. Risk Management ....................................................................................................... 17
2.2.3. Risk Sharing ................................................................................................................ 18
2.2.4. Risk Retention............................................................................................................. 19
vii
2.2.5. Risk Evaluation ........................................................................................................... 20
2.2.6. Risk Control ................................................................................................................ 20
2.2.7. Risk Assessment ......................................................................................................... 21
2.2.8. Types of Auto Insurance ............................................................................................. 21
2.2.9. Role of Insurance Companies ..................................................................................... 22
2.2.10. Insurable and non-Insurable Risk ............................................................................. 24
2.2.10.1. Insurable Risk ........................................................................................................ 24
2.2.10.2. Characteristics of an insurable risk ........................................................................ 26
2.2.10.3. Non Insurable Risk ................................................................................................ 28
2.2.11. Uncertainty................................................................................................................ 28
2.2.12. Risk ........................................................................................................................... 28
2.2.13. Severity ..................................................................................................................... 29
2.2.14. Risk Severity ............................................................................................................. 29
2.2.15. Insurance ................................................................................................................... 29
2.2.16. Principles of Insurance.............................................................................................. 30
2.2.17. Underwriting ............................................................................................................. 32
2.3. Mathematical Explanation .................................................................................33
2.4. Limits on policy benefits...................................................................................34
2.5. Deductibles....................................................................................................35
2.6. Benefit limits .................................................................................................36
2.7. Inflation ........................................................................................................37
2.8. The role of the actuary......................................................................................37
2.9. Predicting the risk severity ................................................................................39
2.9.1. Pearson correlation coefficient .........................................................................39
2.9.2. Forecasting using Simple Linear Regression (SLR)................................................... 40
CHAPTER 3 .................................................................................................................................42
RESEARCH METHODOLOGY ...............................................................................................42
3.1. Case study profile............................................................................................42
3.2. Research design ..............................................................................................43
3.3. Population and sampling techniques ....................................................................44
3.4. Research instruments .......................................................................................44
3.4.1. Interview ..................................................................................................................... 45
3.4.2. Documentation ............................................................................................................ 45
3.4.3. Questionnaire .............................................................................................................. 46
3.5. Data gathering procedure ..................................................................................46
3.6. Data analysis procedure ....................................................................................47
3.7. Ethical consideration........................................................................................48
viii
CHAPTER 4 .................................................................................................................................49
PRESENTATION OF FINDINGS, ANALYSIS AND INTERPRETATION........................49
4.1. Introduction ...................................................................................................49
4.2. Evolution of insurance premium .........................................................................49
4.3. Factors influencing the level of risk severity and frequency within Rwandan automobile
Insurance Market ..................................................................................................50
4.3.1. Physical characteristics ............................................................................................... 50
4.3.2. Environment factors .................................................................................................... 53
4.3.3. Human factors ............................................................................................................. 54
4.4. Frequency, Severity and Risk Ratio .....................................................................56
4.4.1. Frequency of risk ........................................................................................................ 56
4.4.2. Severity of claims satisfied in SORAS/Rubavu.......................................................... 57
4.4.3. Risk Ratio.................................................................................................................... 58
4.5. Assessment of risk severity in SORAS/Rubavu branch .............................................59
4.5.1. Evolution of the number of automobile accidents ...................................................... 60
4.5.2. Evolution of automobile claims satisfied.................................................................... 61
4.5.3. Evolution of severity ................................................................................................... 63
4.6. Measuring relationship between the number of accidents and the amounts of claims ........64
4.7. Measuring the financial performance of SORAS/Rubavu ..........................................65
4.7.1. Efficiency of SORAS/Rubavu .................................................................................... 65
4.7.2. Effectiveness of SORAS/Rubavu ............................................................................... 66
CHAPTER 5 .................................................................................................................................68
CONCLUSION AND RECOMMENDATIONS .......................................................................68
5.1. Conclusions ...................................................................................................68
5.2. Recommendations and suggestions for policy change...............................................71
5.3. Strengths and limitations of the study ...................................................................71
5.4. Recommendations for further research .......................................................................... 72
REFERENCES.............................................................................................................................73
APPENDICES ................................................................................................................................a
ix

LIST OF TABLES

Table 1. Evolution of insurance premium in Rwf............................................................. 49
Table 2. Physical characteristics ....................................................................................... 51
Table 3. Environmental factors ......................................................................................... 53
Table 4. Human factors ..................................................................................................... 55
Table 5. Frequency of risk ................................................................................................ 56
Table 6. Severity of claims satisfied in SORAS/Rubavu ................................................. 57
Table 7. Loss ratio............................................................................................................. 59