EFFECT OF INTERNAL CONTROLS ON FINANCIAL PERFORMANCEIN INSURANCE INDUSTRY IN KENYA, A CASE STUDY OFINSURANCE COMPANY OF EAST AFRICA LION LIFE ASSURANCE LIMITED

Abstract

This study looked at the important part of internal control systems they play in relation 
tofinancial performance, with a specific focus on ICEA Lion Life Assurance Company limited. 
Therefore, the close examination of financial internal control systems as to how they are related 
to the financial performance in insurance companies in Kenyawas the sole purpose of this study, 
intentionally to establish if those internal controls resulted to any significant outcomes in 
improved financial performance. The study applied Reliability theory, Agency theory, Systems 
theory and Transaction cost economics theory.The qualitative as well as quantitative techniques 
were used to conduct the research; where questionnaires were used on a sample population of 43
respondents in gathering primary data for the study fromICEA Lion Life Assurance Company 
Limited’s four branches, where structured closed ended questionnaires were used. Cronbach’s 
Alpha was used to test reliability of the instrument’s ability to produce coherent and stable 
measurements. A pilot study was conducted to pretest the validity and reliability of instruments 
for data collection. The research supervisor’s opinion was obtained to ensure content validity of 
the research instrument. The test retest technique was used to estimate the reliability of the 
instruments. Cronbach’s Alpha Coefficient of values greater or equal to 0.7 was obtained as an 
indicator of internal consistency. The data was analyzed using SPSS version 23 and presented 
using frequency tables to facilitate comparisons and conclusions based on the identified 
independent and dependent variable. This was to establish if there was a correlation between 
dependent variable; financial performanceagainst independent variables: Detective internal 
controls, Preventive internal controls, Corrective internal controls and Monitoring internal 
controls.The study revealedthe four components; Detective internal controls, Preventive internal 
controls, Corrective internal controls and Monitoring internal controls should always be 
available for the functioning of reliable internal control systems. Fraud, loss and 
misappropriation of organizations funds, are encouraged by fragile internal controls. The role of 
Detective internal controls, Preventive internal controls, Corrective internal controls and 
Monitoring internal controls explained 77.4%, leaving 22.6% unexplained. The P- value of 
0.000 (Less than 0.05) implies that the model of financial performancewas significant at 
the 95% confidence level. The researcher concluded that there is need to evaluate other factors 
which contribute to the improvement of financial performance in the insurance industry