Operational Risk Auditing and Financial Performance of General Insurance Companies in Kenya and Zimbabwe: The Moderating Role of Risk Governance

Abstract

Introduction: Failures in processes, people, and systems can erode insurers’ profitability, yet little is known about whether disclosed audit arrangements for operational risk are associated with performance, or whether that association depends on how boards govern risk. Drawing on agency and contingency theory, this study examines the within-insurer association between disclosed operational risk auditing and the financial performance of general insurers in Kenya and Zimbabwe, as well as the moderating role of disclosed risk governance.

Methodology: The study analyses an unbalanced panel of 49 general insurers, comprising 461 firm-year observations, over 2015–2024, using audited annual reports and regulator publications. Operational risk auditing and risk governance are measured using disclosure-based indices, while financial performance is measured by return on assets. Fixed-effects regressions with insurer-clustered standard errors, supported by small-cluster corrections, are used to estimate the associations and test the moderating role of governance.

Results: A 0.10 higher auditing index is associated with a 1.13 percentage-point higher return on assets, while a 0.10 higher governance index is associated with a 0.40 percentage-point higher return on assets, although the governance association is less stable across robustness checks. The association between auditing and performance increases with governance: it is not detected where disclosed governance is weak, but is larger where governance is strong. Evidence of a country difference is limited to a steeper moderation slope in Zimbabwe at high governance levels, and this result is not robust to country-by-year effects.

Conclusion: The findings suggest that operational risk audit and risk-governance arrangements should be considered together when assessing insurer performance. However, the disclosure-based indices measure disclosed arrangements rather than verified quality, and the research design does not establish causation. In the search described in the paper, no earlier study was found that tests risk governance as a moderator of the auditing–performance association or compares general insurers in Kenya and Zimbabwe.