This study sought to establish the effect of financial risk on financial performance of insurance companies in Kenya. A descriptive research design was adopted. Target population was 56 insurance companies licensed in Kenya. Analysis was done using correlation and regression analysis. The study established that there exists a moderate negative correlation between financial performance and operational risk. The correlation between financial performance and counterparty default risk was negative and weak. Financial performance and solvency risk returned a significant weak negative correlation. Correlation coefficient between financial performance and size of firm was positive and strong. The study concluded that increasing exposure to liquidity risk, operating risk and solvency risk significantly reduced financial performance of insurance companies. On the effect of counterparty default risk, it was concluded that it lowered financial performance insignificantly. Lastly, the study concluded that size of the firm had the effect of significantly increasing financial performance of insurance companies in Kenya. The study rrecommends that regulatory bodies and policymakers, should formulate policies that incentivize insurance firms to adopt effective risk management strategies for enhanced financial performance and the need to constantly monitoring risk taking by insurance companies to ensure industry stability. The study underscores the necessity for insurers to institute robust risk management strategies as internal controls measures to mitigate counterparty defaults, liquidity challenges, operational issues and solvency risks thereby fortifying financial performance. Further research can focus on external risk analysis to assess the risks that insurers in Kenya are exposed to from external sources, such as economic, regulatory, or external environmental factors.
Key words: Financial risk; Financial Performance; Insurance companies.