FACULTY OF COMMERCE

DEPARTMENT OF INSURANCE AND RISK MANAGEMENT

EXPLORING A RISK BASED APPROACH TO SOLVENCY MANAGEMENT IN THE

ZIMBABWEAN SHORT TERM INSURANCE INDUSTRY

BY

PLACXEDES MUKONZO

R125253N

A DISSERTATION SUBMITTED TO THE FACULTY OF COMMERCE IN PARTIAL

FULFILMENT OF THE REQUIREMENTS OF THE BACHELOR OF COMMERCE
INSURANCE AND RISK MANAGEMENT (HONOURS) DEGREE.

MAY 2016

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 FACULTY OF COMMERCE

DEPARTMENT OF INSURANCE AND RISK MANAGEMENT

RELEASE FORM

NAME OF AUTHOR PLACXEDES MUKONZO

DEGREE PROGRAMME BACHELOR OF COMMERCE (HONS) DEGREE IN

INSURANCE AND RISK MANAGEMENT.

TITLE OF DISSERTATION EXPLORING A RISK BASED APPROACH TO

SOLVENCY MANAGEMENT IN THE
ZIMBABWEAN SHORT TERM INSURANCE
INDUSTRY.

DISSERTATION SUPERVISOR MR F. MAKAZA.

YEAR OF AWARD 2016

Permission is hereby granted to the Midlands State University library to produce single copies of
this dissertation and to lend or to sell such copies for private, scholarly, or scientific research
only. The author reserves other publication rights; neither the dissertation nor extensive extracts
from it may be printed or otherwise reproduced without the author’s written permission.

SIGNED:……………………… DATE:……………………………

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 FACULTY OF COMMERCE

DEPARTMENT OF INSURANCE AND RISK MANAGEMENT

APPROVAL FORM

This serves to confirm that the undersigned has read and recommended to the Midlands State
University for acceptance of a dissertation entitled,

“Exploring a risk based approach to solvency management in the Zimbabwean

short term insurance industry”

Submitted by Placxedes Mukonzo in partial fulfillment of the requirements of the Bachelor of

Commerce (Hons) Degree in Insurance and Risk Management.

SUPERVISOR:………………………… DATE:……………..…………………………
(Signature)

CHAIRPERSON:…………………… DATE:…………………………………………
(Signature)

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 ACKNOWLEDGEMENTS

I would like to thank the Almighty God for guiding me through my academic progression up to this stage.
I extend my appreciation to Mr F. Makaza for the supervision and advice provided during the study. My
profound gratitude goes to the Zimbabwean short term industry for providing me with information I
required. Lastly I wish to express my sincere gratitude to my friends Munyaradzi Karumbidza and
Paidamoyo Saungweme for their encouragements and help.

iii
 DEDICATIONS

“I dedicate this project to my mother Mrs. W. Mukonzo and my brothers Simbarashe Mukonzo
and Batanayi Mukonzo for their love, inspiration and support.

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 ABSTRACT
The study sought to explore the adoption of a risk based approach to solvency management in
the Zimbabwean short term insurance industry. The review of literature was carried out in order
to establish what other authors had to say on the subject. To come up with a sample of 17 short
term insurers and reinsurers out of a target population of 33 operational insurance and
reinsurance companies, the researcher used stratified sampling technique since the study
population comprised of different characteristics. The researcher used questionnaires and
structured interviews to collect information. Tables, bar graphs and pie charts were used to
present responses from the survey. The results indicated that the insurers and reinsurers are
facing challenges in meeting the minimum capital requirement and appreciates the benefits of
adopting solvency II. However, the challenges and costs associated with the adoption of
solvency II makes its adoption in the Zimbabwean short term industry difficult. The study
recommends the modification of the current solvency management system so as to encourage
insurers and reinsurers to hold risk based capital and the protect policyholders through reporting
rules and the establishment of a policyholder protection fund. It also recommends short term
insurers and reinsurers to use effective capital management and risk management systems.

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 TABLE OF CONTENTS
RELEASE FORM ....................................................................................................................... i

APPROVAL FORM .................................................................................................................. ii

ACKNOWLEDGEMENTS....................................................................................................... iii

DEDICATIONS ........................................................................................................................ iv

ABSTRACT ...............................................................................................................................v

TABLE OF CONTENTS .......................................................................................................... vi

LIST OF FIGURES ....................................................................................................................x

LIST OF APPENDICES ........................................................................................................... xi

LIST OF ACRONYMS AND ABBREVIATIONS .................................................................. xii

CHAPTER 1 ..............................................................................................................................1

INTRODUCTION .....................................................................................................................1

1.0 Introduction ...........................................................................................................................1

1.1 Background of the study ........................................................................................................1

1.2 Statement of the problem .......................................................................................................2

1.3 Research objectives ...............................................................................................................2

1.4 Research questions ................................................................................................................3

1.5 Importance of study...............................................................................................................3

1.6 Assumptions ..........................................................................................................................3

1.7 Limitations ............................................................................................................................4

1.8 Delimitation of the study .......................................................................................................4

1.9 Definition of terms ................................................................................................................4

1.10 Summary .............................................................................................................................4

CHAPTER 2 ..............................................................................................................................5

LITERATURE REVIEW .........................................................................................................5

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2.0 Introduction ...........................................................................................................................5

2.1 Defining solvency and insolvency .........................................................................................5

2.1.1 Measuring solvency using solvency ratios ..........................................................................6

2.1.2 Main reasons for insurance companies’ insolvency .............................................................7

2.2 What is solvency management? .............................................................................................7

2.2.1 Solvency management and the regulators. ..........................................................................8

2.3 Risk based approach to solvency management .......................................................................8

2.3.1 Drivers of the solvency II regime ........................................................................................9

2.4 The European Solvency II directive ..................................................................................... 11

2.4.1 The three pillars of solvency II ......................................................................................... 11

2.4.2 Pillar I .............................................................................................................................. 12

2.4.3 Components of pillar I ...................................................................................................... 12

2.4.4 Pillar II ............................................................................................................................. 15

2.4.5 Pillar III ............................................................................................................................ 17

2.4.6 Objectives of solvency II regime ...................................................................................... 18

2.4.7 Principles of the solvency II directive. .............................................................................. 19

2.5 Why insurers and reinsurers should implement solvency II? ................................................ 20

2.6 Possible challenges in the implementation of solvency II. .................................................... 22

2.7 The costs of adopting solvency II ........................................................................................ 23

2.8 The applicability of the risk based approach to solvency management. ................................ 24

2.9 Conclusion .......................................................................................................................... 26

CHAPTER 3 ............................................................................................................................ 27

RESEARCH METHODOLOGY ........................................................................................... 27

3.0 Introduction .................................................................................................................... 27

3.1 Research design .............................................................................................................. 27

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3.2 Target Population ........................................................................................................... 27

3.3 Sampling techniques............................................................................................................ 28

3.3.1 Random Sampling Method ............................................................................................... 28

3.4 Sample Size .................................................................................................................... 29

3.5 Research instruments and Data collection ....................................................................... 30

3.6 Primary Data Sources ..................................................................................................... 30

3.6.1 Questionnaires ............................................................................................................ 30

3.6.2 Personal Interviews ..................................................................................................... 31

3.7 Secondary Data .............................................................................................................. 32

3.7.1 The Internet ................................................................................................................ 32

3.7.2 Textbooks and Journals ............................................................................................... 32

3.8 Summary ........................................................................................................................ 32

CHAPTER 4 ............................................................................................................................ 34

DATA ANALYSIS AND PRESENTATION.......................................................................... 34

4.0 Introduction ......................................................................................................................... 34

4.1 Questionnaire response rate. ................................................................................................ 34

4.2 Data Analysis and Presentation............................................................................................ 35

4.2.1 Short term insurers and reinsurers faced with challenges of complying with the capital
based regulation. ....................................................................................................................... 35

4.2.2 Challenges faced by short term insurers and reinsurers in complying with the capital based
regulation. ................................................................................................................................. 36

4.2.3 Effects of compliance challenges. ..................................................................................... 37

4.2.4 The weaknesses of the capital based approach in solvency management. .......................... 38

4.2.5 Knowledge and awareness of solvency II.......................................................................... 38

4.2.6 Ability to adopt the solvency II regime. ............................................................................ 38

4.2.7 Challenges of adopting solvency II. .................................................................................. 39

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4.2.8 Costs of adopting solvency II............................................................................................ 40

4.2.9 Benefits of the adoption of solvency II. ............................................................................ 41

4.2.10. The adoption of solvency II in the Zimbabwean short term industry. ............................. 42

4.3 Personal interviews conducted with the regulator. ............................................................... 43

4.3.1 The reasons of failure to meet minimum capital requirements by short term insurers and
reinsurers. ................................................................................................................................. 43

4.3.2 Methods used for coming up with minimum capital requirements. .................................... 44

4.3.3 The inclusion of solvency II in the current regulatory framework. .................................... 44

4.3.4 Preparedness of the short term insurers and reinsurers to adopt solvency II ....................... 44

4.4 Summary ............................................................................................................................. 44

CHAPTER 5 ............................................................................................................................ 45

CONCLUSION AND RECOMMENDATIONS .................................................................... 45

5.0 Introduction ......................................................................................................................... 45

5.1 Summary of findings on research objectives ........................................................................ 45

5.2 Conclusion .......................................................................................................................... 46

5.3 Recommendations ............................................................................................................... 46

5.3.1. To the regulator ............................................................................................................... 47

5.3.2. To the short term insurance and reinsurance companies ................................................... 48

5.4 Summary ............................................................................................................................. 48

References ................................................................................................................................ 49

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LIST OF FIGURES

Figure 4.1 Response rate analyses……………………………………………………………….34

Figure 4.2 Insurance players facing compliance challenges……………………………………..35
Figure 4.3 Challenges faced by insurance players……………………………………………….36
Figure 4.4 Effects of compliance challenges…………………………………………………….37
Figure 4.5 Knowledge and awareness of solvency II framework………………………………..38
Figure 4.6 Ability to adopt the solvency II regime…………………………….………………...39
Figure 4.7 Challenges of adopting solvency II…………………………………………………..40
Figure 4.8 Costs of adopting solvency II………………………………………………………...41
Figure 4.9 Benefits of adopting solvency II……………………………………………………...42
Figure 4.10 Preparedness of the adoption of solvency II………………………………………...43

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LIST OF APPENDICES
Appendix A: Request for information needed for research……………………………………...55
Appendix B: Short term insurers and reinsurers-questionnaire………………………………….56
Appendix C: Interview Guide for Short tern insurers and reinsurers……………………………59
Appendix d: Interview guide for the regulator…………………………………………………..60

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LIST OF ACRONYMS AND ABBREVIATIONS

IPEC Insurance and Pension Commission

SCR Solvency Capital Requirement

MCR Minimum Capital Requirement

EBS Economic Balance Sheet

AOF Ancillary Own Funds

BOF Basic Own Funds

PPIP Prudent Person Investment

SRP Supervisory Review Process

ORSA Own Risk and Solvency Assessment

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 CHAPTER 1

INTRODUCTION

1.0 Introduction
This chapter introduces the research being undertaken. The background of the study, statement
of the problem, research objectives and research question are also looked at. The importance of
study, assumptions, and limitations, definition of terms and delimitation of the research are
outlined in this chapter. Generally, it is the laying ground of the project and a map which will
direct the researcher in carrying out the project.

1.1 Background of the study

Insurance and Pension Commission (IPEC) regulates the insurance industry in Zimbabwe and is
guided by the Insurance Act Chapter 24:07 which commenced on 1 August 1988. It mainly aims
to protect the rights, benefits and other interests of policy owners and of beneficiary of policies.
Zimbabwe is currently using the capital based approach to solvency management. IPEC sets
minimum capital requirements from time to time. The minimum capital requirement as at 31
December 2015 is $1, 5 million for short term insurers and reinsurers and $2 million for life
insurers. The minimum capital requirement has been raised from $300 000.00 for short term,
$400 000.00 for reinsurers in 2013. Insurance and reinsurance companies were supposed to be
50% compliant with the USD 1.5 million dollars minimum capital threshold by 30 June 2013,
50% by December 31 2013 and attain full compliance by 30 June 2014 (IPEC Report,
2013).However as at 30 June 2014 only 11 out of 25 short term insurers had adhered to the set
minimum capital requirement.

The insurance commissioner deregistered 61 insurance players in 2010 because of failure to meet
set minimum capital requirements. According to the IPEC non-life insurance report for the fourth
quarter 31 December 2014, five insurers reported capital positions below the set minimum
capital requirement of USD 1.5 million dollars. This resulted to the deregistering of Altfin and
the suspension of Global Insurance Company, KMFS Insurance Company and New Reinsurance
Company. Excellence Insurance Company, Quality Insurance Company, Tristar Insurance

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Company and Cell Insurance Company were also warned by IPEC in 2015 to meet the minimum
capital requirement of USD 1.5 million dollars so as to avoid being shut down. Although
insurance players are struggling to meet the set minimum capital requirement of USD 1.5 million
dollars, IPEC also highlighted on a soon to be announced 233% increase in capital requirement
to $5 million dollars (Daily News ,18 August 2015).

According to The Zimbabwean Independent on 14 September 2012, the commissioner argues

that the increase in capital requirement would strengthen the sector whereas in the Financial
Gazette 20 August 2012 it is reported that the European Zone is encouraging insurers to go with
the risk based approach way to solvency management opposed to having a uniform minimum
capital level for all insurers irrespective of the different risk each institution faces. Nhavira et.al
(2013) states that the silo based approach to solvency management as currently existing in
Zimbabwe encourages a blinkered approach to regulation and supervision. On the other hand, the
risk based approach to solvency management offers clarity and transparency of regulation, better
understanding of risk, alignment of corporate governance, proactive approach to preventing or
solving problems and focuses on consumer protection (Gray et al 2014). Does this mean that the
risk based regime could be a solution for the Zimbabwe Insurance industry?

1.2 Statement of the problem

The research seeks to explore whether a risk based approach to solvency management is
applicable to the Zimbabwean environment. Across emerging markets and developing countries,
many regulatory agencies are looking to reform the regulatory and supervisory framework and
move towards risk based in the insurance industry (Alms and Company AG 2015). The 2008
economic crisis that gave insurance regulators an increased interest in the concept of risk based.

1.3 Research objectives

(a) To point out the purpose of solvency monitoring by insurance regulators.
(b)To reveal the inadequacy of the capital based approach to solvency management.
(c)To indicate the methods of solvency management used internationally.
(d)To reveal the impact of risk based management approach to solvency management.

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(e)To investigate the adoption of the risk based approach to solvency management in the
Zimbabwe insurance industry.

1.4 Research questions

(a)Is solvency monitoring by insurance regulators effective?
(b)How effective is the capital based approach to solvency management in the Zimbabwean
short term insurance industry?
(c)What is prompting the global considerations and adoption of solvency II (risk based approach)
to solvency management?
(d) What is the relevancy of the risk based approach to solvency management in the
Zimbabwean short term industry?
(e)Is it possible to adopt a risk based approach in the Zimbabwean short term insurance
industry?

1.5 Importance of study

The study is important to the following:
(a) To the Zimbabwean short term industry
The research will be helpful to insurers, reinsurers and the regulating body in managing solvency
risks which are currently threatening the operations of the industry.
(b) To the student
The research will enhance and enrich the researcher’s research skills and equip her with an in
depth understanding of the topic under study.
(c) To the university
The study will be stored in the university library and add reference material to the library.

1.6 Assumptions
The research was carried under the following assumptions:
(a) Honest, reliable and relevant information shall be provided by respondents to the research.
(b) The selected sample was a true representation of the population.

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1.7 Limitations
(a) The research had limited financial resources for travelling expenses from Gweru to the oasis
of information which was Harare.
(b) There was limited time since the research ran simultaneously with her final semester.
(c) Respondents could not provide all the required information due to company privacy policies.

1.8 Delimitation of the study

The research concentrated on short term insurers and short term reinsurers. The research was
conducted on companies based in Harare since this is where the relevant information needed for
the study could be obtained. The research covered statistics and Financial results for the period
of 2009 up to 2015.

1.9 Definition of terms

(a) Solvency is a state in which a company is able to service its debt and meets its other
obligations.
(b) Insolvency is when assets become insufficient for an insurance company to meet its financial
obligations.
(c) Capital based approach to solvency management is an approach where risk measurement is a
generic, one size fits all, externally prescribed collection that does not consider the differing
forms of risk exposure that may be found in each particular business to which it is applied.
(d)Risk based approach to solvency management encompasses the identification of risks that a
company faces as well as assessing the financial strength in relation to the identified risks.

1.10 Summary
This chapter introduced the study and outlined the factors that prompted this research. The
background of the study, the importance of the study, assumptions and limitations were also
outlined in this chapter.

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 CHAPTER 2

LITERATURE REVIEW
2.0 Introduction
According to the Leedy (1997) literature review is an account of what has been published on a ce
rtain topic or concept by accredited authors and writers. In presenting literature review, the purpo
se is to convey to the reader the knowledge and ideas that have been established on a topic and w
hat requires further research.

The chapter tries to critically analyze what has been studied so far in the subject of the risk based
approach to solvency management. This analysis will pay attention to some overlooked but criti
cal aspects of the subject area.

2.1 Defining solvency and insolvency

Solvency is the financial soundness of an entity that allows it to discharge its monetary obligatio
ns as they fall due (Zietlow and Seidner 2007). Dragos (2013) defines solvency as the ability of
an insurance company to pay all its legal debts.

The consumers considers insurance to be a key risk management strategy, therefore the
minimization of the disruption of insurance companies is of paramount importance (Leadbetter
and Dibra 2008).This makes the subject of solvency of great essentiality in the field of insurance
since the whole functionality of insurance is based on insurance players meeting their
obligations. When assets become insufficient for an insurance company to meet its contractual
and other financial obligations it is called insolvency (Leadbetter and Dibra 2008).

Solvency is described by other scholars in liquidity terms as the ability to meet current payment
obligations as they fall due. Cummins and Derrig (2008) however argues that when solvency is
measured in liquidity terms, companies may appear liquid (able to meet its current obligations by
using its current cash flows) while being ruined in the long term sense (liabilities exceeding
assets).

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There is the accounting, legal, economist and financial expert’s ways to measure solvency.
However, the accounting way in terms of solvency ratios is widely applied in measuring
solvency.

2.1.1 Measuring solvency using solvency ratios

Solvency ratios help to assess the company's funds in relation to their obligations. A high
solvency ratio is an indication that a company is most likely to meet its obligations. Good
solvency varies based on different industries but a ratio of 20% is deemed healthy. Solvency
ratios are usually confused with liquidity ratios. Randall et al (2003) states that liquidity ratios
measure the ability to meet short term liabilities whereas solvency ratios look at the ability of
companies to meet their long term debts. The solvency ratio according to Hood and Sangster
(1926) is calculated as

Solvency Ratio = Net Income + Depreciation

Short term liabilities+ Long term liabilities
Randall et al (2003) however, states that there are different types of solvency ratios and these
are:
(a) Equity to total assets ratio
It compares the total equity of the company to the total assets and is calculated as
Equity
Total assets
(b) Debt to equity
It compares total debt to shareholders equity and we calculated as
Total liabilities
Equity

(c) Total debt to Total assets

This compares total liabilities to a company's holdings. It is calculated as
Total liabilities
Total assets

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2.1.2 Main reasons for insurance companies’ insolvency
According to Leadbetter and Dibra (2008) by understanding the causes of insolvency, a
reduction in the winding up of companies and improvements in solvency supervision can be
achieved.

Several scholars have looked into the causes of insolvency in insurance companies. Cummins
and Phillips (2005) research concluded that the leading cause of involuntary exit is inadequate
pricing and deficient loss reserves in which in their research accounted for 31% of the
impairments. The American Academy of Actuaries Property (2010) agrees that deficient loss
reserves and inadequate pricing are causes of insolvency but cited rapid growth, fraud and
mismanagement as the major causes of insolvency.

Most of the scholar’s findings converge on the financial aspects which results in the failure of
insurance companies but in the studies of Hall (1992) size of companies was considered as a key
factor in insolvency of firms. This was supported by Cummins and Phillips (2005) as they
mentioned that larger insurers are less sensitive to financial distress than small insurers .Costello
(2003) identifies catastrophes, reinsurance (either not enough not ceded or failure of reinsurance)
, false reporting and investment failure as causes of insurance companies failures.

2.2 What is solvency management?

Insolvencies have become a major disruption to the insurance sector (Stewart et al 1988). These
disruptions have been some of the major drivers of solvency management through solvency
frameworks and or solvency rules. According to Eling et al (2007) solvency rules stipulate the
minimum amount of financial resources that insurer and reinsurer must have in order to cover the
risks to which they are exposed, and they lay down principles that should guide insurer’s overall
risk management so that they can better anticipate any adverse events and better handle such
situations. Solvency regime ensures the financial soundness of insurance undertakings and
particularly ensures that they can survive difficult periods.

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2.2.1 Solvency management and the regulators.
Stewart et al (1988) states that, the major purpose of insurance regulation is to prevent
insolvency. It further recognizes insolvency as a regulatory failure. According to Monayery
(2013), the objective of insurance regulation is:

(a) To control the conduct of players.

The control of insurance players in the market entails the monitoring of insurance players as to
how they conduct their business. This monitoring is done through acts, rules or policies that the
insurance players are supposed to adhere to.

(b)To ensure that companies are financially sound.

The financial soundness of insurance players is one of the main control functions of regulators.
They undertake solvency assessments so as to ensure that insurers are able to meet their
obligations (Gray, Hougaard and Tham, 2014).If an insurance player is not sufficiently financed,
the regulators have the right to suspend or deregister the insurance player.

(c)To protect consumers

The protection of consumers is the ultimate responsibility of the regulators (Phillips and Grace,
1999). The regulators ensure good conduct of insurance players and their ability to meet their
obligations so that insurance players are able to meet their end of the bargain to consumers.

(d) To establish a strong economic and financial system.

An improvement or a strong insurance industry strengthens the financial sector and eventually
the economy as a whole. The regulators by monitoring and ensuring the financial soundness of
the industry, improves the financial system as well as the economy.

2.3 Risk based approach to solvency management

A risk based approach to solvency management encompasses the identification of risks that an
insurance company faces as well as assessing their financial strength in relation to the identified
risks. Deloitte (2012) argues that the risk based approach seeks to equate the risks and liabilities
of an insurance company with the ability to finance these risks in terms of assets. Cummins and

8
Nini (2002) define a risk based approach as a regime that is oriented towards the insurer risk
structure. It ensures a better understanding of risks thereby necessitating a proactive approach to
solving or preventing problems. However, the risk based approach is also defined in term of the
European Union solvency II as it covers all the aspects and principles of the risk based approach.

2.3.1 Drivers of the solvency II regime

Europe is a leader in the financial market hence the rest of the world normally follows trends set
in Europe. The European Union’s insurer solvency regime was put in place in the1970s and
Solvency I is the name given to changes the European Union’s solvency regime made in 2002
(Financial Conduct Authority (2015). Solvency I which became effective in 2002 was focused on
improving the system. During the preparation of the project it was observed that the mandatory
solvency margin was not the only important parameter to determine the global financial situation
of an insurance company, since the verification of another financial aspects was also needed
(Everis 2009). For this reason according to Christiansen and Niemeyer(2012) solvency II was
initiated as a longer term project which not only aims at defining a new frame of solvency for
European Union insurance companies, but it also seeks to improve companies internal control,
management and openness to clients.

Solvency I is defined by Swain and Swallow (2015) as a rules based regulatory frame work in
which there is a uniform capital requirement for insurance players. According to the Financial
Conduct Authority (2015) it consists of a set of rules and amendments made up of the core which
is the non life directive of 1973 and life directive of 1979. In 2002 amendments as to improve the
calculation of solvency margin were made. Solvency margin required for non life insurers under
solvency I is based on a percentage of gross written premium, a percentage of average claims
over a time period, or the carried forward amount of preceding year (European Commission
Directive 2009/138/EC). In respect of the life business, the solvency margin is based on a
percentage of mathematical provisions and adds a percentage of the remaining positive capital at
risk.

9
(a) Inadequate and inconsistent policyholder protection
In 2009, the solvency II directive was approved over the solvency I directive and Swain and
Swallow (2015) argues that it was as a result of the inadequacy and weaknesses of the solvency I
that drove the proposition and approval of the solvency II directive. Capgemini (2006)
recognizes the weakness of the solvency II in the calculation of the non life solvency margins in
which they are focused on the volume of the contracts instead of the actual risks inherent to
specific contracts. This poses questions of protection to the policyholders hence another shortfall
of solvency I, it provides inadequate and inconsistent policyholder protection.

(b) Lacks risk sensitivity

The solvency I regime is a one size fits all regime and this has been noted as one of the
weaknesses of the directive. According to The Institute and Faculty of Actuaries (2015) the
regime lacks risk sensitivity in that simple and general factors are used to calculate capital
requirements which implies that it does not adequately includes risks that are specific to the
insurer. Solvency I functions on a partial balance sheet approach that is it ignores the risks that
may crystallize on the assets and liabilities off the balance sheet. This has been described by
Capgemini (2006) as the inadequate determination of technical provision.

(c) Growth of the insurance sector in Europe

The weakness of the solvency I regime are not entirely responsible for driving the solvency II
initiative. The economic development of the insurance sector also played an important role.
According to Capgemini (2006) there is massive growth that has been noted in the insurance
sector in Europe, becoming the second largest hence disturbance of the insurance sector can
possibly affect the whole European financial system. This has been a strong solvency II driver as
the sector demanded more protection.

(d) Emergence of new and complex risks

Generally, the business world has been evolving and this has resulted to the emergence of new
and complex risks. Companies and markets are also becoming increasingly sophisticated in their
operations therefore creating new types of risks such as operational risks. Capgemini (2006)
argues that it is easier for insurers to manage risks that are core to their business for instance the

10
technical risks than general risks making it essential for regulatory intervention so as to tackle
other risks. The complexity in risks has been countered by technical developments which have
provided advanced risk management strategies which the insurers are trying to implement.

(e) Financial conglomerates

Capital requirements across financial sector are not uniform and this has resulted to the transfer
of risks to sectors were capital requirements are low. According to PwC (2009) the issue of
financial conglomerates between the banking and the insurance sector has presented a high risks
on the insurance sector as the banking sector transfers risks to the insurance sector where
compared to the banking sector has lower capital requirements. This among other issues has
made risk scrutiny essential as well as group’s supervision.

2.4 The European Solvency II directive

Solvency II was developed as a result of previous market turmoil which highlighted system
weakness and renewed awareness over the need to modernize insurance industry standards and
improve risk management techniques (Clarke 2014). Solvency II has a similar structure to the
Basel II regulation for the banking industry. It has three pillars that includes quantitative and
qualitative requirements including specific components that focused on capital, risk, supervision
and disclosure (KPMG 2011).The solvency II directive is a new regulatory framework for the
European insurance industry that adopts a more dynamic risk based approach and according to
EU Commission, it implements a non zero failure regime that is a 0.5% probability of failure.

2.4.1 The three pillars of solvency II

The three pillars are intended to promote capital adequacy, to achieve greater transparency and to
enhance supervisory review so as to protect policyholders and ensure sound risk management
(KPMG 2011).This is achieved through improved processes and controls, implementation of
approaches to better measure and manage risk as well as instituting structures that encompasses
enterprise wide governance.

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2.4.2 Pillar I
According to Eling et al (2007) pillar 1 outlines the financial requirements such as market
consistent valuation of the balance sheet including insurance liabilities and assets. Piotrowska
(2008) argues that pillar I primarily concerns itself with capital requirements in form of the
minimum capital requirement and solvency capital requirement. Pillar I generally focuses on the
quantitative requirements and it ensures adequate capitalization of firms with risk based capital.

2.4.3 Components of pillar I

(a) Valuation of assets and liabilities
The measurement of solvency is through the assets and liabilities of a company since it is
measured by the excess of assets over liabilities. Clarke et al (2014) mentioned that the risk
based approach focuses on critical risks affecting assets and liabilities. This is termed the total
balance sheet approach. According to PwC (2009),it provides for market consistent valuation of
the balance sheet meaning that assets and liabilities should be at market value that is as if they
could be transferred or settled respectively. Where market prices are not available reasonable
proxies should be used. Qualifying assets are also stated.

The trading of assets is done in liquid markets where prices which are taken to be market values
which is not the case for liabilities. According Piotrowska (2008) the market value of insurance
liabilities is the forecast of future liability cash flows discounted using a risk free interest rate.

(b) Technical provisions

Technical provisions are insurance obligations due to policyholders and beneficiaries. Brosemer
et al (2002) states that, the technical provisions will be valued basing on current exit value. This
is the amount that an insurance company would pay in order to transfer its obligations
immediately to another company. Technical provisions according to the Institute and Faculty of
Actuaries (2013) will be calculated as best estimate liabilities then add a risk margin. However,
this does not apply to hedge able risks. With respect to hedge able risks, the technical provisions
are calculated directly and valuations of the financial instruments are used to derive value. On
non hedge able risks, a risk margin using the cost of capital method is calculated.

12
(c)Solvency capital requirement (SCR)
KPMG (2011) defines SCR as an approach to solvency calculation which is sophisticated,
dynamic and more risk sensitive. It is designed to focus on key risks affecting all balance sheet
components and will be fully centered on any risk mitigation that can be demonstrated. The SCR
is according to Eling et al (2012) there to absorb unforeseen losses therefore assuring desired
policyholders protection. The SCR is designed to be a target level of capital which will cover all
risks an insurer faces, the confidence level is proposed to be 99, 5% over one year period (White
et al 2011).SCR covers market risks, operational risks, credit risks and insurance risks.

When calculating SCR, companies have the option to use the standard formula which is set by
the directive or the internal model which is preapproved by the regulator. Solvency II however
encourages the use of an internal model as costly as it is because it deals with risks that are
specific to a company (White et al 2011).This is because although it is simple and less costly, the
standard formula is a one size fits all approach to the measurement of risk exposure.

(d) Minimum Capital Requirement (MCR)

This is the level below which presents unacceptable level of risk to policyholders and
beneficiaries. It is meant to be the lower solvency calculation which corresponds to SCR
(McHugh 2014).White et al (2011) states that the MCR is calibrated to a one year Var. with a
confidence level of 85%.The breach of MCR results to ultimate supervision intervention.

(e) Own funds

According to KPMG (2011) this is capital under solvency II and comprises of the excess of
assets over liabilities at market values or economic balance sheet (EBS).The addition of
qualifying subordinated debt to excess of assets over liabilities at market value amount to Basic
own Funds (BOF) (White et al 2011).The subordinated debt however if it has a fixed maturity it
should be at least 5 years and if not fixed its subject to 5 years unless it is no longer considered a
component of the solvency margin (European Commission Directive 2009/138/EC). The insurer
or reinsurer should also if the subordinated debt has a fixed maturity provide a plan showing how
the available solvency margin will be kept at or brought to the required level at maturity of loan.

13
Companies could apply for approval of including some off balance sheet finance to own funds
and so called is Ancillary Own Funds (AOF). Ancillary Own funds include unpaid share capital
and letters of credit and guarantees. This is to classify and restrict the extent at which various
components of own funds can be used to meet capital requirement and both SCR and MCR have
rules in regard to extent in which these could be used. Both BOF and AOF are classified into
three tiers which according to McHugh (2014) are:

(a)Tier 1 capital comprises of common equity, retained earnings and surplus funds. It is the
highest capital quality capable of absorbing losses on a day to day basis. The proportion of this
tier should at least be higher than a third of the total amount of the eligible own funds (European
Commission Directive 2009/138/EC).

(b)Tier 2 capital is subordinated debt and is of low quality and only absorbs losses on
insolvency. This takes the form of mutual type associations.
(c)Tier 3 is said to be the lowest of capital and has only limited loss. The eligible amount of this
tier should at least be less than a third of the eligible own funds (European Commission Directive
2009/138/EC).
The classification of own funds into tiers depends on whether they are basic own funds or
ancillary own funds. Additionally, the level of subordination, servicing costs involved and the
availability of the funds in terms of permanence and demand is considered.

(f) Investment
Insurance and reinsurance companies under the solvency II regime are not restricted on the
classes of assets that they can investment provided that in all those assets they can prove that
they are complying with the prudent person investment (PPIP).PPIP provides for full
understanding of risks involved with the assets invested in and provide for them accordingly
through the SCR and that the investments decisions that were made were in the best interest of
policyholders. Pillar 1 also focuses on investment management rules of insurance companies and
stipulates that insurance companies can make investments they deem appropriate but risks
associated thereto should be catered for within the SCR of the company (European Commission
Directive 2009/138/EC).

14
Investment of assets covering the MCR and SCR should however be invested in such a manner
that ensures security, quality, liquidity, profitability and availability through localization (White
et al 2011). Assets covering technical provisions on the other hand shall be invested in a manner
appropriate to the nature and duration of the insurance and reinsurance liabilities and these are
invested in the best interest of the policyholders. The assets should also be properly diversified to
avoid excessive reliance on a particular asset (European Commission Directive 2009/138/EC).

2.4.4 Pillar II
It pertains to corporate governance within insurance firms, supervisory review process and the
enforcement of high standards of risk management. The key issue on pillar II is to establish
processes and functions that support a sound risk management system and the seen compasses
internal audit functions, actuarial, risk management and finance with the board being ultimately
responsible for all three pillars compliance (European Commission Directive 2009/138/EC).
Clarke et al (2014) argues that under pillar II of the solvency II regime, supervisors are required
to challenge the internal control systems and qualitative aspects of a company's risk
management. These qualitative issues involves a leadership overall responsible for risk
management, risk strategies that are clearly defined and links to the business strategy and a
continuous and ongoing control and management of a company's risk also considering its
capacity.

(a) Supervisory Review Process

Supervisory Review Process (SRP) ensures that the supervisory authority reviews and evaluates
the undertakings of insurance and reinsurance players to ensure compliance and identify
potential financial weakness which could pose risks to policyholders (Piotrowska 2008). Collado
et al (2011) states that the supervisory authorities particularly reviews the strategies, processes
and reporting procedures in terms of capital requirements, investment rules, technical provisions,
systems of governance and the quality and quantity of own funds. The supervisory duty also
includes the assessment of the methods and practices designed by insurance and reinsurance
companies to identify adverse effects that could threaten the organization’s financial stability
from possible events and future changes.

15
If deficiencies or weaknesses are identified, the authorities have the power to require remedies.
According to Capgemini (2006) an important feature of pillar II is the power the supervisor has
to require additional capital resulting in a so called adjusting SCR, and to take measures to
reduce risks. Capital add on could be required in situations where the system of governance has
failed to identify, measure, monitor, manage and report risks or if the review concludes a
significant deviation of the insurance or reinsurance company's risk profile from the SCR
assumptions.

(b)System of governance
Insurance and reinsurance companies are required to put in place effective governance systems
and this includes transparency in terms of allocation and segregation of responsibilities (KMPG
2011). The system is determined by the complexity and nature of an organization’s operations
and it also outlines the policies that deal with internal control, internal audit and risk
management. Clarke et al (2014) states that a qualified, knowledgeable and experienced
personnel who adequately enables sound and prudent management completes the requirements
of the governance system.

(c)Risk Management
Risk management is also key as in this pillar it has a potential to take a thorough view of risk
than on pillar I and this results in more extensive categories of risks being catered for. KPMG US
(2011) argues that in pillar II a company does not only manage its retained risks but all risks
relating to the management of the business environment and has to be communicated to the
supervisory authority. Risk management comprises of necessary procedures to identify, measure,
monitor, manage and report on risks continuously at both individual and aggregate level (White
et al 2011). The effectiveness of these risk management systems requires the full integration of
the whole organization.

(d) Own Risk and Solvency Assessment (ORSA)

Firms are also required to go through self assessment of risks in relation to their capital and
adequacy of the capital resources. This is achieved through the ORSA process and is intended to

16
ensure the conduction of own assessment of solvency and financial position as well as own
review of exposed risks by senior management (European Commission Directive 2009/138/EC).

(e) Internal control and Internal audit

Internal control according to KMPG (2011) encompasses the compliance function, accounting
procedures and reporting arrangements. Ernest and Young (2008) mention that the compliance
function is responsible for assessment of the legal environment, and offers advice on regulation
provisions and compliance with laws. Internal audit evaluates the adequacy and effectiveness of
the control system and elements of the system of governance. They ensure that intended
operations are taking place and then make recommendations to management or supervisory
body.

2.4.5 Pillar III

This completes the framework with a set of solvency II disclosure requirements. According to
White et al (2011) it aims to achieve greater levels of transparency to their supervisors and the
public so as to instill discipline in the actions that firms takes. Ernest and Young (2008) explain
that the report will display the solvency and financial situation of insurance companies and must
contain the following information.

(a)A detail of the business how it is performing .That is the company describes its activities,
group structure, external environment, objectives, and strategy of financial results.

(b)Governance structures and an evaluation of how the governance structures are adequate for
the insurance or reinsurance company's risk profile. A compliance code including competence
and integrity rules is also drawn.

(c)Valuation method that is used to calculate technical provisions, assets held to cover technical
provisions and capital requirements, as well as other assets and liabilities.

17
(d)Risk management strategies used to identify, measure, control and hedge risks. This includes
the SCR and MCR as well as any breach if any and the explanations and then corrective
measures taken.

The regulators also ensure that there is onsite verification of information. However, there are
circumstances in which the regulators may approve nondisclosure of certain information
(European Commission Directive 2009/138/EC). This is information which when disclosed may
give the insurer's or reinsurer's competitors a significant undue advantage. There are also
circumstances in which a company has a binding obligation to policyholders of nondisclosure,
the regulator may approve it. If the regulators approve nondisclosure, the company shall make a
statement in its report to the effect clearly stating the reasons.

2.4.6 Objectives of solvency II regime

White et al (2011) outlines the main objectives of the solvency II regime and these are:
(a)Insurance and reinsurance companies match their level of capital with their specific or chosen
risk profile.

(b)Under solvency II there is much emphasis on the identification and mitigation of risks as well
as aligning risks to capital which will eventually result to more efficient, accurate and transparent
risk measurement and management. Coates et al (2011) mentioned that it aims to instill a greater
understanding of measuring risks as well is the monitoring and management of the risks.

(c)The MCR and SCR provide an early warning system for deterioration in solvency by active
capital management.

(d) It is also meant to create incentives to implement effective risk management strategies.

(e) According to Coates et al (2011) the emphasis on transparency help policyholders to compare
insurers and products therefore the solvency II framework aims to improve policyholders’
choice.

18
2.4.7 Principles of the solvency II directive.
The solvency II regime is based on principles in comparison to solvency I which is rules based.
These principles are stated by (European Commission Directive 2009/138/EC) as:
(a) Principle 1
Technical provisions should be objective, reliable and adequate.
(b) Principle 2
Liabilities should be adequate.
(c) Principle 3
Appropriate assets should be objectively valued and they should be reliable.
(d) Principle 4
Assets and liabilities should be matched in terms of currency and amount of cashflow.
(e) Principle 5
Capital Requirements should be adequate to absorb losses and risks.
(f) Principle 6
Capital adequacy has to be sensitive to risking the form of the requirements of assets, clearly
defined appropriate capital, solvency margin etc.
(g) Principle 7
There should be control levels created and be enabled to intervene when necessary.
(h) Principle 8
Minimum capital requirement should be specified.
(I) Principle 9
Forms of capital should be clearly defined.
(j)Principle 10
There should be effective risk management systems.
(k)Principle 11
There should be allowance for different forms of risk transfer not only reinsurance for insurance
companies.
(l)Principle 12
Market disclosure is of paramount importance.
(m)Principle 13
Solvency assessment should be undertaken by solvency authorities.

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2.5 Why insurers and reinsurers should implement solvency II?
(a)Competitive advantage in capital requirements
Coates et al (2011) states that solvency II acknowledges that insurance companies have different
risk profiles hence their capital requirements should differ. This will result into some companies
benefiting from lower capital requirements than their competitors. Niche players will also benefit
from their low risk profiles as well as calculation of the SCR using the standard model which is
relatively cheaper Capgemini (2006).

(b) Product pricing and design

Clarke et al (2014) state that solvency I does not take into account different underwriting risks
that insurance and reinsurance firms face. In comparison to solvency I, solvency II recognizes
the different types of risks that insurance and reinsurance companies faces. It further requires the
backing up of adequate capital as well as understanding and creation of models to reflect the
risks. This will help the organization to understand which products are suitable for their level of
solvency as well as price the products relatively to the risks associated with them. For instance,
products with high volatility of claims and heavily discounted long term products requires more
capital (KPMG, 2011). Eling (2012) also argues that it will help insurers in product development
as some of the products with high market risk exposure may have to be redesigned or replaced.

(c)Performance management
Through the solvency II risk based principles, insurance companies can proactively and
continuously identifying profitable lines of business and pursue them and they also have the
choice to abandon the less profitable ones.

(d)Investment strategy
Solvency I state the rules for investment of assets and that’s how it deals with the investment risk
(The Institute and Faculty of Actuaries, 2015).Under solvency II insurance and reinsurance
companies are not prohibited to invest in any assets provided they can prove that the investment
risk is carted for in the SCR. The capital charges for investment risks may encourage insurers to

20
take less investment risks and their investment decisions will be solely based on the best interest
of the policyholders.

(e) External rating

Market disclosure in the form of reports is required by the pillar 3 of solvency II and these
includes risks that a company faces as well as the risk management of the risks. In determining
credit worthiness, this information is useful especially for investors and rating agencies.
Capgemini (2006) explains that this will drive the market to a point where risk profiles will
determine share prices and credit ratings therefore a sound risk management system will be in
the best interest of insurance companies.

(f) Reserving
According to White et al (2011) technical provisions are the largest item on an insurer's balance
sheet. The reserving risk is the risk of insufficient technical provisions and under solvency II
these are backed up by a capital charge. The market consistent valuation of reserves also
enhances transparency of reserves as well as a better understanding of risks associated with
reserves. This may encourage insurers and reinsurers to adequately reserve for technical
provisions.

(g) Organizational impact

Clarke et al (2014) states that pillar II of solvency II requires an enterprise wide risk framework
which includes more formal approach to governance, demonstration of risk awareness,
systematic approach to risk management as well as the coordination of risk management,
finance and actuarial functions. This will have the impact of improving structures as well as the
operations and risk mitigation abilities of these organizations.

(h) Risk transfer mechanisms

Solvency I only permitted the use of reinsurance as a risk mitigation instrument whereas
solvency II advocates for the consistency of risk mitigation instruments such as hedging,
securitization and reinsurance. However, for a risk mitigation instrument to be accepted,
solvency II requires insurers to quantify their actual contribution to risk reduction Ernest and

21
Young (2008).Solvency II therefore gives insurers and reinsurers a wider spectrum of risk
hedging and risk transfer instruments. New options will give insurers an incentive to optimize
their risk transfer solutions and may consequently intensify competition among providers of
various solutions (KPMG 2011).

2.6 Possible challenges in the implementation of solvency II.

The solvency II directive was approved on April 22, 2009 and to be effective on January1, 2013
but a delay proposal to January 1 2014 was filed and currently full implementation is said to be
due 2016 (European Commission Directive 2009/138/EC). The challenges being faced are a
result of the implementation of solvency II.

(a) Time consuming

Solvency II by its nature affects the operations of the whole organization. Its impact affects the
organization from the front office to the board of directors as well as from management to IT.
This implies that there is need to influence the whole organization resulting to its programme
taking several years to fully implement them. This implies that the whole organization will be
tied up in compliance issues neglecting the organization’s core business.

(b) Complexity
According to Capgemini (2006) insurers may be familiar with risk management strategies like
scenario analysis as well as actuarial approaches but not with specific risk dimensions such as
probability of economic ruin and value at risk which is integral to the solvency II approach. Also
the implementation of the risk management strategies requires experienced personnel for
instance actuaries as well as models that are costly to the organizations. Coates et al (2011) also
argues that the proposed approach is too complex and some terms of the requirements are
difficult to interpret even after clarifying making it difficult to apply them.

(c) Disclosure
Coates et al (2011) expresses concern of the disclosure requirements under solvency II in that
there is some confidential information which is said to sensitive and misinterpretation of that
information may highly cost the organization. This was also supported by Ducoffe and Chanson

22
(2013) as they mentioned that too much information to consumers may be as helpless as too little
information.

(d) Cost of insurance

The additional security and information that is provided to the consumers attracts extra costs
since companies will need to hold more capital as well as change business models. These extra
costs will increase the cost of insurance and Coates et al (2011) then argues that will eventually
the extra costs to consumers be justified? The increase in the cost of insurance may reduce the
uptake of insurance products.

(e) Integration of risk

Solvency II requires the integration of risk for companies. This will not be easy for companies
that are involved in both life and non life business. This is due to the less sophisticated systems
that these companies have and as a result according to the survey carried out by Capgemini
(2006) less than half of the companies involved in both life and non life business are currently
employing advocated integrated risk management strategies by the framework.

2.7 The costs of adopting solvency II

(a) Supervision costs
The effectiveness of solvency II is highly dependent on supervisory authorities as they oversee
the whole functionality of the regime. According to (European Commission Directive
2009/138/EC) supervisory authorities should be provided with financial resources and they
should have relevant expertise so as to achieve their objectives.

(b) Compilation of data

The effectiveness of solvency II is dependent on the compilation of adequate, accurate, reliable,
complete and clean data. According to Oyugi and Mutuli (2013) the collection of data could be
costly and time consuming especially in Africa where there are only a few notable stock
exchanges that can provide credible data.

23
(c)Skilled resources and models
Bernardino (2011) mentions that solvency II is mainly focused on the valuation of the balance
sheet and the calculation of the capital requirements which. Sherwood et al (2011) argues that the
effectiveness of solvency II is also dependent on enterprise risk management .The quantitative
aspects of solvency II as well as enterprise risk management requires the use of models. This
implies that there is need for an actuarial function and other industry professionals which could
be costly for organizations.

2.8 The applicability of the risk based approach to solvency management.

Although solvency II regime is a European regulatory initiative it has both direct and indirect
implications to the United States insurance industry and this is because United States companies
that are subsidiaries of the European parent will need to be consolidated with their European
counterparts (KPMG US 2011). The United States system has been described as a national
system or state based in which state regulators afforded protection under the McCarran-Ferguson
Act of 1945. However, developments in the past several years since the financial crisis have
resulted in significant involvement by the federal government in the insurance sector.

The Dodd-Frank Wall Street Reform and Consumer Protection Act were created among other
things and it was meant to reduce excessive risk taking by financial institutions that led to the
financial crisis. According to The United States Insurance Financial Solvency Framework (2010)
in 2008 through the NAIC, the state insurance regulators in the US embarked on the Solvency
Modernization Initiative (SMI) to perform a critical self evaluation development in insurance
supervision and international accounting standards to determine their potential use in US
insurance supervision. The SMI focuses on 5 key solvency issues which are capital requirements,
international accounting, insurance valuation, reinsurance and group regulatory issues (Deloitte
2012).According to the National Association of Insurance Commissioner, the adoption of a risk
based regime was as a result of large company insolvencies. Its main aim is to match capital
levels of companies to the related risks which raises a safety net for insurers and also provides
for regulatory authority's timely action.

24
As in the case in many other countries in the world, the present supervisory regime in China is
based on Solvency I and the lack of risk sensitivity and the absence of an incentive for insurance
undertaking to improve the risk management were important reasons for the China Insurance
Regulatory Commission (CIRC) to plan are form to its existing regulatory scheme introduced in
2003 (Van Hulle 2014). Prior to 2012 according to the CARe Conference (2015) there were
minimum capital requirement set and CIRC officially launched the China Risk Oriented
Solvency System(C-ROSS) in March 2012 and testing started in 2014 with the aim to evaluate
the reasonableness and practicability of the C-ROSS formula and full implementation is targeted
in 2016 with a transition period with respect to meeting the capital requirements.

C-ROSS also borrows the solvency II three pillar approach with pillar 1 additionally to the
solvency II pillar 1 consisting of quantitative requirements for insurance risk, credit risk and
market risk. Pillar 2 focuses on risk management as well as dealing with risks that are difficult to
quantify. These are operational risks, strategic risks, reputational risks as well as liquidity risks.
Pillar 3 looks at the market discipline through public disclosure or transparency of insurance
companies operations and dealings.

The Kenya Insurance Act was put in place 1984. The collapse of many insurance companies in
Kenya during the 1990s coupled with numerous problems that bedeviled the sector necessitated
amendments to the relevant laws governing insurance. The first set of significant amendments to
the act was made in 2003 and these mainly dealt with mismanagement and transparency. In 2006
there were amendments with the effort to enhance the ability of payment of claims and 2010 one
core function set out in the amendment was to monitor the risk profile on insurers Gadaffi
(2014). In 2013 the supervision frame work for the Kenya insurance industry shifted from
compliance based supervision to risk based supervision (IAIS 2015).

Due to the 2008 global financial crisis, South Africa reviewed its regulatory frame work on its
financial sector. With the adoption of the solvency II in Europe, South Africa have adopted an
equivalent frame work for insurers called the Solvency Association and Management Framework
(SAM) which replaced certain sections of the Long Term Insurance Act 52 of 1998 and the short
term Insurance Act 53 of 1998 (International Reinsurance Letter 2015). The risk based frame

25
work mainly seeks to address the short coming so for the global financial crisis that is the lack of
sufficient mechanisms to provide supervisors with early warning of potential solvency concerns
as well as risk management (Khoza, 2015).

2.9 Conclusion
The chapter gave us an overview of the risk based approach in the insurance sector. Despite the
fact that risk based approach will not end all the insurance industry predicaments it has proven to
be of significant changes in the industry. To critically analyze the relevancy and applicability of
the intended objectives in the Zimbabwean insurance industry, we have to employ the research
methods detected in the following.

26
 CHAPTER 3

RESEARCH METHODOLOGY

3.0 Introduction
This chapter focuses on the research design and methodologies the researcher employed to
collect data and a detailed description of the procedure applied in conducting the research, the
research instruments, sampling techniques and sources of data.

3.1 Research design

A research design is a programme which guides the researcher in the process of collecting data,
analyzing and interpreting it (Keith et al 2007).Research design enables the researcher to answer
questions as clearly as possible through the evidence obtained.

Collins and Hussey (2009), notes that the determination of a research design gives a detailed plan
which one will use to guide and focus his research. A descriptive research design was used for
the purpose of this study because it allows for the fusion of both qualitative and quantitative data.
In this survey, questionnaires and interviews were used to obtain information from respondents
on their views regarding the adoption of a risk based approach to solvency management in
Zimbabwe. Questionnaires enabled the researcher to get honest opinions of respondents on the
subject as there is an element of anonymity associated with questionnaires whereas interviews
gave the researcher an opportunity to further probe as well as observe and gather information
through nonverbal cues.

3.2 Target Population

Collins and Hussey (2009) define a study population as a precisely defined body of people or
objects under consideration for statistical purposes. According to Cooper and Schiniller (2003), a
population is a universe of objects whose attributes or factors are to be investigated.

The targeted population for this research consists of the Insurance and Pension Commission
(IPEC), 24 operational short term insurance companies and 9 short term reinsurance companies.

27
General Managers (operations) of short term insurance and reinsurance companies were targeted
respondents. This is because they have the knowledge regarding the capital positions and
systems of their organizations and are also involved in the decision making of the overall
operations of the organization. However, the researcher could not collect data from the whole
population due to financial constraints and limited time so a sample representative of the
population was selected.

3.3 Sampling techniques

The main decision which the researcher has to make is to whether go for a census or sample
research. According to Kothari (2007) census means each and every element which forms the
part of the research will be investigated and sample means few elements which represent the
entire research would be investigated. Practically it is not possible to conduct a census. Hair
(2003) defines sampling as a process of selecting a relatively small number of elements from a
larger defined group of elements so that the information gathered from the smaller group allows
one to make judgments about the larger group.

According to Brink (1996) a sample is a subset of a population selected to participate in the

study, it is a fraction of the whole, selected to participate in the research project. The concept of
sample arises from the inability of the researcher to test all the individuals in a given population
(Castillo 2009). Sampling is therefore a process of selecting group(s) of subjects for a study in
such a way that the individuals represent the larger group from which they were selected. The
sample in this research involves short term insurers and reinsurers as well as the regulator.

3.3.1 Random Sampling Method

There are basically four methods of sampling under random sampling.

(a) Simple random sampling

This method ensures that each element of the population has an equal probability of being
selected to become part of the sample (Wagner 1993).

28
(b) Systematic sampling
Systematic sampling involves the selection of elements using a fixed or sytematic interval until
the desired sample is reached (Allison et al; 2001).

(c)Stratified sampling
Stratified sampling involves dividing the population into subgroups, with each subgroup having
relatively uniform elements. Once the strata have been identified a simple random sample is
selected from each stratum separately, the sample corresponding to the proportion of elements in
each stratum. Stratified sampling is used when the population is assumed to consist of a number
of smaller subgroups or sub populations such as male or female which are thought to have an
effect on the data to be collected (Wagner 1993).

(d) Cluster sampling

Cluster sampling is a probability sampling procedure in which elements of the population are
randomly selected in naturally occurring groups called clusters.

3.4 Sample Size

The term sample size relates to the number of the variables within a population. Evans (2000)
defines a sample size as the number of observations in a sample. Saunders et al (2007) states that
a sample size is determined based on a 95% confidence interval and Haralambos and Halbon
(1990) explains that a sample size should be more than 33% of the target population since the
larger the sample, the greater the level of accuracy. The researcher used stratified sampling as it
ensures representation of all the intended participants. The grouping of the targeted population
also reduces bias as it allows for the questioning and interviewing of different participants with
different views. There is an estimate of one general manager (operations) in every insurance and
reinsurance. The researcher used a sample of 18 respondents comprising of general managers
(operations) as a representation of the whole target population of 33 general managers
(operations) and the regulator.

29
3.5 Research instruments and Data collection
Data collection steps comprises of the boundaries for the study, collecting information through
unstructured or semi structured observations and interviews, documents and visual materials as
well as establishing the protocol for recording information (Creswell (2009).The researcher used
the survey design in which questionnaires and interviews data collection instruments were used.
The data sources can be categorized into primary and secondary data.

3.6 Primary Data Sources

Lancaster (2005) defines primary data as facts used in a research originally obtained through the
direct effort of the researcher through surveys, interviews and direct observation. The researcher
used questionnaires and interviews as primary data sources.

3.6.1 Questionnaires
A questionnaire is a tool for collecting and recording information about a particular issue of
interest (Corporate Research and Consultation Team 2008).It comprises of list of questions
which include clear instructions as well as options and space for answers. The questionnaires
were delivered by the researcher in person to the selected short term insurers and agreed on the
date of collection with the respondents.

Advantages
(a) Questionnaires allows for a quick and easy contact of large numbers of people. They can be
distributed to different people at the same time and collected within a short period.
(a) They are easy and quick to interpret and provide anonymity of respondents which encourages
them to give honest opinions.
(b) A questionnaire is standardized in that it asks the same questions in the same manner.
(c) They avoid interview bias. Personal questions are often more willingly answered as the
respondent is not face-to-face with the interviewer.

Disadvantages
(a) The respondent may not clearly understand the question and it’s difficult to know especially
when the researcher is not present.

30
(b) The respondents have a tendency of discussing the questions with others so as to complete
the questionnaire and this may result to biased answers.
(c) Questionnaires do not permit the observation of facial expressions and gestures yet they are
essential for evaluation of responses and does not also allow for further probing so as to
achieve clarity and understanding.
(d) The targeted respondents may not complete the questionnaire. For instance, a busy manager
may ask a personal assistant to complete it on their behalf.

3.6.2 Personal Interviews

Panneerselyam (2005) defines an interview as a conversation that is initiated by the interviewer
for the purpose of obtaining relevant information. Personal interviews can be unstructured that is
are informal and casual or can be structured that is are formally set questions. The researcher
made use of structured interviews after making appointments with some managers in the short
term industry.

Advantages
(a) The researcher benefits from face-to-face communication with the interviewee and thus any
misunderstandings are cleared immediately and the researcher can ask probing questions.
(b) The respondents through interviews can freely express themselves and can benefit from non-
verbal communication.
(c) Interviews are less time consuming.

Disadvantages
(a) The presence of the interviewer may influence the interviewees such that they may end up
giving biased responds so as to please the interviewer.
(b) Interviews require good interpersonal skills to build the trust of respondents as well as to get
unbiased responses.
(c) Interviews are costly in terms of transportation.

31
3.7 Secondary Data
This involves the collection of data from sources that are already available. Lancaster (2005)
notes that the sources can be categorized into raw secondary and compiled secondary data.
Compiled secondary data is data that would have been selected and summarized whereas raw
secondary data is that which diminutive has been done. Secondary information contributed
immensely to the research effort as the researcher consulted several sources of data available on
the topic area of the study.

3.7.1 The Internet

The university allowed the researcher to carry out her research through accessing information on
the internet. This information was accessed from other scholars work, eBooks and e-journals
through the internet.

Advantages
(a) The internet provides recently researched data that is not found in the library.
(b) It is easy to access and it helps the researcher to screen out unnecessary data.

Disadvantages
(a) It can be difficult to retrieve information from the internet since its efficiency is dependent on
network servers which can be highly congested sometimes.
(b) It is time consuming as the researcher has to screen the data provided on internet.

3.7.2 Textbooks and Journals

The researcher consulted numerous professional journals and text books in this investigation
towards. The background of solvency management in the short term industry was extracted from
journals and they helped the researcher know researches that have been done by other scholars
that are in relation to solvency management.

3.8 Summary
This chapter focused on the summarizing of the methods and techniques used to gather data for
the research. The data range from primary to secondary and secondary data was mainly used on

32
the literature review whereas primary data forms the next chapter in which data analysis is
focused on.

33
 CHAPTER 4

DATA ANALYSIS AND PRESENTATION

4.0 Introduction
This chapter presents a description and analysis of data gathered through the use of
questionnaires and interviews. Tables and graphs were used for quantitative data presentation
whereas qualitative data was used for analysis.

4.1 Questionnaire response rate.

De Vaus (2002) defines response rate as a percentage of the sampled people that actually
completed or participated on the survey. The researcher managed to collect 15 questionnaires of
the total of 17 questionnaires distributed to the chosen sample. This shows a response rate of
88% which did not affect the overall results of the research. The response rate is presented in
figure 4.1 below

Figure 4.1 Response rate analyses

12%

88%

Rturned Not Returned

Source: Primary data

34
4.2 Data Analysis and Presentation
4.2.1 Short term insurers and reinsurers faced with challenges of complying with the
capital based regulation.
The researcher mentioned the above question in order to find out the number of short term
insurers and reinsurers that have faced challenges in complying with the capital based regulation.
Challenges of compliance with the capital based regulation were indicated by 65% of the
respondents. Some operated for a quarter or two with capital below the set minimum whereas
some had to run around and raise the required capital at a very costly rate. However, 35% of the
respondents did not face any capital based regulation compliance challenges. The findings are
illustrated in figure 4.2

Figure 4.2 Insurance players facing compliance challenges.

Short term nsurers and

reinsurers that have faced
35%
challenges in complying
with the rules based
regulation
65%
Short term nsurers and
reinsurers that have not
faced challenges in
complying with the rules
based regulation

Source: Primary data

35
4.2.2 Challenges faced by short term insurers and reinsurers in complying with the capital
based regulation.
This question was designed to assess the challenges that the short term insurers and reinsurers
faced. The liquidity crunch and ever increasing regulatory capital was stated by 70% of the
respondents as they constitute the greater percentage of the challenges they faced in complying
with the capital based regulation. The regulators are ever increasing the minimum capital
requirement as a way of hedging against risk but are not considering the low market penetration
rate the insurance industry is currently facing. The premiums written and the capital requirement
are not corresponding. However, 20% of the respondents mentioned the depletion of their capital
and investments during the dollarization era as a challenge they faced in meeting capital
requirements. The remaining 10% indicated that they faced challenges of capital based
regulation compliance because there is no or little activity on the stock market. The findings are
illustrated in figure 4.3 below

Figure 4.3 Challenges faced by insurance players.

80
70
60
50 Liquidity crunch and ever
40 increasing regulatory
30
capital
Depletion of capital and
20
investments
10
0 Little activity on the stock
Liquiity Depletion of little activity market
crunch and capital and on the stock
ever investment market
ncreasing
regulatory
capital

Source: Primary data

36
4.2.3 Effects of compliance challenges.
The question sought to find out the effects the short term insurance industry faced due to failure
to comply with the capital based regulation. The high costs of accessing external funds as stated
by 35% of the respondents resulted in the reduction of profits. The perceived instability of
companies as cited by 30% of the respondents brought about by warnings from the regulator
resulted in companies losing their key workers. A number of policyholders withdrew their
policies after challenges’ of compliance were publicized; this according to 20% of the
respondents was an effect of bad reputation. Compliance challenges’ as indicated by 15% of the
respondents resulted in suspension which affected their relationships with service providers. The
findings are presented in figure 4.4 below

Figure 4.4 Effects of compliance challenges.

15% Reduction of profits

35%

20% Loss of key workers

Withdrawal of policies
30%
Relationships with service
providers

Source: Primary Source

37
4.2.4 The weaknesses of the capital based approach in solvency management.
Respondents indicated that insurance players face different risks which require a different
capital back up. The capital based approach on the other hand uses uniform factors when setting
the minimum capital requirement. The other weakness of the capital based approach is that it
perpetually changes therefore presenting a level of uncertainty to insurance players.

4.2.5 Knowledge and awareness of solvency II.

All respondents are aware of the solvency II framework. However, their knowledge of the
solvency II framework varies with 90% of the respondents having an in-depth knowledge of
solvency II. They were able to outline the components as well as the objectives of the
framework. The awareness and knowledge of the solvency II framework is illustrated on figure
4.5 below

Figure 4.5 Knowledge and awareness of solvency II framework

102

100

98

96

94
Awareness
92 Knowledge
90

88

86

84
Awareness Knowledge

Source: Primary data

4.2.6 Ability to adopt the solvency II regime.

The question sought to determine the ability of short term insurance companies to adopt the
solvency II framework. Confidence in the ability to adopt solvency II was indicated by 40% of

38
the respondents and this comprises of insurance giants that are currently heavily capitalized. 60%
of the respondents mainly constituting of small insurance players stated that they are not able to
adopt solvency II. The results are illustrated on figure 4.6 below

Figure 4.6. Ability to adopt the solvency II regime

40%
Inability to adopt solvency
II
60%
Ability to adopt solvency
II

Source: Primary data

4.2.7 Challenges of adopting solvency II.

This enquiry was made to find out the challenges of adopting solvency II. Respondents
appreciates that solvency II advocates for a holistic approach to risk management and according
to 70% of the respondents it requires the integration of the whole organization which presents a
challenge for short term insurers and reinsurers. However 20% of the respondents were worried
about a possible challenge that is presented by pillar III disclosure requirements of solvency II.
The emphasis on higher levels of transparency and disclosure to the public and the regulators
may result in the disclosure of sensitive information which if misunderstood may ruin the
reputation of a company The remaining 10% indicated that the increase of cost brought about by
the adoption if solvency II may increase the cost of insurance which may reduce the uptake of
policies. Findings presented in figure 4.7 below

39
Figure 4.7 Challenges of adopting solvency II.
80

70

60

50
Integration of the whole
40 organisation
Disclosure requirements
30
Cost of insurance
20

10

0
Integration of Disclosure Cost of
the whole Requirements Insurance
organisation

Source: Primary Data

4.2.8 Costs of adopting solvency II.

This question was probed with the aim of finding out the costs associated with the
implementation if solvency II. The setting up of models and risk management systems which
requires industry experts and actuaries was mentioned by 80% of the respondents as the main
cost that is associated with the adoption of solvency II. The other 20% stated that the need for
compilation of adequate data that comes with the adoption of solvency II presents a high costs to
organizations. Respondents highlighted that these costs are more of a challenge to countries like
Zimbabwe due to lack of experience and data compilation skills. The findings are presented in
figure 4.8 below

40
Figure 4.8 Costs of adopting solvency II

20%

Industry experts and

actuaries
Compilation of data
80%

Source: Primary Data

4.2.9 Benefits of the adoption of solvency II.

The question was designed to determine the benefits that accrue to an organization by adopting
solvency II. Solvency II requires the market consistent valuation of technical reserves and 60%
of the respondents agrees that it would help insurance players to make adequate reserves.20% of
the respondents mentioned that solvency II would reduce rate undercutting as risks and returns of
business lines are assessed therefore helping in the product design and pricing. Although
solvency II aims to protect consumers which ultimately improve customer and public confidence
20% of the respondents outlined that solvency II improves the overall performance of short term
insurers and reinsurers. The findings are illustrated in figure 4.9 below.

41
Figure 4.9 Benefits of adopting solvency II.
70

60

50

40
Adequate reserving
30
Product design and pricing
20

10 Improvement in overall
performance of organisations
0
Adequate Product design Improvement
reserving and pricing in overall
performance
of
organisations

Source: Primary data

4.2.10. The adoption of solvency II in the Zimbabwean short term industry.

The question sought to find out what respondents think in relation to the adoption of solvency II
in the Zimbabwean short term insurance sector with the aim to manage solvency. The adoption
of solvency II is supported by 40% of the respondents and they considered all the benefits that
will accrue to their organization by adopting the framework as well as the improvement of the
industry as a whole. The rest of the 60% do not support its adoption and they argue that the
European Union with all its resources is looking forward to the full implementation of solvency
II in 2016 yet it was approved in 2006.This is due to the level of complexity as well as inherent
costs. They therefore concluded that the Zimbabwean economy and industry set up do not
support such sophistication. The findings are illustrated in figure 4.10 below:

42
Figure 4.10 Preparedness of the adoption of solvency II

40% Insurers and reinsurers who do

not support the adoption of
solvency II in Zimbabwe
60%
Insurers and reinsurers who
support the adoption of
solvency II in Zimbabwe

Source: Primary data

4.3 Personal interviews conducted with the regulator.

A structured interview was scheduled and conducted with the Insurance and Pensions
Commission IPEC personnel. As a way of regulating insurance players IPEC ensures that
minimum capital requirements are adhered to by insurance players so that they are able to meet
their obligations.

4.3.1 The reasons of failure to meet minimum capital requirements by short term insurers
and reinsurers.
The regulator highlighted that there are poor returns on most insurer’s investments and also most
of the insurer’s funds are tied up in premium debtors which makes it difficult for them to meet
required capital. Respondents also mentioned that some of the insurance players are greatly
affected by rate undercutting and lack of product innovation which in turn reduces their retained
profits.

43
4.3.2 Methods used for coming up with minimum capital requirements.
This question was probed so as to find out what uniform factors are used to determine the
minimum capital requirement. The respondents stated that the balance sheets of insurance and
reinsurance companies are considered and an average capital requirement is extracted from this.

4.3.3 The inclusion of solvency II in the current regulatory framework.

The respondents pointed out that they are currently contemplating on the idea of merging the
current solvency system with solvency II. This however would require time, funding as well as
willingness and preparedness of the insurance players.

4.3.4 Preparedness of the short term insurers and reinsurers to adopt solvency II
The respondents cited poor data collection skills and inexperience as a major hindrance of
insurance companies and reinsurers to the adoption of solvency II. The difficulties of the
implementation of pillar 1 as compared to pillar II and III were however mentioned as it was
explained that pillar II and pillar III can be adopted in Zimbabwe with minimal difficult. As far
as the preparedness of insurers and reinsurers is concerned, the respondents argues that the
implementation of solvency II would take time and high cost hence their ability to implement
solvency II is limited.

4.4 Summary
This chapter focused on the findings, data interpretation and analysis. The data gathered was
presented in the form of pie charts, bar graphs and tables.

44
 CHAPTER 5

CONCLUSION AND RECOMMENDATIONS

5.0 Introduction
This chapter summarizes the entire research project, conclusions and recommendations based on
the research were drawn. The research intended to explore the adoption of a risk based approach
to solvency management of short term insurers and reinsurers in Zimbabwe.

5.1 Summary of findings on research objectives

The following summary can be drawn based on research findings
(a) A substantial proportion of short term insurers and reinsurers face challenges in complying
with the rule based regulations.
(b) The ever increasing regulatory capital, the liquidity crunch and the depletion of capital and
investments due to dollarization were cited by the respondents as the major challenges they
faced in complying with the minimum capital requirement.
(c) The short term players facing compliance challenges were affected through suspension which
restricted them from writing new business as well as renewing policies which decreased their
profits. Bad publicity also resulted in them losing quite a number of policies and some of
their key workers left for other companies due to the perceived instability.
(d) The capital based approach is a one size fits all approach in which general factors are used to
set a minimum capital requirement whereas the insurance industry comprises of different
companies with different risks.
(e) The solvency II regime is a well appreciated subject in the Zimbabwean short term insurance
industry. Respondents cited the benefits of the adoption of the solvency II approach as
improved product design and pricing, enhancement of performance, positive impact on the
organization and adequate reserving.
(f) The implementation of solvency II in Zimbabwe comes with a number of challenges which
includes the integration of risk in organizations, the possibility of disclosure of sensitive
information and a possible increase in the cost of insurance.

45
(g) There are a number of costs that are associated with the implementation of solvency II in
Zimbabwe and these are the costs of compilation of data and set up of internal models, the
need for actuaries and industry professionals and regulators risk management systems.
(h) A substantial proportion of short term insurers and reinsurers are not able to implement
solvency II and do not support its adoption in the Zimbabwean insurance industry.

5.2 Conclusion
Capital based approach is not a very effective tool to solvency management in the Zimbabwean
insurance sector. Window dressing of accounts, failure to meet the set minimum capital
requirement, suspension and deregistering of companies are some of the effects of using the
`capital based approach to solvency management. Capital based approach encourages insurers to
focus on achieving compliance yet neglecting the management of their specific risks in relation
to their own funds. The regulators on the other hand are also mainly concerned with the
compliance of the (re) insurance players with capital requirements than their prudent actions in
business operations and risk management strategies. The use of capital based approach as a
standalone tool has proved to be less effective since there are a number of loop holes and other
strategies need to be adopted to curb problems caused by capital based approach.

5.3 Recommendations
The capital based approach is currently being used as solvency management tools in the
Zimbabwean insurance sector were a minimum capital requirement is set. This is meant to
safeguard policyholders from the insolvency of insurance companies. The study has revealed a
number of weaknesses of the solvency management tool currently in use. The regulator is also to
blame as they put much emphasis on the minimum capital requirement compliance. This puts
much strain on the insurance players as they end up employing unethical strategies such as
window dressing of accounts in order to satisfy the regulator. Critical risk elements such as
investment of premium in prescribed assets instruments are forgone, risk management
departments are closed as a cost cutting measure and a way of increasing retained profit so as to
meet the set capital requirement. The following recommendations were made in an effort to
improve solvency management in the Zimbabwean short term insurance industry:

46
5.3.1. To the regulator
(a) Modification of the current regulation for short term insurance and reinsurance
companies.
The merging of the Own Risk and Solvency Assessment (ORSA) model and current regulation
can help (re)insurance companies better manage their risks .This would take the form of a capital
requirement being set and companies have the option to take on the ORSA model in which they
will be required to report on the assessment of their risks and risk management strategies in sync
with sufficient own funds. If the company can prove that the capital set is too high for their level
of business and risks, it therefore can be reduced accordingly. The use of ORSA limits insurance
companies from accepting risks which are above their capacity. Cases were a company's pool is
wiped out by a single risk are minimized, issues of suspension and deregistering of insurance
companies are reduced and this has the effect of improving the image of the whole insurance
sector.

(b) Reporting rules

In addition to the current reporting and disclosure system in which IPEC publish a quarterly
report and public insurance players publicizes their financial statements quarterly, the financial
elements of the companies should also be clearly stated and broken down. This applies on
elements like fixed assets, income and expenses in which total figures are put yet what comprises
those totals is not mentioned. The regulators can also appoint external auditors to assess
companies so that they don’t completely rely on information provided by insurance players for
reporting. This will reduce the window dressing of financial results by insurers.

(c) Guarantee or policyholder’s protection fund.

The regulator can incorporate the formation of a guarantee or policyholder protection fund. This
provides last resort protection to policyholders and beneficiaries in case of failures in insurance
undertakings. Insurers will be required to contribute a certain percentage to the fund depending
on their liabilities. The use of the protection fund will be triggered only when other protection
mechanisms fail. This will not only protect the policyholders but will increase market confidence
and stability.

47
(d) Further research on risk based approaches
A further research on the risk based approach could be conducted. Delays in other countries as
well as weaknesses of the frameworks could be better understood. This will assist in tailor
making a risk based framework for the Zimbabwean insurance industry.

5.3.2. To the short term insurance and reinsurance companies

(a) Short term (re) insurers should create effective risk management systems.
The adoption of effective risk management systems helps companies better manage their risks
hence reducing their risks of insolvency. These systems take the form of proactive and
continuous monitoring of strategies, processes and reporting of the activities of an organization.
This means that the risk management function is also vital in organizations for effective risk
management hence risk management departments should be incorporated into the organizational
structures.

(b)They should have effective capital management systems.

The ongoing monitoring of capital adequacy in companies will help them comply with the
required minimum capital therefore reducing the possibility of insolvency as well as achieve
capital adequacy. This involves the assessment of available capitals in relation to the risks posed
by the activities of an organization. Capital management systems also involve the monitoring of
individual solvency requirement and capital buffer in addition to regulatory compliance. This
will allow them to assess the performance of their measures of capital. Individual levels of
capital which signals the organization any need of recapitalization could also be set. This
systems will assists insurance players in managing their solvency.

5.4 Summary
The conclusions from the research findings were drawn in this chapter. It was concluded that the
capital based approach as a standalone tool is less effective in solvency management. However,
it was revealed that the adoption of a risk based approach in the Zimbabwean insurance industry
is difficult .A recommendation of current regulation modification was made by the researcher as
one of the strategies to manage solvency in the insurance industry.

48
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54
 APPENDIX A

FACULTY OF COMMERCE

DEPARTMENT OF INSURANCE AND RISK MANAGEMENT

Midlands State University

Faculty of Commerce
Department of Business management
P. Bag 9055
Gweru

Dear Sir/Madam

REF: Request for information needed for research

This questionnaire was prepared by Placxedes Mukonzo (Registration Number R125253N)

fourth year student at Midlands State University studying a Bachelor of Commerce in Insurance
and Risk Management Honors Degree. The researcher is conducting a research project entitled
EXPLORING A RISK BASED APPROACH TO SOLVENCY MANAGEMENT IN THE
ZIMBABWEAN SHORT TERM INSURANCE INDUSTRY.

All the information and expressions to be expressed by the respondents will be confidentially and
strictly handled. The findings of this research are for academic use only. If you wish to get more
information about this study, you are free to contact the chairperson of the Department of
Insurance and Risk Management, Mr. F. Makaza on his email [email protected] or mobile
number 0774 620 669

Your co-operation will be greatly appreciated

Yours sincerely

Placxedes Mukonzo
077641901

55
 APPENDIX B
SHORT TERM INSURERS AND REINSURERS-QUESTIONNAIRE

Tick where appropriate

(a) Have your organization ever faced challenges in complying with the capital based
regulation?

Yes No

(b) If Yes, briefly explain the challenges that the organization have faced in complying with
the capital based regulation?
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................

(c) To what extent was your organization affected by failure to comply with capital based
regulation?

................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
.................................................................................................................................................

(d) What do you think are the weaknesses of the capital based approach to managing
solvency?
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................

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 ................................................................................................................................................

(e) The insurance sector worldwide is moving towards the implementation of solvency II, do
you think Zimbabwe should do the same?

Yes No

(f) If Yes, please explain your reasons

......................................................................................................................................
.......................................................................................................................................
.......................................................................................................................................
.......................................................................................................................................

(g) Do you think your organization is able to adopt the solvency II framework?

Yes No

(h) What do you think are the challenges your organization may face in implementing
Solvency II?

………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………….......

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(i) What do you think are the costs of adopting solvency II to your organization?

………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
…………………………………………………………………………...............................

(j) What do you think are the benefits of adopting solvency II to your organization?

.......................................................................................................................................

.......................................................................................................................................
.......................................................................................................................................
.......................................................................................................................................
(k) Do you think Solvency II could be adopted in the Zimbabwean insurance industry?

Yes No

(l) If yes, please briefly give details of your answer.

………………………………………………………………………………………..
.......................................................................................................................................
.......................................................................................................................................

.......................................................................................................................................

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 APPENDIX C

INTERVIEW GUIDE FOR SHORT TERN INSURERS AND REINSURERS

(a) Have your organization ever faced challenges in complying with the capital based
regulation?
(b) What are the challenges that the organization have faced in complying with the
capital based regulation?
(c) To what extent was your organization affected by failure to comply with capital based
regulation?
(d) What do you think are the weaknesses of the capital based approach to managing
solvency?
(e) The insurance sector worldwide is moving towards the implementation of solvency II,
do you think Zimbabwe should do the same?
(f) Do you think your organization is able to adopt the solvency II framework?
(g) What do you think are the challenges your organization may face in implementing
Solvency II?
(h) What do you think are the costs of adopting solvency II to your organization?
(i) What do you think are the benefits of adopting solvency II to your organization?
(j) Do you think Solvency II could be adopted in the Zimbabwean insurance industry?

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 APPENDIX D

INTERVIEW GUIDE FOR THE REGULATOR

(a) What might be the reasons why short term insurance companies fail to meet the minimum
capital requirement?
(b) What basis is used for the calculation of minimum capital requirement for short term
insurance companies?
(c) Does the current regulatory framework allow for the inclusion of Solvency II?
(d) How prepared is the short term insurance industry in adopting the Solvency II
framework?

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