ACTA UNIVERSITATIS DANUBIUS Vol. 17, No.

5, 2021

Assessing the Solvency, Underwriting Risk

and Profitability of the Kenyan Insurance
Sector

Kamanda Morara1, Athenia Bongani Sibindi2

Abstract: The aim of this study was to assess the solvency, underwriting risk and financial performance
of the Kenyan insurance industry. The insurance industry is a key player that drives economic growth
in Kenya. Notwithstanding there has been a dearth of studies that have investigated the factors that have
a bearing on the financial performance and by extension the financial stability of the Kenyan insurance
sector. In this article, we explored how solvency and underwriting risk impacted on the financial
performance of insurance firms in Kenya for the period 2009 to 2018. We employed descriptive
statistics and correlational analysis to analyse the data. The sourced secondary data from the Insurance
Regulatory Authority Annual Reports. There were two main findings from this study. Firstly, it was
established that solvency position of Kenyan insurance companies has been increasing steadily over
the years. Solvency was also found to be positively correlated to financial performance. Secondly, it
was found that underwriting risk was on an upward trend. Further it was established that underwriting
risk proxied by the combined ratio was positively associated with the financial performance variable.
This study therefore makes a contribution to the sparse literature on the financial performance of the
insurance sector in Kenya. Furthermore, it provides pointers to the management insurance companies
on the aspects of their business that would need greater attention to drive and sustain superior financial
performance.
Keywords: Insurance; Financial Performance; Solvency; Underwriting Risk; Kenya
JEL Classification: G22; G32

1
Phd in progress, Department of Finance Risk Management and Banking South Africa University of
South Africa, Address: P.O Box 392, UNISA, Pretoria 0003, South Africa.
2
Associate Professor, Department of Finance Risk Management and Banking, University of South
Africa, South Africa, Address: P.O Box 392, UNISA, Pretoria 0003, South Africa, Tel: +27(0) 12 429
3757, Fax: +27 (0) 86-569-8848, Corresponding Author sibinab@unisa.ac.za.
AUDOE, Vol. 17, No. 5/2021, pp. 226-240
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1. Introduction
The importance of the insurance firms to economic activity is indisputable, as such
it is imperative to safeguard this sector (Sibindi, 2014). Despite the importance of
this sector, insurance inclusion in Kenya is very low. Insurance penetration is
relatively low in Kenya at measly 3% compared to over 13% for South Africa (Swiss
Re Institute, 2018, p. 46). As such it is imperative to nature this sector which is not
well developed.
In addition, there have been notable failures of insurance companies in Kenya; since
2005, four insurance companies have collapsed. The organisations that have been
declared financially insolvent include among others: United Insurance Limited, Blue
Shield Assurance, Concord Insurance, Standard Assurance, and Invesco Assurance.
A bit of a bright spot is that Invesco Assurance is back in operation. The demise of
these firms was attributable to that they could not handle the obligations due from
them as insurance firms, including the payment of key debtors and creditors
(Waitathu, 2013). We hypothesise that if the management of these companies had
been well versed in the factors that drive superior financial performance, there is a
possibility that they may have kept their companies afloat. Financial viability
depends on the going concern aspects of the insurance industry. As such solvency
and underwriting risk both have a bearing on overall performance. As such, there is
a need to assess these elements and their contribution to the insurers top-line.
There has been growing strand of studies that explore the elements that impact on
the financial performance of insurance firms. Notwithstanding, there has been
relatively few studies on this topic especially with a focus on solvency and
underwriting risk. Moreover, those few studies do not cover the insurance sector in
Kenya. Amongst others, Maina (2016, pp. 25-31) found a strong correlation between
annual liquidity ratios and insurance company profitability. However, the study does
not outline the solvency aspect of the insurance sector. Further, Odira (2016, pp. 39-
44) investigated the influence of liquidity, solvency, and leverage on the
performance drivers of general insurance firms and found that liquidity had a
significant and positive correlation with financial performance. Leverage was found
to have a negative sway on the performance of insurance firms, while the effect of
solvency on the financial performance of similar insurers was found to be positive
but statistically insignificant. As such, this research effort will illuminate light on the
relevance and impact of solvency margins and underwriting risk on the financial
performance of the Kenyan insurance sector.
Principally, there were two objectives that underpinned this study: Firstly, the study
sought to establish whether there was a link between the solvency of Kenyan
insurance companies and their financial performance. Secondly, the study sought to
determine if there was a connection between the level of underwriting risk and the
financial performance of insurance firms in Kenya.
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The remainder of articles is arranged as follows: Section 2 reviews the theoretical
literature. Section 3 reviews the empirical literature about the solvency and
underwriting risk in the insurance sector. Section 4 describes the research
methodology employed for the study. Section 5 presents the and discusses the
empirical results of the study. Finally, section 6 gives a concludes the article.

2. Review of Related Literature

2.1. Solvency Theory and Underwriting Risk
In general, terms, solvency is a yardstick that measures the long-term financial
strength of a company. It refers to the ability of the company to satisfy its long-term
financial commitments promptly. While solvency is of interest to various
organisation stakeholders it is of paramount importance to both investors and
creditors. Investors are keen on the company’s continued financial standing so that
it can continue to grow, generate profits, and earn them dividends. Investors are
concerned with protecting and growing their investment, and if a company becomes
insolvent not only do they lose income and capital gains; their entire investment risks
being written off (Cummins & Derrig, 1988). Lenders and creditors are keen on
being repaid and will be interested in whether the company that is borrowing from
them has the resources to meet its commitments. The interest coverage ratio and debt
to equity ratio are among the most applied metrics to assess the solvency of a
company. Savvy potential creditors take those ratios into account prior to advancing
funds (Bragg, 2018).
A company that is creditworthy and solvent is in a position to pay present and
subsequent claims as they fall due (a going concern situation). A solvency margin is
a shield in a company’s assets that cushions one or more of the theoretical solvency
levels mandated from the supervisory institutions. (Sandstrom, 2010, p. 3). The
greater the solvency margin the greater the level of comfort will be for creditors,
investors, current clients, potential clients, and regulators.

2.2. Underwriting Risk

Underwriting involves assessing the level of risk attributable to a proposer of
insurance. The process assists in establishing the appropriate premiums to
satisfactorily counterbalance the potential cost of insuring policyholders.
Underwriting risk is the possibility of loss on business taken up by an underwriter.
In insurance, this risk may come about from a poor evaluation of the risk being
covered or from an unexpected catastrophe. The impact of this erroneous assessment
is that the losses incurred following writing of the cover may significantly exceed
the premiums collected (Zhangjiwu, et al., 2011).

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An insurer’s financial soundness is dependent on how well it prices the risks that it
takes on as well its management of claims related costs. It is noteworthy that
underwriting risk may also be referred to as the risk of collecting low levels of
insurance premiums, the implication being that loss occurrence has exceeded the
predictions that were made in estimating the level of premiums (Fields, et al., 2012).
The premium charged to a pool of clients should be enough to cover forecasted
claims. If an insurer underestimates the risk associated with providing insurance
coverage, it could end up paying much more than it receives in premiums.

2.3. Financial Performance Theory

Financial performance can be stipulated as a subjective estimate of how effectively
an organisation uses assets to earn and accumulate revenues (Nandan, 2010, p. 66-
74). If a company is utilising its assets in a better way than its peers or competitors,
it can be deemed to be doing well from a financial performance perspective.In their
review of company performance (Brealey, et al., 2001, p. 150-151) established that
an investment that earns more than the cost of capital makes investors better off, as
it is earning them a higher return than what they can obtain for themselves. Naturally,
managers of an enterprise are primarily interested with whether the firm’s returns on
its assets outweighs or falls short of the cost of capital (Jacobs & Anil, 2012). A firm
would be deemed to be performing well if the return it is achieving on the assets it
is employing is superior to that which would be achievable by investment in a
relatively safe fixed income security.
There are several basic measures of financial performance. These can be expressed
as financial ratios and are generated from a company’s financial statement; the
balance sheet, income statement, and cash flow statements (Engle, 2011). The
estimates of Return on Equity (ROE) and Return on Assets (ROA) are the key
metrics employed in this study.
Return on Equity, which assesses profitability for the providers of a company’s
equity capital is defined by after-tax profits divided by shareholder’s equity and is
expressed as a percentage. Return on Assets on the other hand measures profitability
for all providers for capital. ROA can be outlined as the takings before interest and
taxes divided by total assets, the total assets being the sum of shareholder’s equity
and all liabilities (Bodie, et al., 2008, pp. 654-655).
There are several financial performance measures particular to the insurance
industry. The basis for computing performance metrics for insurance companies is
the Net Earned Premium. When an individual pays annual insurance premium, they
are counted as part of the Gross Written Premium for an insurance company. To
arrive at the Net Earned Premium, the cost of reinsurance is deducted from the
Grosss Premium (Mohamed & Florentin, 2018).
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The expense ratio refers to the percentage of the net premium that insurance firms
spend on obtaining, writing, and servicing insurance, and reinsurance, which is more
simply referred to as “underwriting expense” (Atkinson & Hedges, 2020). Business
expenses such as marketing, software maintenance, professional fees, and
commissions paid are examples of expense ratio costs. A lower expense ratio is
better because it implies that the insurance company is more profitable (Atkinson
and Hedges, 2020). A lower expense ratio also means that an insurance company
has a greater scope to attract clients with lower prices compared to competitors with
higher expense ratios.
The combined ratio simply sums up the expense ratio and the loss ratio (Nickolas,
2018). A combined ratio beneath 100% implies that an insurance firm operates at an
underwriting profit, which means that the company is profitable before adding
returns from investment of premiums. By the same token, an underwriting ratio that
is higher than 100% signifies that claims and expenses have outweighed income
from premiums (Calandro & Lane, 2002).

3. Review of Empirical Literature

3.1. Solvency
As appertains the insurance industry, solvency forms a fundamental measure of the
financial strength of an insurer and its capability to pay expected claim amounts.
Insurance industry regulators whose key objective is to protect policyholders and the
financial system set solvency ratios (Dembla, 2014).
Caporale, Cerrato and Mario (2017) in an examination of the triggers of insolvency
concerning insurance firms in the United Kingdom found that insurance industry risk
factors include: profitability, interest rates, liquidity and leverage. They also found
out that different business lines present different credit risks. Primary insurers can
reduce their insolvency risk by taking out reinsurance contracts (Caporale, et al.,
2017).
Managing capital and solvency requires the management of insurance companies to
ensure regulatory solvency limits are adhered to, liquidity is maintained and that
actions are taken to sustain the growth of net income (Rousseau, 2017, pp. 1-3). In
an analysis of 3178 life insurers and 7322 non-life insurers from over 95 countries
(Irresberr, et al., 2017, pp. 2-4) found strong empirical evidence that boosting capital
reserves enhances the performance of both life and general insurers as measured by
their returns on shareholder funds and returns on total assets. Their tests confirmed
a strong link between profitability and capital levels.
Mazviona, Dube, and Tendai, (2017, pp. 15-27) in a study of the drivers of financial
performance of non-life insurance houses in Zimbabwe over a five-year stretch from
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2010 to 2014 found that expense ratio, claims ratio, leverage, and liquidity
significantly affect performance as measured by return on assets.
Kiio (2014, pp. 34-39) assessed four variables that impact insurance company
liquidity: quick ratio, leverage ratio, the log of net premiums and loss ratio for the
41 insurance companies in operation in Kenya from 2009 to 2013 and settled that
there is a valid and positive association between profitability, measured in terms of
return on assets with the quick ratio and the log of net premiums. Higher leverage
was associated with poor financial performance.
High levels of liquidity put Kenyan insurance companies in a position to quickly
settle obligations as they come through. Kenya insurance companies should strive to
avoid being over-leveraged as weaker levels of performance are evident as leverage
levels are cranked up (Kiio, 2014). The importance of liquidity to the performance
of insurance firms in Kenya was further reinforced by a study of 47 insurance firms
from 2011 to 2015 by (Maina, 2016) which showed a strong correlation between
annual liquidity ratios and insurance company profitability.
Fraud prevention has a direct link with strong financial performance; since excessive
fraud harmed both the liquidity and solvency of insurance firms (Maina, 2016).
Odira (2016, p. 39-44) investigated the impact of liquidity (current assets divided by
short term liabilities), solvency (total assets divided by total liabilities) and, leverage
(total debt divided by total equity) on the financial effectiveness of general insurance
companies from 2011 and found that liquidity had a significant and positive
correlation with financial effectiveness. Leverage was found to have a negative
influence on performance while the effect of solvency on the financial performance
of insurance companies was found to be positive but statistically trivial. High
leverage is linked to a high percentage of unpaid claims relative to shareholders’
funds in Kenya (Odira, 2016). Further, it was found that information about high
claims outstanding amounts diffused into the market with the negative association
on the involved insurance firms. Further, Odira (2016, pp. 42-44) recommended that
Kenyan insurance firms should also take steps to settle claims promptly so as to
maintain a good reputation and standing in the market.

3.2. Underwriting Risk

In relation to underwriting risk, Scordis (2019) found that there was a positive
interconnection between underwriting performance and financial performance.
Scordis (2019) reasoned that the positive relationship between underwriting and
performance could be explained by insurers possessing a comparative informational
advantage in underwriting. Further, a positive association between revenues and
performance was documented. Since as revenues increase it intensifies the positive
impact of underwriting performance on financial strength (Scordis, 2019, pp. 36-38).
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The challenge for insurers in the future is the reducing cost of data and information
mining which enables rivals to segment and locate lower risk clients whom they can
then entice away with cheaper premiums (Scordis, 2019, pp. 36-38).
Adams and Buckle (2003, pp. 137-142) evaluated insurers’ financial performance in
Bermuda, an international financial centre. They employed panel data techniques
covering 47 insurers with data ranging from 1993 to 1997 with company size,
underwriting risk, leverage, liquidity, and size of operations as independent
elements. Results from their investigation maintain that insurers with high leverage
and low liquidity report better financial outcomes. Contrary to their expectations
they find the existence of a definite and positive correlation between performance
and underwriting risk.
Burca and Batrinca (2014, pp. 307-308) in a study of the Romanian insurance market
from 2008 to 2012 found that the key elements of the financial performance in the
Romanian insurance market are leverage, company size, growth of gross written
premiums, underwriting risk, risk retention ratio, and solvency margin. In a study on
the various components of underwriting risk: pricing risk, reserve risk, and
reinsurance risk on the underwriting cycles on insurance houses in the state of
Croatia (Jakovcevic & Mihekja, 2014, pp. 1256-1257) find that underwriting risk
has a valid contribution to insurance pricing. On the various components, pricing
risk is found to have the highest impact on the underwriting cycle.
Boyjoo, Ramesh and Jaunky (2017) in a review of the relatively well-developed
Mauritius insurance sector over the 5-year period from 2011 to 2015 find that
judicious management of underwriting risk (gauged as a ratio of benefits paid to net
premium) translates into better financial performance for insurance companies.
Since the main activity for an insurance company is risk underwriting and spreading
the risk exposure across different clients, insurers should ensure good underwriting
to mitigate on the exposure losses (Boyjoo, et al., 2017, pp. 132-133).
In Kenya, insurers are mandated to hold a minimum solvency margin (Gitau &
Oraro, 2018). The Kenyan Insurance Act outlines the margin of solvency
requirements. The act states that an insurer shall always hold total admitted assets of
not less than its total admitted liabilities. The law further states that an insurer that
undertakes both long term and general insurance business shall always maintain
discrete margins of solvency for each of the classes of business. Third-party motor
covers have been fixed at a maximum of KES 7,500 over the 8-year period. Further,
Kenyan underwriters rely on fixed-rate tables instead of developing appropriate
quantitative risk models (Ndeda, 2014, p. 43-44). Risk modelling will generate
premiums that would be closer to the figure needed to ensure premiums levels cover
the level of incurred claims with a good degree of sufficiency.

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4. Data and Methodology

4.1. Sample Description and Data Sources
This article mainly uses quantitative research approach to adequately explore
solvency and underwriting risk in the insurance industry. The quantitative approach
was chosen on account of the following: Firstly, it encompasses the conversion of a
wide of range data into a usable statistical form from which conclusions can be drawn
(Syed, 2016). Secondly, it enhances depth and details in term of the metrics under
study. Lastly, the quantitative approach gives room for flexibility thus the study can
be adjusted according to fresh information and data. More specifically, the study
employed trend analysis to investigate how the variables of interests evolved over
time. Further, the study also employed correlational analysis in-order to assess the
association between the financial performance, underwriting risk and solvency
measures.
The population of this study consisted of all the insurance companies operating in
Kenya. 52 insurance firms are operating in Kenya. Out of the 52, sixteen write long
term business (life) only, nine are composite insurers (writing both life and general
business), while the rest are general insurance only businesses (Insurance Regulatory
Authority, 2018, pp. 154-158). The full composition of all the registered insurance
firms in Kenya as reported in Table 1. The type of data collected was secondary as
we relied on reports and publications, research papers, specific company websites
for analysis. Analysts consider secondary data to be of higher quality and more
accurate than that of an individual researcher (Mugenda & Mugenda, 2003, p. 112).
In this study, different firms were observed over a 10-year period.
Table 1. Composition of the Kenyan Insurance Sector
Insurance Companies in Kenya
Life insurance 16
General Insurance 27
Composite (Both life and General) 9
Total 52
Source: Authors’ own compilation from data sourced Insurance Regulatory Authority (2018)
The main origin of the data used in the analysis was the Insurance Regulatory
Authority Annual Reports from 2009 to 2018 (Insurance Regulatory Authority,
2018). This information is considered credible as the regulator enforces strict rules
ensuring authenticity. The second source used in the research is the annual financial
reports from the individual company audited financial statements. Companies are
bound to file reliable information due to the high penalties inflicted on those that
post erroneous figures. Industry annual reports from the Association of Kenyan
Insurers, an industry lobby group, for the ten-year period from 2009 to 2018 were
also relied on to fill in gaps from the other primary data sources.
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4.2. Variable Definition
This paper utilised both the ROA and ROE variables to proxy financial performance.
The determinants assessed included underwriting risk and solvency. We took cue
from empirical studies on what variables to employ to proxy solvency margin and
underwriting risk. Table 2 describes the summary of variables employed in this
study.
Table 2. Summary of Variables under Study
Variables Definition /Formula Expected Sign
ROA 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐴 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 -
ROE 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 -
𝑅𝑂𝐴 =
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
Solvency Ratio SOL=𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 Positive
(SOL)
Combined Ratio 𝐼𝑛𝑐𝑢𝑟𝑟𝑒𝑑 𝐿𝑜𝑠𝑠𝑒𝑠+𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 Positive/
COM= 𝐺𝑟𝑜𝑠𝑠 𝐸𝑎𝑟𝑛𝑒𝑑 𝑃𝑟𝑒𝑚𝑖𝑢𝑚𝑠
(COM) Negative

Data analysis procedure encompassed some stages. Firstly, descriptive statistics was
presented and analysed. Secondly, correlation analysis was performed. The direction
and slope of the correlation was important when discussing the findings from the
study as the type of correlation helped dictate the type of influence, whether positive
or negative (Berg, 2004).
5. Empirical Results
5.1. Descriptive Statistics
In this section, focus is mainly geared towards trend analysis and correlation study
between the elements employed in this study. The results in Figure 1 and Figure 2
elucidate the trend for various variables under review. The results for correlation
analysis are summarised and presented in Table 3.

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Figure 1. Graphs of Average Trend in ROA and ROE of Kenyan Insurance

Companies
The trends in the insurance industry performance with Return on Assets and Return
on Equity (ROE) displayed for the period under study is as shown in Figure 1. ROA
showed steady decrease within a range of 1% to 9% in average values. Further, as
depicted in Figure 1, general insurance underwriters realise higher ROA figures in
comparison to life insurance underwriters. Equally important, general insurers in
Kenya generated more return on the equity value to shareholders from 2009. It must
be noted however that the returns depicted minor fluctuations in the rates realised.
In 2013, the returns generated by life insurers was twice as much as that of general
insurers. The potential in life insurance business seemed to have taken over during
that year. Subsequently, there was a decline documented from 2013 at 42% down to
10% on average over the period ending 2018. It can also be noted that in 2010 and
2011, a significant decline in equity return were recorder by both life and general
insurers in consecutive years.

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Figure 2. Trends of Solvency Ratio and Combined ratio for the Kenyan Insurance
Companies
A comparison of the annual averages for solvency ratio for insurers from 2009 to
2018 is documented in Figure 2. Solvency ratio has total equity and assets as the
main constituents in its computation. It can be noted that there has been a gradual
decline in the factor from 2009 to 2014. However, the measure took a different turn
at the end of 2014. The analysis proved that solvency ratio of Kenyan insurance
companies has been increasing steadily from 2014. However, the peak realised
during 2009 has not yet been attained. It can be inferred that the ability of Kenyan
insurers to meet long-term liabilities is growing, albeit at a slower pace than realised
in 2009-2011. Subsequently, most companies have realised the importance of setting
aside resources to curb long-term liabilities: as such, the ratio has depicted a gradual
rise in the previous years from 2014.
Furthermore, trends in the annual averages of the combined ratio for Kenyan insurers
from 2009 to 2018 is documented in Figure 2. The main element outstanding in its
computation is the net earned premiums. The trend in combined ratio can be inferred
above as ranging from 120% to 160%. There has been a decline in the measure over
the years from 2010 to 2017 albeit a slight increase was realised in 2018.

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5.2. Discussion of Findings
In this section we discuss the empirical findings in relation to the twin objectives that
anchored this research effort next in turn. Primarily the analysis and discussion is
based on the results of the correlation analysis presented in Table 3.
Table 3. Correlation Matrix
ROA ROE Combined Solvency
Ratio
ROA 1
ROE 0.44*** 1
Combined Ratio 0.10** 0.05*** 1
Solvency 0.43 0.11*** 0.56 1
(*) / (**) and (***) highlights 10%, 5% and 1% level of significance respectively
Objective 1: To establish whether there exists a link between the solvency of
Kenyan insurance firm and their financial performance
The solvency ratio was employed as a proxy to help investigate the interconnection
that exists between solvency and financial performance. The findings of this
evaluation established that solvency was positively correlated to ROE. The
association was valid at a 1% level of significance. Thus, the results of the study
documented that the solvency ratio had a 11.37% explanatory power on the financial
performance measure (ROE). The results of the study finding were inconclusive
when ROA was employed as the proxy for financial performance as the association
was found to be statistically insignificant.
Objective 2: To determine if there was a relationship between underwriting risk
and the financial performance of insurance firms in Kenya.
Underwriting risk was measured using the combined ratio variable. Results from
correlation analysis revealed a positive association between the combined ratio and
the financial performance variables (both ROA and ROE). The results document that
the combined ratio had a 10% explanatory power on the ROA of the Kenyan
insurance companies and the result was statistically significant at the 5% level of
significance. Similarly, the combined ratio was positively associated with the ROE
variable and the result was statistically significant at the 1% level. Therefore, this
demonstrates that underwriting risk is has a significant impact on the financial
performance of insurance company. However, there is a need to explore the specific
factors leading to the positive contribution; loss and expense ratios were used in the
calculation of combined ratios. This is in line with the aprior expectations.

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6. Conclusion
The purpose of this study was to examine the influence of solvency and underwriting
risk on the financial performance of insurance companies in Kenya. Firstly, the
results of the study documented that solvency was positively correlated with the
financial performance of insurance companies in Kenya. The implication of this is
that firms operating in the country and in the region as a whole should take steps to
beef up and maintain their capital levels to gain a competitive edge.
Secondly, we found that the impact of underwriting risk on the overall insurance
industry was substantive. Underwriting risk proxied by the combined ratio was also
positively correlated with the financial performance measures (both ROA and ROE).
A good number of insurance companies in Kenya reported underwriting profits in
the period under the study, which evidences that they had largely taken steps to
mitigate against underwriting risk.
Drawing from the findings we wish to make the following recommendations. Firstly,
we recommend that Kenyan insurance companies give more recognition to solvency
because of the higher direct influence on returns achieved. Maintenance of sufficient
solvency margins and careful management of underwriting risk are critical to the
long-term viability of insurance firms.
Secondly, it will be prudent that all Kenyan insurance companies build up sufficient
assets to settle claims as and when they arise. General insurance companies in
particular, should ensure that a sizeable portion of their asset base is held in liquid
investments so that they are in a position to tackle claims at short notice.
Thirdly, the industry regulator would be well advised to take into account the link
between financial performance and solvency in formulating solvency margin caps
and limits. The regulator should also keep close tabs on the underwriting ratios for
the various industry players as an indicator of potential looming problems and guide
on mitigation measures as necessary.
The study also makes a contribution in a number of ways. Potential equity and fixed
income investors could use the empirical findings herein in making investment
decisions regarding the securities offered by insurance companies. Future and
current policyholders may use the information as a guide when selecting which
companies to place their business. Other stakeholders and the government will be
interested in a vibrant insurance sector given the vital role it plays in the economy
and may therefore use aspects of this study to advocate for measures to ensure that
insurance companies manage their underwriting risk well and that they maintain the
necessary capital buffers to ensure their solvency and consequently their long-term
viability.

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