PENSIONS AND INSURANCE AUTHORITY
THE INSURANCE CAPITAL AND SOLVENCY
TECHNICAL GUIDANCE NOTE PURSUANT TO THE INSURANCE
(GENERAL) REGULATIONS, SI 105 OF 2022
(FOR GENERAL INSURANCE AND REINSURANCE ENTITIES)
August 2023
Draft V0
1
PENSIONS AND INSURANCE AUTHORITY
TABLE OF CONTENTS
Page
PART 1. OVERVIEW AND GENERAL REQUIREMENTS ........................................... 4
Authority ............................................................................................................................. 4
Title ..................................................................................................................................... 4
Application .......................................................................................................................... 4
Interpretations ..................................................................................................................... 4
PART 2: BACKGROUND ..................................................................................................... 7
Risk Based Capital Framework – The Concept .................................................................. 7
Responsibility for Capital Adequacy and Solvency framework ......................................... 8
Own Risk and Solvency Assessment Guidance................................................................ 10
Financial Statements and Insurance (Statutory) Accounts in the CAS............................. 12
Role of the External Auditor in the CAS and ISA ............................................................ 14
Role of the Appointed Statutory Actuary in CAS ............................................................ 16
Capital Adequacy and Solvency Requirement – at a glance ............................................ 17
Total Balance Sheet Approach – for CAS Requirements ................................................. 17
Quality of Capital Concept – Summary of Capital Components...................................... 18
Qualifying Criteria for inclusion of capital instruments in Tier 1 .................................... 20
Qualifying Criteria for Inclusion of Capital Instruments in Tier 2 ................................... 22
PART 3: DETERMINATION OF AVAILABLE CAPITAL ........................................... 23
PART 4: DETERMINATION OF CAPITAL ADEQUACY AND SOLVENCY
REQUIREMENT FOR GENERAL INSURERS & REINSURERS ............................... 24
Determination of Minimum Capital Requirement for General Insurers or Reinsurers .... 27
i.
Determination of Capital Required for balance sheet Assets ..................................... 28
ii.
Determination of Capital for Investing above Concertation Limits ....................... 33
iii.
Determination of Capital Required for Technical Provisions................................. 35
Reserves for Claims Incurred but not Settled (Outstanding Claims Reserve) .................. 36
Incurred but not Reported Reserves .................................................................................. 37
Unearned premium Reserves (UPR) ................................................................................. 38
Unexpired Risk Provision (URR) ..................................................................................... 39
Guidance for Reinsurers’ on the Calculation of Technical Provisions ............................. 40
2
PENSIONS AND INSURANCE AUTHORITY
iv.
Determination of Capital Required for Catastrophe Risks ..................................... 41
v.
Determination of Capital for Reinsurance Risk ...................................................... 42
vi.
Determination of Capital Required for Operational Risks ..................................... 45
vii.
Determination of Capital Required for Guarantees ................................................ 47
Guidance to Reinsurers on the calculation of Capital Required for Guarantees .............. 48
Aggregating the Capital charges for XYZ General Insurance Limited. ........................... 49
STATEMENT OF ................................................................................................................. 49
CAPITAL ADEQUACY AND SOLVENCY REQUIREMENT ........................................ 49
PART 4: Determination of Solvency margin for General Insurers and Reinsurers .Error!
Bookmark not defined.
PART 5: DETERMINATION OF CAPITA FOR LONG-TERM INSURERS AND
REINSURERS............................................................................Error! Bookmark not defined.
3
PENSIONS AND INSURANCE AUTHORITY
PART 1. OVERVIEW AND GENERAL REQUIREMENTS
Authority
1. The Capital Adequacy and Solvency (CAS) guideline is made under Regulation 39
of the Insurance (General) Regulation, Statutory Instrument No. 105 of 2022 of the
Insurance Act (Act)
Title
2. This guideline may be cited as the Pensions and Insurance Authority’s Capital
Adequacy and Solvency Technical guide, 2023.
Application
3. The CAS Guideline shall apply to all General Insurers, Long-term Insurers and
Reinsurance companies licensed under the Act, except where expressly noted
otherwise.
4. The Guidelines are meant to provide the minimum standards in relation to the CAS. It
is not intended to replace or override any provisions under the Insurance Act. The
Guidelines should be read in conjunction with the provisions of the Act, regulations
made thereunder and any other rules, guidelines, circulars and notices that the
Authority has issued or may issue from time to time.
5. The CAS guidelines shall come into operations on the date appointed by the Authority.
Interpretations
6. In this technical guidance note, unless the context otherwise requires –
“365th method” means a method that assumes that the risk is spread evenly over the
365 days of a year of cover;
“Authority” has the meaning assigned to the word in the Act;
“available capital” means excess assets after removing total liabilities and disallowable
assets;
“best-estimate assumption” means an assumption that,
4
PENSIONS AND INSURANCE AUTHORITY
i.
is realistic;
ii.
depends on the nature of the business concerned;
iii.
reflects anticipated experience with no provision for risk of adverse
deviations; and
iv.
is determined by immediate past experience or modified by any knowledge
or expectation of the future;
“capital adequacy requirement” means an amount that will ensure that the liabilities
of the insurer under each policy is less than the amount that will become
available to policyholders when an insurer ceases to operate or make new
business;
“capital adequacy requirement ratio” means the ratio of
available capital to
minimum capital requirements;
“chain ladder method” means a technique that uses past experience data to
forecast or determine the amount of claim reserves that an insurer or reinsurer
should maintain;
“claims not reported” means a reserve in respect of the claims that occurred before
the end of the financial year that have not been reported;
“collective investment scheme” has the meaning assigned to the word under
the Securities Act, 2016;
“compulsory margins” means the margins that are used to determine the value of
liabilities as provided in paragraph (iv) of Part B of the Schedule;
“Insurance statutory Accounts” means insurance accounts, annual financial
statements, annual returns, quarterly returns prepared in accordance with
statutory accounting principles.
“minimum capital adequacy requirement” means the capital that is required to be
held by an insurer or reinsurer under Regulations 5 and 6;
“property” includes direct investment in investment properties, mortgages,
land and building for an insurer’s own use;
“ordinary capital adequacy requirement” means a factor based approach that
establishes what capital is needed to be held in respect of each major risk
5
PENSIONS AND INSURANCE AUTHORITY
category isolated and whose formula and list of categories is set out in
paragraph (iii) of Part B of the Schedule;
“related company” has the meaning assigned to the word under the Companies
Act, 2017;
“Reserve for Unexpired Risk” means a reserve to cover the claims and expenses
relating to unexpired periods of risk for which the insurer has already
received premiums that are deemed inadequate;
“termination capital adequacy requirement” means the summation of the lapse
capital adequacy requirement and the surrender capital adequacy
requirement where –
the lapse capital adequacy requirement, for policies without
surrender value, is the amount required to ensure that no policy has
a negative liability, where liability refers to the statutory liability
before considering any other capital adequacy requirements; and
(b)
the surrender capital adequacy requirement is the amount
required to ensure that a policy’s liability is not less than its current
surrender value; provided that for policies which cannot be
surrendered or transferred from the long-term insurer, the amount
is zero.
“statutory accounting principles” means accounting principles, requirements or
practices in relation to financial reporting that are prescribed or stated in the Act,
statutory instruments, enforcement notices, circulars and guidelines issues by
the Authority.
“solvency margin” means the excess of available capital over minimum capital
requirements; and
“undertaking” means a commitment, a business contingency recovery plan,
promise or other future conduct that a licensed person provides to the Authority
in order to address any concern raised by the Authority in relation to the capital
adequacy requirement.
6
PENSIONS AND INSURANCE AUTHORITY
PART 2: BACKGROUND
Risk Based Capital Framework – The Concept
7. To reflect the economic impact of material risks on balance sheet sheets, the
Authority adopted the risk based capital framework (RBC). The RBC framework
models material risks that affect reporting entities by identifying material risks using
modelling techniques.
8. RBC defined as “a method of measuring the minimum amount of capital appropriate
for insurers or reinsurers to support its overall business strategy and operations in
consideration of size and risk profile.
9. Capital is defined as the “the excess of the value of assets over the value of
liabilities”. An efficient way for insurers to demonstrate financial soundness is to meet
regulatory levels of capital prescribed by the Authority – and maintain sufficient levels
of capital resources.
10. The objective of the Authority’s RBC is to ensure that insurance undertakings have
sufficient assets to absorb unforeseen losses to safeguard the interest of
policyholders with a high confidence level and safeguard the integrity of the financial
system. The RBC also aims to achieve the following;
(a) Provide flexibility for insurance undertaking to operate at varying risk levels in line
with business strategies, as long as their hold commensurate capital;
(b) Provide explicit quantification of solvency buffers with the aim of improving
transparency;
(c) Provide incentives for insurance entities to put in place appropriate risk
management infrastructure and adopt prudent risk management practices;
(d) promote consistent measurement of assets and liabilities – and quantification of
technical provision;
(e) promote holding of quality assets to absorb losses;
(f) provide mechanisms for an early warning system for the deterioration in the capital
adequacy level of an insurer, hence allowing for decisive, prompt and pre-emptive
supervisory actions to be taken.;
(g) align the jurisdiction with international best practices i.e. ICP’s and other
jurisdictions; and
(h) Provide a multi-layer supervisory regime consisting of three pillars ;- the
maintenance of minimum financial requirements (for technical provisions,
7
PENSIONS AND INSURANCE AUTHORITY
appropriate assets and resources), supervisory review processes and measures
to foster market discipline (use of best practices).
11. In broad terms, the CAS RBC framework assesses the amount of capital resources
required to meet stresses reflecting the entity’s risk appetite and set minimum levels
of capital. The RBC framework captures non-linearity and a combination of risks
affecting entities under various stressed conditions.
12. In general, when calculating the CAS the Authority will adjust assets of an insurer or
reinsurer to reflect the true economic value or the likely realizable values under the
wind-up scenario. Generally, these adjustments will be made via the deduction and
capital charge approach.
(a) Deduction Approach: Not admitting a portion of the economic value of the
asset for solvency purposes. This is the approach used in the calculation of
Available Capital; and
(b) Capital Charge Approach: risks associated with economic values placed on
assets are assessed and the potential deterioration of the assets due to
adverse events over a defined time period are quantified – the estimated
deterioration, based on past experience, are used to determine “capital
charges” which are used to adjust the economic value of balance sheet assets
to reflect the risk. This approach is used to determine the Minimum Capital
Requirement.
13. In summary, the purpose of CAS is to quantify the minimum level of assets in excess
of liabilities that will provide a sufficient cushion against random negative fluctuations
in experience in any variables used in the valuation. The quantum of this cushion is
set in such a manner that in the majority of cases a negative experience variation
will lead to a reduced cushion rather than a deficit under the valuation.
14. However, it should be noted that the existence of a CAS framework cannot
guarantee against future financial difficulty - it only helps to make it less likely and
protects the interest of policyholders.
Responsibility for Capital Adequacy and Solvency framework
15. Capital is the cornerstone of an insurers’ or reinsurers’ financial strength. It supports
an insurer or reinsurer’s operations by providing a buffer to absorb unanticipated
8
PENSIONS AND INSURANCE AUTHORITY
losses from its business activities and, in the event of such losses, enables
companies to continue to meet its insurance obligations.
16. As a consequence of the key role played by capital in the financial strength of
companies, the Board must ensure that entities have sufficient capital that is
adequate for the scale, nature and complexity of its business and its risk profile, such
that it is able to meet its obligations under a wide range of circumstances.
17. A reporting entity’s CAS assessment should be closely tied to business planning. In
view of this, entities should have a robust capital forecasting capability that supports
its management of risk over the planning time horizon in line with its stated risk profile
and appetite. Using a total balance sheet prospective solvency approach, a
reporting entity should demonstrate that it has financial resources necessary to
execute its multi-year business strategy/plan in accordance with its stated risk
appetite.
18. To effectively implement CAS requirements as outlined under the Act and the
Insurance General Regulations, Boards of regulated entities must establish
comprehensive enterprise risk management (ERM) frameworks appropriate to the
nature, scale and complexity of their operations and risk profile.
19. A critical component of ERM in relation to capital is that Boards are expected to
implement is the Own Risk and Solvency Assessment framework (ORSA). ORSA is
an internal assessment model associated with an insurer’s current business strategic
plan and the sufficiency of capital resources to support risk exposure.
20. As part of the risk based capital framework, insurers and reinsurers with the Capital
Adequacy ratio (CAR) of less than 150% and those belonging to groups with a CAR
less than 150% MUST develop and submit an ORSA as part of the undertaking
highlighted in Regulation 24(4) of the Insurance (General) regulations.
21. The table below highlights the likely ladder of inventions, among other supervisory
actions outlined in PART XI of the Act, that the Authority may institute in relation to
the CAS requirements.
CAR Ratio
> 150%
150% – 120 %
120 %– 110%
< 110%
Action Level
No Action Required
Management Action
Management & Supervisory Action
Supervisory & Mandatory Action
Description
N/A
Management Action
Management & Corrective Actions
Corrective Actions, Authorized Control,
Mandatory Control, Liquidation
9
PENSIONS AND INSURANCE AUTHORITY
22. An ORSA is a critical component of Stress Tests Requirement (STR’s) that regulated
entities shall perform to quantify the minimum amount of assets that an insurer
should hold in excess of its liabilities.
Own Risk and Solvency Assessment Guidance
23. The ORSA has two primary objectives:
(a) To foster an effective level of ERM through effective identification, assessment,
monitoring, prioritisation and reporting on material and relevant risks using
techniques that are appropriate to the nature, scale and complexity of risks in a
manner that is adequate to support risk and capital decisions; and
(b) To provide a group-level perspective on risk and capital as a supplement to the
existing legal requirement view.
24. As indicated above, an entity that has a CAR of less than 150% will be required to
(submit an ORSA as part of the undertaking);
(a) Regularly, not more than 12 months – conduct an ORSA to assess the adequacy
of its ERM framework, as well as its current and estimated projected future
solvency positions – taking into account various scenarios;
(b) Internally document the process and results of the assessment; and
(c) Provide a high level ORSA summary report annually to the Authority as part of
its undertaking annually and/or upon request.
25. The board and senior management of the reporting entity should take an active part
in the development of the ORSA, including steering, how the assessment is
performed and challenging the results, where necessary.
26. Reporting entities must formulate and document ORSA policies and procedures which must be approved and reviewed every three years by the Board.
27. The ORSA policy developed by a reporting entity should at a minimum include the
following;
(a) Adequate procedures, systems, controls and personnel to identify measures,
monitor and manage the risks arising from the company’s activities on a
continuous basis, and the capital held against risks;
10
PENSIONS AND INSURANCE AUTHORITY
(b) Clearly defined responsibilities, reporting lines and roles of senior management
and staff in relation to the ORSA;
(c) Clearly defined assumptions and quantification of capital needs addressing
material risks identified in the business;
(d) A forward looking perspective of the overall solvency needs assessment –
highlighting the medium and long term perspectives;
(e) Measures to address the impact of identified material risks on capital that are not
explicitly covered by the CAS;
(f) Measures to be used in the ORSA that clearly outlines the valuation and
recognition basis aligned with the Act;
(g) Measures and strategies that clearly analyse the continuous compliance with the
CAS requirements – highlighting the following –
o Potential future material changes in its risk profile;
o The quality and quantity of excess assets and capital resources over a
period of time; and
o The composition of excess assets and quality of capital resources –
across tier 1 and tier 2.
(h) Measures to be taken to continuously comply with the technical provisions;
(i) Measures and disclosure requirements for stress testing and scenario analysis
under the ORSA; and
(j) Disclosure procedures for deviations from assumptions underlying the
computation of the CAR ratio.
28. The ORSA high level summary report, referred to in 20 above, must include the
following;
(a) A statement of the objectives of the ORSA, the expected level of financial
soundness associated with the capital targets and the time horizon over which
the ORSA applies;
(b) A description of key assumptions and methodologies utilized by the company
in its ORSA, including stress testing and scenario analysis;
11
PENSIONS AND INSURANCE AUTHORITY
(c) Triggers for reviewing the ORSA in light of changes to business operations,
regulatory, economic and market conditions, and other factors affecting the
company’s risk profile and capital resources; and
(d) References to supporting documentation and analysis, as relevant.
Financial Statements and Insurance (Statutory) Accounts in the CAS
29. Section 105 mandates regulated entities to submit copies of financial statements
and insurance accounts.
“(1) A licensed insurer, reinsurer or insurance broker shall submit to the Registrar
a copy of financial statements and insurance accounts, signed in accordance with
section 109, within three months after the end of the period to which the account,
balance sheet, return or statement relates.
(2) A licensed insurer, reinsurer or insurance broker shall submit to the Registrar
a certified copy of a report made to its shareholders or policyholders, as applicable,
on the affairs of the licensed insurer, reinsurer or insurance broker within one
month after the making of the report.
(3) A licensed insurer, reinsurer or insurance broker who fails to comply with this
section commits an offence and is liable to pay to the Authority one thousand five
hundred penalty units for each day that the failure to comply continues.”
30. The provision above requires insurers to submit audited financial statements and
Insurance accounts. Section 105 defines company accounts as financial statements
prepared in accordance with the Companies Account. Further, the Act defines
insurance accounts as annual insurer, reinsurance or insurance brokers returns
prepared in a prescribed manner and form.
31. Reporting entities are mandated to submit Insurance accounts by the above provision
hence these are referred to as Insurance Statutory Accounts (ISA). It should be noted
that insurance accounts or statutory accounts are prepared in a prescribed manner
and form and may not mirror financial statements prepared in accordance with
International Financial Reporting Standards (IFRS).
32. The diagram below highlights the key differences between IFRS financial statements
and Statutory Accounts or Insurance Accounts.
12
PENSIONS AND INSURANCE AUTHORITY
IFRS Accounts
Insurance Statutory Accounts
Going Concern
Matching Concept
Income Statement/Earnings Focus
Deferred Expenses
Solvency Concern
Meet Policyholder Obligations
Balance sheet Focus
Disallowed Assets
33. The IFRS Financial Statements focuses on highlighting the going concern of a
regulated entity, matching liabilities and assets in a period. Further, the financial
statements focus on the income statements highlighting the earnings. Insurance
Statutory Accounts (ISA) on the other hand focuses on Solvency – or the ability of a
regulated entity to fulfil its obligations to policyholders.
34. Unlike IFRS accounts that focus on the income statement (maximizing value for
shareholders), ISA focuses on the balance sheet to assess ability of an insurer to meet
policyholder obligations – disallowing assets that may not be readily available to meet
policyholder obligations at a given point.
35. Using a total balance sheet prospective solvency approach, a reporting entity is
required to demonstrate that its financial resources would be readily available to
absorb losses at any given point. IFRS financial statements form a basis for
preparation of ISA – ISA rely on IFRS audited accounts for quality assurance.
36. ISA rely on three key concepts and principles - conservatism, consistency and
recognition.
o The concept of conservatism: is that financial statements should always
provide a margin of protection or safety for policyholders. Conservatism should
be applied when developing estimates in the IFRS Financial Accounts and in the
ISA. The Insurance (General) Regulations requires reporting entities to use best
estimate assumptions.
Financial reporting by insurers requires the use of substantial judgments and
estimates by management. Such estimates may vary from the actual amounts
for various reasons. To the extent that factors or events result in adverse variation
from management’s accounting estimates, the ability to meet policyholder
obligations may be eroded. In order to provide a margin of protection for
policyholders, the concept of conservatism should be followed when developing
estimates as well as establishing accounting principles for statutory reporting.
13
PENSIONS AND INSURANCE AUTHORITY
o The concept of consistency - is that reporting entities should be consistent in
the way they report and submit IFRS accounts and ISA accounts to facilitate
comparability of accounts between different periods. The valuation procedures
should prevent sharp fluctuations – protecting policyholders from sharp
fluctuations that may not reflect the true economic value of assets or liabilities.
Consistency entails that the CAS framework may not provide optionality or
provide options to measure or value assets or liabilities.
o The recognition concept entails that assets that cannot be used for policyholder
claims are not recognized in the regulatory CAS framework. All liabilities on the
other hand are recognized fully.
The principal focus of solvency measurement is determination of financial
condition through analysis of the balance sheet. However, protection of the
policyholders can only be maintained through continued monitoring of the
financial condition of the insurer. Operating performance is another indicator of
an insurer’s ability to maintain itself as a going concern.
Accordingly, the income statement is a secondary focus of statutory insurance
accounting and should not be diminished in importance to the extent
contemplated by a liquidation basis of accounting. The ability to meet
policyholder obligations is predicated on the existence of readily marketable
assets available when both current and future obligations are due.
Certain statutorily mandated liabilities may also be required to arrive at
conservative estimates of liabilities and probable loss contingencies (e.g.,
interest maintenance reserves, asset valuation reserves, and others). Revenue
should be recognized only as the earnings process of the underlying underwriting
or investment business is completed.
37. Section 103 requires reporting entities to reconcile IFRS audited financial
statements and ISA statements on an annual basis. The external Auditor is required
to provide a reconciliation statement at the end of a reporting period.
Role of the External Auditor in the CAS and ISA
38. Section 87 of the Insurance Act, requires entities to appoint an individual or firm as
external auditor.
14
PENSIONS AND INSURANCE AUTHORITY
39. The duties of an external auditor in relation to reporting entities are outlined in Section
89 of the Act. The external auditor is expected to make a report to the shareholders
and express an opinion, in accordance with the Act, any relevant written law and
standard promulgated by the Zambia Institute of Chartered Accountants on the –
(a) “statement of financial position, statement of comprehensive income,
statement of cash flows (IFRS Financial statements) and other financial
statements required to be submitted by the licensed insurer, reinsurer or
insurance broker in accordance with this Act (Insurance Statutory Accounts) ;
and
(b) Compliance of the licensed insurer, reinsurer or insurance broker with
requirements of this Act or other relevant written law, with respect to financial
statements.”
40. Further, under Section 90, an external auditor is expected to report to the Authority
where;
i.
the licensed insurer, reinsurer or insurance broker’s financial soundness is
prejudiced;
ii.
there is a material change in the business of the licensed insurer, reinsurer or
insurance broker which is likely to jeopardise the ability of the licensed insurer,
reinsurer or insurance broker to continue as a going concern;
iii.
the licensed insurer, reinsurer or insurance broker has contravened this Act in
relation to the keeping of accounting records, or has committed an offence
involving fraud or dishonesty;
iv.
the licensed insurer, reinsurer or insurance broker’s program to counter money
laundering, financing of terrorism and proliferation or any other associated
serious offence is inadequate or lacking;
v.
the licensed insurer, reinsurer or insurance broker is unable or unlikely to meet
the margin of solvency; or
vi.
an irregularity has occurred which jeopardises the interests of the policyholders
of the licensed insurer.
41. The annual audit report of the CAR must be prepared separately from the audit report
for the financial statements (as provided under Section 65 and Section 105), and is to
be filed no later than 90 days after the insurers’ financial yearend. The annual audit
opinion provided must be with respect to the current financial year-end.
42. The report on which the auditors opinion is based must include reconciliations of
numbers to the audited annual financial statements and must give full disclosure and
15
PENSIONS AND INSURANCE AUTHORITY
due consideration to the requirements of section 33 of the Insurance General
Regulations.
43. The Zambia Institute of Chartered Accountants has since provided guidance on the
nature of certification that must be provided on the CAS.
Role of the Appointed Statutory Actuary in CAS
44. Section 69 requires a licensed insurer to appoint a qualified actuary to carry out the
duties imposed or conferred under the Act before commencing insurance business.
The statutory actuary’s primary role include the following, among others;
o Provide advice on the licensed entity’s liability valuation;
o Provide critical advice on the licensed entity’s technical provisions – reserving
methodology oversight;
o Provide an opinion on the regulated entity’s ability to meet policyholder reasonable
expectations;
o Periodically provide assessment of price or rate reasonableness/ profit testing for
products and services; and
o Provide an impartial and independent assessment over the overall financial
condition of the insurer using actuarial principles and practices (issue an actuarial
certificate).
45. Further the Act has provided specific duties in relation to long term insurance entities
to include, among others;
o Section 71 – provide a tri-annual valuation report – investigation into the financial
condition of licensed insurer;
o Section 71 – prepare an estimate of the present value of liabilities of the long term
licensed insurer using method and assumptions that are based on generally
accepted principles;
o Section 71. (2) – produce an annual actuarial report annually were a deficit is
observed;
o Section 71. (3) – produce a review of the financial condition of an entity when
appointed or required by the Authority;
o Section 71. (4) – produce an abstract of the actuarial report to the directors of the
company;
o Section 71. (5) – state any limitation in terms of data faced during the valuation
process, if any;
o Section 71. (7) – report to the Authority where the actuary considers that an entity
has failed to comply with the Act or is likely to continue contravening the provision
of the Act.
16
PENSIONS AND INSURANCE AUTHORITY
Capital Adequacy and Solvency Requirement – at a glance
46. Section 64(1) of the Act provides that “A licensed insurer or reinsurer shall not carry
on insurance business unless the licensed insurer’s or reinsurer’s available capital
exceeds the minimum capital adequacy requirement as the Minister shall, by
statutory instrument prescribe.”
47. Statutory Instrument No. 105 of 2022, the Insurance (General) Regulations, provides
under Regulation 24 (2) that “A licensed insurer or reinsurer shall maintain a capital
adequacy requirement of at least one hundred and fifty percent.” Regulation 24(1)
mandates insurers and reinsurers to maintain a solvency margin of at least ten
percent.
48. Capital Adequacy Requirement (CAR) is defined as an amount that will ensure that
the liabilities of the insurer under each policy is less than the amount that will became
available to policyholders when an insurer ceases to operate or make new business.
In technical terms, CAR is defined as “the reserve that a company would need…
with a probability of 1⇢∝ of meeting its present and future liabilities if the company
ceased to make new contracts after one year” (17th Congress of Actuaries Edinburg
– Solvency Measurement).
49. The formulae below shows the definition of CAR;
CAPITAL ADEQUACY REQUIREMENT
Capital Adequacy Requirement (CAR) = (Available Capital/Minimum Capital Requirement) x 100%
Available Capital (AC)
𝐶𝐴𝑅 =
x 100%
Minimum Capital Adequacy Requirement (MCR)
Total Balance Sheet Approach – for CAS Requirements
50. The Authority requires that a total balance sheet approach is used in the assessment
of solvency to recognize the interdependence between assets, liabilities, regulatory
capital requirements and capital resources and to require that risks are appropriately
recognised. The Authority considers the valuation requirements that should be met for
purpose of the CAS assessment of insurers within the context of risk-based solvency
requirements that reflect a total balance sheet approach on an economic basis and
address all reasonably foreseeable and relevant risks. It should be noted that the
concept of economic basis may include amortized cost valuations and marketconsistent valuations.
17
PENSIONS AND INSURANCE AUTHORITY
51. The term ‘total balance sheet approach’ refers to the recognition of the
interdependence between assets, liabilities, regulatory capital requirements and
capital resources. A total balance sheet approach requires that the impacts of relevant
material risks on an insurer’s overall financial position are appropriately and
adequately recognized.
52. It should be noted that the total balance sheet approach is a concept rather than a
particular methodology. The interdependence between the balance sheet and CAS
requirements are reinforced by the requirement for the external auditor to state in his
opinion whether licensed insurers or reinsurers have complied with the provisions of
the Act (Section 98(1)).
53. The Authority will issue additional guidance on the application of the CAS in view of
the revised Insurance Contract Standard IFRS 17 that came in effect on 1st January
2023. It should be noted that the Total Balance sheet approach will continue to be
applied even after full implementation of IFRS 17. It is expected in the interim that a
reconciliation as per the requirements of section 103 of the Insurance Act will be done
to bridge the total assets as per IFRS accounts to the Insurance Accounts.
Quality of Capital Concept – Summary of Capital Components
54. Regulation 25 of the Insurance general Regulation requires entities (existing and
prospective applicants) to take into consideration the quality of capital resources
provided for the business.
The requirement is hereunder reproduced for ease of reference.
Determination of
available capital
25. (1) A licensed insurer or reinsurer shall, in determining available
capital, use a method set out in Part A of the Schedule.
(2) Despite subregulation (1), a licensed insurer or
reinsurer shall consider the following in determining available capital:
(a) permanence of assets or capital elements;
(b) ability of capital resources to absorb losses
when required;
(c) availability of capital resources or assets; and
(d) absence of encumbrances.
55. This part establishes requirements for the adequacy and appropriateness of capital
resources used to meet capital requirements, having regard to their ability to meet
insurers’ obligations to policyholders and creditors and to absorb losses. This includes
the determination of the criteria for assessing the quality of capital components for
inclusion in available capital and the composition of available capital for regulatory
purposes, focusing on the predominance of highest quality capital.
18
PENSIONS AND INSURANCE AUTHORITY
56. The four primary considerations for defining the available capital of a company for the
purpose of measuring the CAS are;o Permanence - the period for, and extent to which, the capital element is
available;
o Ability - the extent to the capital resource is available to absorb losses;
o Availability – the extent to which the capital element is fully paid in and available
to absorb losses;
o Absence of encumbrances and mandatory servicing costs - the extent to
which the capital element is free from mandatory payments or encumbrances.
The Authority further considers Subordination - the extent to which and the
circumstances under which the capital element is subordinated to the rights of
policyholders and creditors of the insurer in an insolvency or winding-up.
QUALITY OF CAPITAL
LOSS ABSORBENCY
Loss absorbency under winding-up/
run-off
Loss absorbency under going concern
Availability
Subordination
Permanence
Absence of encumbrances/
mandatory servicing costs
Figure 1: Characteristics of Capital elements
Source: IAIS – ICP 17
.
19
PENSIONS AND INSURANCE AUTHORITY
57. For purposes of determining the quality of capital, the CAS requirements classifies
the available capital of a licensed insurer or reinsurer into Tier 1 and Tier 2 capital
(Firth schedule). It should further be noted that the CAS requires that “the available
capital of a licensed insurer or reinsurer should be at least seventy-five percent of
Tier 1 capital.
58. For first time applicants, it is assumed that the balance sheet has negligible liabilities,
hence the Minimum Paid-Up share Capital (or the Minimum Capital Requirement)
shall be equal to the available capital and should meet the “seventy-five twenty five”
criteria as provided under the Regulations.
59. Paid-up share capital generally refers to capital that has been received with finality
by the entity, is reliably valued, fully under the entity’s control and does not directly
or indirectly expose the entity to the credit risk of the shareholder or investor.
60. The prospective applicant must provide proof of adequate capital resources to meet
the Minimum Capital requirement that comply with the above criteria as provided
under Regulation 6(2) (o).
S/N
1
2
3
License Category
General Insurance
Long-term Insurance
Reinsurer
Minimum Capital Requirement
K 10,000,000.00
K 12,000,000.00
K 20,000,000.00
61. At no point will the available capital for both existing and first time applicants for
insurance licenses be less than the entry minimum capital requirement.
62. In line with 61 above, a reporting entity shall maintain the composition of the entry
capital requirement to reflect 75% in tier one capital resources represented by the
criteria set out in the Insurance General Regulations and expounded below.
Qualifying Criteria for inclusion of capital instruments in Tier 1
63. The application of this criteria should preserve the quality of the instruments by
requiring that they are deemed fully equivalent to common shares in terms of their
capital quality as regards loss absorption and do not possess features that could
cause the condition of the insurer to be weakened as a going concern during periods
of market stress.
64. Tier 1 capital shall be made up of;
o Issued and fully paid-up ordinary shares;
o Surplus (share premium) resulting from the issuance of instruments included in
common equity capital; and
20
PENSIONS AND INSURANCE AUTHORITY
o Retained earnings;
65. Tier 1 capital resources shall be supported by balance sheet assets comprising of
cash and cash equivalents, government securities or fixed term deposits.
66. When assessing the admissibility of Tier 1 Capital resources, the Authority may
consider the following additional factors which must be fulfilled;
a) The entity does not, in the sale or marketing of the instrument, create an
expectation at issuance that the instrument will be bought back, redeemed or
cancelled, or the contractual terms provide an feature that might give raise to
such expectations;
b) Distributions are paid out of distributable items (retained earnings included).
The level of distribution is not in any way tied or linked to the amount paid at
issuance and is subject to a contractual cap;
c) There are no circumstances under which the distribution are obligatory; nonpayment is, therefore, not an event of default;
d) Distributions are paid only after all legal or contractual obligations have been
satisfied, and payment on more senior capital instruments have been made.
This means that there are no preferential distributions, including in respect of
other elements classified as the highest quality issued capital;
e) The resources are in form of issued capital that takes the firs and
proportionately greatest share of any losses as they occur. Within the highest
quality capital, each instrument absorbs losses on a going concern basis
proportionately and pari passu with all the others;
f) The paid-in amount is recognized as equity capital ( i.e. not recognized as a
liability) for determining the CAS;
g) It is directly issued and paid-up and the entity cannot directly or indirectly have
funded the purchase of the instrument. Where the consideration for shares is
other than cash, the issuance of the common share is subject to the prior
approval of the Authority;
h) The paid-up amount is neither secured nor covered by a guarantee of the
issuer or related party or subject to any other arrangement that legally or
economically enhances the seniority of the claim;
21
PENSIONS AND INSURANCE AUTHORITY
i) The capital instrument is only issued with the approval of the owners of the
issuing insurer, either given directly by owners or, if permitted by applicable
law, given by the Board of directors or other persons duly authorized by the
owners; and
j) The instrument is clearly and separately disclosed on the entity’s balance
sheet, prepared in accordance with the relevant accounting standards.
Qualifying Criteria for Inclusion of Capital Instruments in Tier 2
67. The Insurance (General) Regulation provides that Tier 2 capital shall be the
aggregate of cumulative irredeemable preference shares, capital stocks and other
similar capital instruments, undisclosed reserves, subordinated term debt and
revaluation reserves for properties.
68. For new entrants any capital instrument provided or issued that does not meet the
Tier 1 criteria i.e. supported by cash or cash equivalents, government securities or
fixed term deposits shall be classified as Tier 2 Capital.
69. When assessing the admissibility of Tier 2 Capital resources, the Authority may
consider the following additional factors; a) The instrument must be subordinated to policyholders, general creditors and
debt holders of the entity;
b) The instrument is perpetual, i.e. there is no maturity date and other incentives
to redeem it;
c) The instrument should not contribute to liabilities exceeding assets;
d) The instrument cannot have a credit sensitive dividend feature, i.e. a dividend
or coupon;
e) The instrument cannot have any features that hinder recapitalization, such as
provisions that require the issuer to compensate investors if a new instrument
is issued at a lower price during a specified timeframe; and
f) Any instrument that does not qualify as Tier 1 may be considered for Tier 2,
subject to approval.
70. Where an entity considers an amendment or variation to its Tier 2 instrument’s terms
and conditions that may affect the recognition for CAS purposes, such an
amendment or variation should only be done with prior approval of the Authority.
22
PENSIONS AND INSURANCE AUTHORITY
PART 3: DETERMINATION OF AVAILABLE CAPITAL
71. Regulation 25 cited above, mandates insurers or reinsurers to use a method set out
in the fifth schedule of the regulation to determine available capital. Part A of the fifth
schedule is reproduced, hereunder, for ease of reference. It should be noted that the
Available Capital computation applies to both general insurers, long-term insurers and
reinsurers.
72. Generally, when determining the Capital Adequacy Requirement
PART A
(Regulation 25)
i.
Determination of Available Capital Requirement
Available Capital = Total Balance Sheet Assets – Disallowable Assets – Total Balance
Sheet Liabilities
Where
1.
Total Balance Sheet Asset represents total value of assets derived from
International Financial Reporting Standards audited statement of financial position;
2.
Disallowable Assets means assets defined in the Insurance (general) Regulation
that must be deducted from the total value of balance sheet assets; and
3.
Total Balance Sheet Liabilities represents total value of liabilities derived from
International Financial Reporting Standards audited statement of financial position.
23
PENSIONS AND INSURANCE AUTHORITY
73. Disallowable assets are defined as (a) Goodwill and other intangible assets;
(b) Deferred tax income or expenses and
current tax assets or future income tax
credits;
(c) Branding and research development costs;
(d) Assets pledged to support credit facilitates
obtained by related parties
(e) Any asset title, which is held by a person
other than the insurer;
(f) Any asset that is a mortgage or charged for
the benefit of a person other that the
insurer;
(g) A guarantee given to the insurer, other than
a guarantee given by a reinsurer;
(h) Loans to agents, directors, associates,
related parties or shareholders;
(i) Surplus or deficit of right of use assets over
lease liabilities;
(j) Prepayments;
(k) Receivables from related parties;
(l) Receivables outstanding from insurance
brokers for more than fourteen days;
(m) Merchandise inventory and corporate
stationary;
(n) Any implicit accounting assets;
(o) Deferred acquisition costs; or
(p) Any other assets that the Authority may
determine.
PART 4: DETERMINATION OF CAPITAL ADEQUACY AND
SOLVENCY REQUIREMENT FOR GENERAL INSURERS &
REINSURERS
74. Kindly note that this guidance note will use an imaginary balance sheet of XYZ
General Insurance Limited below to illustrate computation of various requirements.
Kindly note that Available capital applies to all insurers and reinsurers.
24
PENSIONS AND INSURANCE AUTHORITY
XYZ GENERAL INSURANCE LIMITED
As at 31 December 20X2
ASSETS
NOTES
ZMW
Property & Equipment
71,745,508
Long term Secured Loans
1,362,000
Intangible Assets - Insurance software
4,067,272
Current Tax
893,631
Equity Securities
1,298,562
Held to Maturity investments
4,463,200
Insurance Receivables
35,280,726
Deferred acquisition costs
1,252,644
Loan to Related Parties
2,933,006
Loan Receivables
2,738,338
Other receivables
4,486,974
Reinsurance Receivables
1,828,202
Prepayments
1,055,840
Cash and cash equivalents
TOTAL ASSETS
69,826,759
203,232,662
EQUITY & LIABILITIES
Share capital
10,000,000
Share premium
1,229,905
Revaluation reserves
18,681,647
(Deficit on reserves) Revenue reserve
Total Equity
29,143,083
59,054,635
Insurance Funds and Provisions
Unearned premium Provision
42,582,762
Outstanding claims
18,544,818
IBNR
Total Policy holder Liabilities
3,438,239
64,565,819
Liabilities
Reinsurance & agents Payables
52,516,582
Other Payables
15,155,736
Deferred tax Liability
11,906,727
Long term loan
-
Current tax liabilities
-
Amounts due to related parties
Total Other Liabilities
33,163
79,612,208
Total liabilities
144,178,027
TOTAL EQUITY & LIABILITIES
203,232,662
75. Using the total balance sheet approach, Available Capital shall be computed as
follows;
25
PENSIONS AND INSURANCE AUTHORITY
ii.
Determination of Available Capital Requirement XYZ General Insurance BS
Available Capital = Total Balance Sheet Assets – Disallowable Assets – Total Balance
Sheet Liabilities
Where
4.
Total Balance Sheet = K 203,232,662.00
5.
Disallowable Assets = K 11,135,121.00
o
Prepayments
K 1,055,840
o
Related Party Receivable:
K 2,933,006
o
Deferred Acquisition Costs;
K 1,252,644
o
Current tax Asset:
K 893,631
o
Property (Title Not in entity’s)
K 5,000,000
o
Total Disallowable
K11,135,121
All asset meeting the criteria of disallowable should be considered.
6.
Total Balance Sheet Liabilities = K 144,178,027
Therefore;
Available Capital = K 203,232,662 – K 11,135, 121– 144,178,027
= K 47,919,514
The Available Capital Requirement of XYZ General Insurance Limited is equal to K
47,919,514
In the formula for CAR, we have determined Available Capital (AC)
CAPITAL ADEQUACY REQUIREMENT
Capital Adequacy Requirement (CAR) = (Available Capital/Minimum Capital
Requirement) x 100%
𝐶𝐴𝑅 =
47,919,514 (AC)
x 100%
Minimum Capital Adequacy Requirement (MCR)
76. The requirement for computing Available Capital (AC) is standard for all insurers (longTerm, General and Reinsurers). For first time applicants, it is assumed that the
Available Capital (AC) is equal to Minimum entry capital requirement. It should meet
the capital instrument tests for Tier 1 and Tier 2 capital instruments described above.
26
PENSIONS AND INSURANCE AUTHORITY
77. The guidance will provide guidance on the determination of the Minimum capital
requirement (MCR) for General Insurers and reinsurers.
Determination of Minimum Capital Requirement for General Insurers or
Reinsurers
78. Regulation 26 of the Insurance (General) Regulation provides as follows;
Minimum Capital
26. A licensed general insurer or reinsurer shall have the required minimum
Adequacy
capital which shall be the higher of -
for
general insurer or
(a)
reinsurer
(b)
An amount determined by aggregating capital required for (i) balance sheet assets as set out in the fifth Schedule;
(ii) investing above concentration limit as set out in the fifth
Schedule;
(iii) policy liabilities which shall be ten percent of the aggregate of
unexpired risk reserve, claims incurred but not settled and
claims not reported reserves;
(iv) catastrophes which shall be a provision of five percent of the
preceding year’s net claims on all classes of insurance;
(v) reinsurance ceded as set out in the fifth Schedule;
(vi) operational risks which shall be a provision of five per cent of
the total earned premium for the current reporting period; and
(vii) guarantees issued to contract holders which shall be fifteen
percent of the sum guaranteed; or
An amount representing a paid-up share capital requirement set out
in the fifth Schedule.
79. The Minimum Capital Requirements (MCR) comprises two elements - an insurance
undertaking will be required to hold the higher of the two requirements –
(a) An amount that will be determined in accordance with the regulation using a
factor based or risk based approach. The Minimum capital adequacy
requirement is a risk based capital measurement that ensures that an
insurance undertaking withstands significant adverse deviations in experience
from expected.
(b) An amount representing the minimum capital entry or paid up capital
requirement supported by Tier 1 capital resources - amounting to ZMW
12,000,000 for life insurers, ZMW 10,000,000 for general insurers and ZMW
20,000,000 for reinsurers.
80. As provided above, the general insurer or reinsurer’s MCR is calculated on a
consolidated basis and determined as the sum of the capital requirements for each
specific risk component. The MCR risk factor based formula assumes deviation from
27
PENSIONS AND INSURANCE AUTHORITY
expected and quantify the impact of such deviation on the economic balance sheet
of an insurer or reinsurer.
81. The general insurer’s or reinsurers MCR is calculated as the aggregate or sum of (a) Capital required for balance sheet risks (CBA = BA* F1) ;
(b) Capital required for investing above concertation limits (CIL = (I – IL)* F1);
(c) Capital required for policyholder liabilities and technical provisions
(CPL = UPR+OCR+IBNR)*10%);
(d) Capital required for catastrophe risks (CCR = NC*5%);
(e) Capital required for reinsurance risks (CRC = RC*F2);
(f) Capital required for operational risks (COR = NEP * 5%); and
(g) Capital required for guarantees issued to contract holders (CGL= GL* 15%).
MCR = ∑ [(BA * F1) + ((I-IL)*F1) + ((UPR + OCR+ IBNR) *10%) + (NC * 5%) + (RC*F2) +
(NEP*5%) + (GL * 15%)]
Where
1. BA means the balance sheet assets;
2. F1 means the risk factor provided in Table 1 below;
3. I means value of investment in an allowable investment;
4. IL means investment concentration limits provided in Table 2 below;
5. UPR, INBR and OCR means the reserves provided under regulations 9, 10 of these
Regulations and Section 62 of the Act respectively;
6. NC means the preceding year’s net claims on all classes of business;
7. RC means reinsurance value ceded to various reinsurers;
8. F2 means the risk factor provided in Table 3 below;
9. NEP means the preceding year’s net earned premium on all classes of business.
10. GL means the total sum assured of the guarantee policies or contract issued by a licensed
general insurer.
Below is a demonstration of how, specific capital for various risks are expected to be
calculated.
i.
Determination of Capital Required for balance sheet Assets
82. The determination of capital required for balance sheet assets addresses the following
risks; (a) Credit risks: this is the risk of default by contract holders, reinsurers and other
transactional counterparties as well as the loss in the value of assets due to
28
PENSIONS AND INSURANCE AUTHORITY
deterioration in quality of assets. The Authority has provided “factors” that should
be used to determine the amount of capital to support the credit risk exposure. The
principal determinates in Authority’s exposures, include;
o Asset portfolio composition, including size and type of exposures;
o Credit policy and strategies;
o Likelihood of default, including the financial strength of counterparties i.e.
reinsurers credit rating and their ability to meet commitments; and
o The extent of loss should default actually occur.
(b) Investment and market risks: Market risks referrers to the risk of loss arising from
adverse movements in the level or volatility of market rates or prices (interest rates,
foreign exchange rates, equity, commodity, property and credit prices). Investment
risk refers to the risk of an adverse movement in the value of on-balance sheet
assets and/or off balance sheet obligations and is derived from a number of
sources, including market risk and investment concentration risks. The CAS has
provided investment concentration limits factors address the market and
investment risk. When assessing an entity’s market and investment risks, the
Authority objective is to;
o The size, nature and complexity of market and investment activities;
o Asset and liability mismatch;
o Sensitivity to market risks;
o Balance sheet instruments and foreign currency exposure;
o Diversification across asset classes and asset allocations; and
o Nature of asset valuations.
83. Capital for balance sheet assets seeks to determine the real economic value of assets
presented in the IFRS compliant financial statements as reconciled to the Insurance
Statutory Accounts- ISA.
84. All balance sheet exposures are subject to a specific risk factor that represents a
prescribed factor determined by the Authority. To determine the capital requirements
for balance sheet assets, factors are applied to the balance sheet values or other
specified values of these assets.
85. The computations thus takes the balance sheet amount for each asset multiplied by
the specific capital factor as highlighted in the table below (provided in the fifth
schedule of the Insurance (General) Regulation. A summation of the results will give
the capital required for balance sheet asset risks and will form part of the MCR.
Capital For balance Sheet Assets = Balance Sheet Asset * Risk Factor (F1).
29
PENSIONS AND INSURANCE AUTHORITY
FACTOR (F1)
0%
2%
3%
4%
8%
10%
15%
30%
40%
100%
UNLISTED
ASSET DESCRIPTION



















Cash
Deposits in an institution licensed under the Banking and Financial Services Act
Government Securities
Investment income due and accrued from Government Securities
Receivables from other insurance companies
Receivable outstanding for less than 8 months from re-insurers
Receivables outstanding from the Government of the Republic
Premiums receivable for less than 60 days
Deposits in excess of 25% limits per institution licensed under the Banking and Financial
Services Act
Term deposits, Bonds and Debentures expiring or redeemable in one year
Term deposits, Bonds and Debentures expiring or redeemable in one year or less from
Corporations
Residential Mortgage
Term deposits, Bonds and Debentures expiring or redeemable in one year or more from
Corporations
Commercial Mortgage
Other secured loans
Loans to Corporations
Premiums outstanding for 60 days to 1 year
Preference shares
Receivables from Corporations













Shares in listed companies
Investment in collective investment schemes
Investment Properties
Other investments income due and accrued from listed companies
Receivables from related companies outstanding for less than 12 months
Shares in unlisted companies
Land and Building for insurer’s own use
Other investments income due and accrued from unlisted companies
Investments in related companies
Outstanding receivables from re-insurers for more than 8 months but less than 1 year
Premiums outstanding between 1 year and 2 years
Receivables from the related companies outstanding for less than twelve months
For assets classified as “Other Assets” the lesser of o Other Assets capital requirement using this capital charge; or
o 1% of Total Assets

Unsecured loans

Assets situated outside Zambia

Loans to related companies

Loans to directors, Agents and their Associates (including those from related companies)

Outstanding premiums for more than 2 years

Outstanding receivables from re-insurers for more than 1 year

Outstanding receivables from related companies for more than 1 year

Fixed assets in excess of their written down values

Any excess of “Other Assets” over 1% of total assets.
New assets, not currently listed, shall be categorized according to their inherent risk and this
categorization shall be agreed with the Authority.
ASSETS
MULTIPLE
CATEGORIES
Where information is not available to determine the redemption/maturity of an asset, and the asset
falls in more than one category, insurers must use the category with the highest capital factors for
that asset.
30
PENSIONS AND INSURANCE AUTHORITY
86. For purposes of Regulation 26, a licensed insurer and reinsurer shall use the factors
provided in the table above to determine the capital required for balance sheet assets
and investing above concentration limits.
87. Below is an illustration from XYZ balance sheet above. Calculation of Balance sheet
Asset capital Charge.
Property plant & Equipment/Investment in Property
ASSET
AMOUNT
AMOUNT
BALANCE
F’
NOTES
Property &
Equipment
Building (Own Use)
1,929,864
1,929,864
30%
1
CAPITAL
CHARGE
578,959.20
Investment
Property
Motor Vehicles
Furniture & Fittings
Computer
Equipment
Other fixed Assets
Total
62,466,542
62,466,542
15%
1
9,369,981.30
3,761,826
1,500,000
2,000,000
3,761,826
1,500,000
2,000,000
40%
40%
40%
2
1,504,730.40
600,000.00
800,000.00
87,276
71,745,508
87,276
40%
34,910.00
12,888,580.90
Notes:
1. It is assumed that the plant and building capital charge of 30% (for own use). If the property is
used as an investment vehicle, then a 15% capital charge should apply or alternatively the
portion of the property used for investment should be recorded as such in the financial
statements.
2. Other properties have no concentration limit and attract a capital charge of 40% under other
assets. (These assets could attract a 0% capital charge as they are used to generate revenue
in the business – however, strict application requires that a 40% capital charge is applied
across these assets).
Intangible, Tax, Acquisition, Prepayments and Loans to related parties
ASSET
ITEM
AMOUNT
BALANCE
F’
Intangible
Tax
Acquisition
Loan
Advance
TOTAL
Software
Current Tax
Deferred costs
Related Party
Prepayments
4,067,272
893,631
1,252,644
2,738,338
1,055,840
4,067,272
893,631
1,252,644
2,738,338
1,055,840
100%
100%
100%
100%
100%
NOTES
3
3
3
4
3
CAPITAL
CHARGE
4,067,272
893,631
1,252,644
.
1,055,840
10,007,725
3. All assets that are disallowed for the calculation of Available capital attract a 100% capital
charge.
4. Loans to related parties are disallowed when calculating Available Capital and attract
charge of 100%.
31
PENSIONS AND INSURANCE AUTHORITY
F’
NOT
E
15%
30%
5
5
150,000.00
89,568.60
4%
6
138,528.00
8%
6
80,000.00
3%
8%
40%
100%
7
7
7
7
548,156.16
914,939.36
982,266.80
3,116,445.00
2%
8
25,594.83
40%
8
219,384.24
1,828,202
40%
9
731,280.80
69,826,759.0
0
0%
10
0
ASSET
ITEM
AMOUNT
Equity
Equity/Securities
Listed
Unlisted
Held to maturity Investments
Term Deposits Maturity within
1 year
Term Deposits maturity over 1
year
Insurance Receivables
Premium less 60 days
Premium 61 to 365 days
Premium 1 to 2 years
Premium Over 2 years
Reinsurance Receivables
Reinsurance receivables less 8
month
Reinsurance 8 months & more
1,298,562.00
1,000,000
298,562
4,463,200
3,463,200
Other
Other Receivables
Cash
Cash and Cash Equivalent
HTMI
Receivables
Receivables
TOTAL
1,000,000
35,280,726
18,271,872
11,436,742
2,455,667
3,116,445
1,828,202
1,279,741.40
548,460.60
CAPITAL
CHARGE
6,996,163.79
5. Shares in listed companies attract 15% capital charge while, shares in unlisted companies
attract a 30% capital charge. It is imperative that entities provide a detailed breakdown in
the notes of the breakdown of these assets.
6. Held to maturity investment, other than those in a Bank of Zambia regulated institution
attract a capital charge that is lower. Held to maturity investments with a term of one year
or less attract a 4 % capital charge while those that are redeemable in one year or more
attracts an 8% capital charge.
7. Insurance receivable assets are classified according to the age – the longer it takes for a
general insurer to recover from policyholders the higher the risk. The capital charges
ranges from 2% to 100%. It is assumed that receivables over 2 years are unrecoverable
hence a capital charge of 100%.
8. Reinsurance risk management is critical for the operation of an entity, as such, a reporting
entity is required to manage the reinsurance asset and ensure that economic benefits flow
to the company when required. Reinsurance receivables over 8 months attract a 40%
capital charge while those below eight months attract 2%. Huge outstanding receivables
is an indication of poor credit risk management and underwriting management.
9. Other receivables attract a 40% capital charge. However, it is imperative that the entity
discloses the other receivables.
88. Therefore, from the above calculation, Capital for balance sheet assets is aggregated
as follows;
32
PENSIONS AND INSURANCE AUTHORITY
Capital for Balance Sheet Assets
=
12,888,580.90 + 10,007,725.00 + 6,996,163.79
= 29,892,469.69
ii.
Determination of Capital for Investing above Concertation Limits
89. The nature of insurance business necessitates the investment in and holding of assets
sufficient to cover technical provisions (policyholder liabilities) and capital
requirements. The quality and characteristics of an insurer’s asset portfolio and the
interdependence between the insurer’s assets and its liabilities are central to an
assessment of an insurer’s or reinsurer’s solvency position.
90. Investment risk arises from potential changes in rates or prices in various markets
such as for interest rates, foreign exchange rates, equities, real estate, and other
market risk exposures. Exposure to this risk results from trading, investing, and other
business activities, which create on- and off balance sheet positions.
91. When developing concentration limits for general insurers and reinsurers, the
Authority considered the governance arrangements and status of the
capital/investment markets in the country. Ideally, insurers should have been provided
more flexibility to choose particular investments to best manage investment risks appropriate to they risk appetite and overall financial objectives. However, experience
on the Zambian market has shown in increased appetite to invest in assets that do not
support liquidation of policyholder liabilities in line with general insurance or short-term
business. As such, the Authority has embraced a principle based and risk based
approach in the CAS framework.
92. The table below provides for the concentration limits of various assets computed as a
percentage of total balance sheet assets.
The excess amount above the
concentration limit attracts a capital charge as stipulated under the table for capital
charges on balance sheet assets.
93. For purposes of regulations 26 (a) (ii) and 32, a licensed insurer shall apply the
concentration limits set out below.
DESCRIPTION
LIMITS
1. Government Securities and Cash
2. Deposits in Institutions Regulated by Bank of Zambia (institutional limit of 25%)
3. Listed Equity
100%
100%
10%
33
PENSIONS AND INSURANCE AUTHORITY
4.
5.
6.
7.
8.
9.
Unlisted Equity
Related Party Investments
Debt Securities – Secured & Listed
Debt Securities – Unsecured & Unlisted
Investment in Fixed Properties
Collective Investment Schemes
5%
5%
5%
2%
10%
0%
94. Below is an illustration from XYZ balance sheet above on the calculation of investment
concentration limit.
DESCRIPTION
LIMIT
Cash/Bank Balances
100%
Total Deposits BoZ FSP’s
FNB
STANBIC
BARCLAYS
STANCHART
ECO
100%
25%
25%
25%
25%
25%
Listed Equity
Unlisted Equity
Related Party Investments
Term Deposits/Debt Securities
Debt Securities – Unlisted
Investment in Fixed Properties
TOTAL
10%
5%
5%
5%
2%
10%
A
F
ACTUAL
EXCESS
K’CHARGE
0
69,826,759.00
-
-
49.5%
28%
19%
24%
12%
7%
3%
69,826,759.00
19,551,492.52
13,267,084.21
16,758,422.16
8,379,211.08
4,887,873.13
2,094,802.77
2,094,802.77
-
62,844.08
-
0.7%
0.2%
2.1%
3.2%
0%
44.3%
15%
30%
40%
15%
30%
15%
1,000,000
298,562
2,933,006
4,463,200
62,466,542
140,988,069
56,219,887.80
8,432,983.17
8,495,827.25
95. Therefore, from the above calculation, Capital for investing above concentration limits
is aggregated as follows.
Capital for Investing above Concentration Limits
=
62,844.08 + 8,432,983.17
= 8,495,827.25
96. Reinsurers are excluded from this requirement and only an insurer is mandated to
invest within set limits by the Insurance Act.
34
PENSIONS AND INSURANCE AUTHORITY
97. In the internal capital assessment models or ORSA, reinsurers will however be
expected to demonstrate how they have matched investments to the nature of
products reinsured.
iii.
Determination of Capital Required for Technical Provisions
98. Determination of capital resources required for technical provisions or policyholder
liabilities is meant to address variations that may arise from potential claims and actual
claims to policyholders. This is the risk that for any class of risk insured, the present
value of actual claims payable, will exceed the present value of actual premium
revenues generated – hence the need to calculate “Technical reserves”. Exposure to
this risk results from the present value of losses being higher than the amounts
originally estimated.
99. Technical provisions represent the amount that an insurer or reinsurer requires to fulfil
its insurance obligations and settle all expected commitments to policyholders and
other beneficiaries arising over the lifetime of the insurer’s portfolio of insurance
contracts.
100. Technical provisions are normally the largest item on the general insurer and
reinsurer’s balance sheet. A key consideration for entities in making significant
decisions is the excess of the value of assets over technical provisions, other liabilities
and the minimum capital requirement. The excess of assets or available capital over
the minimum capital requirement (MCR) determines an entities ability to expand
existing business, move into new areas, moving out of more volatile capital-intensive
risks or reducing the volume of business they write.
101. Technical provisions are a direct input into the balance sheet and therefore form a
key input into the computation of the MCR and overall the CAR, as it models potential
movements in the balance sheet over a one year time horizon. In view of the foregoing,
if the computation of technical provisions is wrong, there is a potential double impact
as the risk-based capital could equally be wrong. This would amplify the impact on the
Available Capital (AC) over the MCR.
102.
The technical provision risk includes uncertainties around;
a) The ultimate amount of net cash flows from premiums, commissions, claims
and related settlement expenses; and
b) The timing of the receipt and payment of these cash flows.
103. The Authority has provided a market consistent approach to valuation of technical
provisions in the Regulations. Technical provisions represents the amount of
35
PENSIONS AND INSURANCE AUTHORITY
resources that a general insurer or reinsurer would have to pay in order to transfer its
policyholder obligations to another insurer or reinsurer.
104. For purposes of determining capital required at the reporting date, the risk
associated with insurance exposure is divided into four parts;
o
o
o
o
Provisions for Claims Incurred but note settled (OCR);
Incurred But Not Reported Reserves (IBNR);
Unearned Premium Reserves (UPR); and
Reserves for Unexpired Risk (URR).
105. Policyholder liabilities and technical provisions is the aggregate of OCR, IBNR,
UPR and URR. Incurred But Not reported reserves (IBNR) is based on best estimate
calculations using the chain ladder method while the other provisions depend on the
actual recorded liability or risk margin.
106. Section 62 provides as follows
“A licensed insurer shall make adequate provisions in a licensed insurer’s account for
liabilities in respect of claims incurred but not settled at the end of each financial
year, including provisions for claims not reported but computed as the Minister
may, by statutory instrument, prescribe.”
Regulation 31(1) provides as follows;
(1) “A licensed insurer shall, for the purposes of section 62 of the Act, make provisions
for claims not reported using the chain ladder method.”
Reserves for Claims Incurred but not Settled (Outstanding Claims Reserve)
107. Section 62 of the Act requires entity’s to make adequate provisions in respect of
claims incurred but not settled or outstanding claim reserves. As soon as a potential
claim is reported, an entity is required to estimate and record the claim cost. The
provision is expected to be computed and recorded on the following basis;
a) The gross and net written premium basis;
b) A class of insurance business basis; and
c) An aggregate of classes of insurance business.
108. The requirement to provide a breakdown is provided for under Regulation 30(2) of
the insurance general regulation. In the Notes to the CAS statement, an insurer or
reinsurer is required to provide a breakdown highlighting on a gross and net claims
basis, by class of business and aggregate level for the OCR.
36
PENSIONS AND INSURANCE AUTHORITY
109. The illustration below, from XYZ General insurance Limited, shows the breakdown
of OCR that is expected to accompany the CAS computation and statement.
Class
Business
Property
Transport
Motor
Liability
Engineering
Accident
Guarantee
Other
Total
of
Gross Claims
Recorded
5,980,704
7,276,986
16,261,950
4,717,801
3,488,280
1,513,257
0
1,900,844
41,139,824.25
Reinsurance
Recoveries
3,198,981
3,938,919
9,400,368
2,492,423
1,819,246
717,464
0
973,603
22,595,006.25
Net Claims
2,781,732
3,338,067
6,861,583
2,225,378
1,669,034
741,792
0
927,240
18,544,818.00
Incurred but not Reported Reserves
110. Incurred But Not Reported Reserve (IBNR) - Section 62 of the Insurance Act
No. 38(2021), reproduced above, requires reporting entities to make adequate
provisions for incurred but not reported claims (IBNR) using the chain ladder method.
111. The chain ladder method is defined as a technique that uses past experience data
to forecast or determine the amount of claim reserves that an insurer or reinsurer
should maintain. A reporting entity is required by law to maintain this reserves in an
amount estimated using the chain ladder method to provide for the payment of all
losses or claims incurred on or prior to the date of settlement.
112.
The IBNR calculated by an entity should be sufficient to;
i.
Cover the cost of claims that have occurred before the end of the period but
have not been reported to the insurance undertaking;
ii.
Cover the cost of claims that have been reported by the end of the period but
for which the raised outstanding claims reserved are not sufficient (normally
referred to as an incurred but not enough reported reserve (IBNER))
iii.
The claims handling and adjustment cost associated with each of those claims.
113.
The provision is expected to be computed and recorded on the following basis;
a) The gross and net written premium basis;
b) A class of insurance business basis; and
c) An aggregate of classes of insurance business.
37
PENSIONS AND INSURANCE AUTHORITY
114. Using XYZ General Insurance Limited illustration, IBNR provision is calculated
Gross, net and class - and aggregated and presented in the balance sheet accordingly
Class of Business
IBNR at Gross
Property
Transport
Motor
Liability
Engineering
Accident
Guarantee
Other
Total
593,096.23
730,281.96
1,742,843.35
462,099.32
337,291.25
143,030.74
0
180,507.55
4,189,150.40
Reinsurance Share
77,360.38
111,398.94
470,694.92
49,510.64
27,849.74
5,501.18
0
8,595.60
750,911.40
Net IBNR
515,735.85
618,883.02
1,272,148.43
412,588.68
309,441.51
137,529.56
0
171,911.95
3,438,239.00
115. Reporting entities must disclose by illustrating the chain ladder method per product
line used to calculate the figures in the table above. All reasonable assumptions used
in the calculation must be fully disclosed, including limitation of data faced by reporting
entities the extent to which the limitation have affected the final results.
Unearned premium Reserves (UPR)
116. Unearned premium in simple terms could be defined as the premium, which
corresponds to the period remaining on an insurance policy. UPR is proportionate to
the unexpired portion of the insurance premium paid and appear as a liability (under
IFRS 4) on the entity’s balance sheet.
117.
Section 61 provides that;
61. “A licensed insurer carrying on general insurance business shall, in assessing the
licensed insurer’s liabilities for purposes of annual financial statements, set aside
reserves for the unearned premium to meet liabilities on unexpired risk at the end of
the each financial year, using a method that the Minister may, by statutory instrument
prescribe.”
Regulation 30(1) provides the method that should be used to compute unearned
premium reserve or provision;
30. (1) “A licensed insurer shall calculate the unearned premium reserve, for the
purposes of Section 61of the Act, using the 365th method or a method that assumes
that premium is earned equally over the duration of the insurance contract.”
38
PENSIONS AND INSURANCE AUTHORITY
118. The law has provided the 365th method as the standard method for computing UPR
or any other method that assumes that premium is earned over the life of the policy.
Since UPR is recognized over the policy term in accordance with expected pattern of
loss emergence as derived from actuarial analysis of historical loss development. The
law has provided.
119. Entities using any other method will be required to demonstrate that the method
assumes that premium is earned equally over the duration of the insurance contract.
From XYZ General Insurance balance sheet above, UPR is as shown below.
Class of Business
Property
Transport
Motor
Liability
Engineering
Accident
Guarantee
Other
Total
UPR
6,387,414.00
7,664,897.16
15,755,621.94
5,109,931.44
3,832,448.58
1,703,310.48
0
2,129,138.10
42,582,762.00
Unexpired Risk Provision (URR)
120. Where an insurer has specific knowledge that the premium charged is inadequate
to meet claims and associated costs, an unexpired risk provision of (URR) will need
to be raised in addition to the UPR. Best estimate assumptions based on profit testing
exercise across the business lines will determine the URR raised.
121. Appropriate prudence would need to be taken when calculating the URR – context
and specific circumstances of the insurer must be considered.
122. In our XYZ Insurance Limited above, the insurer is assumed to be charging
appropriate premium for the business. Capital for policy liabilities or technical
provisions is aggregated as below.
XYZ GENERAL INSURANCE LIMITED
Capital Required for Policyholder Liabilities/Technical Provisions
Provision for Outstanding Claims (OCR)
18,544,818.00
Provisions for Incurred But Not Reported Claims (IBNR)
3,438,239.00
Unearned Premium Reserves (UPR)
42,582,762.00
Reserves for Unexpired Risk (URR)
0
Total
64,565,819.00
39
PENSIONS AND INSURANCE AUTHORITY
123. For purposes of regulation 26 (a) (iii), a licensed reinsurer shall compute as part of
the determination of MCR a capital for policyholder liabilities at 10% of technical
provisions and outstanding claims using the guidance provided below for its
determination of technical provisions.
Guidance for Reinsurers’ on the Calculation of Technical Provisions
124. Section 61 and 62 excludes reinsurers in the calculation of Technical provisions,
reinsurers are required to apply and comply with the CAS requirement accordingly.
Further, Regulations 30 and 31 references primary insurers only.
Section 61 & 62, hereunder reproduced for ease of reference states that
61. A licensed insurer carrying on general insurance business shall, in
assessing the licensed insurer’s liabilities for purposes of annual financial
statements, set aside reserves for unearned premium to meet liabilities on the
unexpired risk at the end of each financial year, using a method that the Minister
may, by statutory instrument prescribe.
62. A licensed insurer shall make adequate provision in the licensed insurer’s
accounts for liabilities in respect of claims incurred but not settled at the end of
each financial year, including provisions for claims not reported but computed
as the Minister may, by statutory instrument, prescribe.
125. Reinsurance undertakings are expected to apply the formulas provided on
valuation of technical provisions in a manner that is proportionate to the nature, scale
and complexity of the risks inherent in their business. However, this should not result
in a material deviation of the value of the technical provision from the current amount
that reinsurance undertakings would have to pay if they were to transfer their
reinsurance obligations immediately to another insurance or reinsurance undertaking.
126. Where it is not appropriate to use a method provided, reinsurers should use any
scientific deterministic or stochastic approach that would result in estimating technical
provisions in a more accurate manner. For example, when determining claims
provisions, the reinsurer could use discounted best estimate of all future cash flows
(claim payments, expenses and future premiums) relating to claim events before the
valuation date and add a risk margin. The risk margin is intended to be the balance
that another reinsurer taking on the liabilities at the valuation date would require over
and above the best estimate.
127. Where a reinsurer elects to use best estimate assumptions to compute technical
provisions, the data used should be appropriate, complete and accurate.
40
PENSIONS AND INSURANCE AUTHORITY
128.
For data to be considered appropriate, it should at least meet the criteria below;
o be suitable for the purposes of calculating technical provisions;
o not exhibit undue estimating errors arising from the amount or nature of the
data;
o be consistent with the methods and assumptions used to calculate the
provisions; and
o reflects the underlying risks.
129.
For data to be considered complete, it should at least meet the criteria below;
o be sufficiently granular and include sufficient information to identify trends and
assess the characteristics of underlying risks;
o be available for each homogeneous risk group in the calculation; and
o no relevant data should be excluded from use in the calculation without
justification.
130.
For data to be considered accurate, it should at least meet the criteria below
o the data should be free from material errors;
o the data from different time periods used for the same estimation should be
consistent; and
o the recording of the data should be consistent over time, and performed in a
timely manner.
iv.
Determination of Capital Required for Catastrophe Risks
131. Catastrophes are infrequent events that cause severe loss, injury or property
damage to a large population of exposures. The term “exposures” refers to units for
measuring the size of an insurance portfolio, such as number of policies, number of
property locations, aggregated coverage amounts, or other alternative measures.
While catastrophe is most often associated with the natural events (e.g. earthquakes,
floods or hurricanes), it can also be used when there is concentrated or widespread
damage from man-made disasters (e.g. fires, explosion, pollution or nuclear fallout).
132. The classification of an event as a catastrophe depends on the size of the loss and
impact on an entity or on the entire industry. An entity may utilize an internal model or
criteria to determine whether an event is a catastrophe as it relates to its specific book
of business even if the event has not been labeled as a catastrophe for the industry
as a whole.
41
PENSIONS AND INSURANCE AUTHORITY
133. In non-catastrophe exposures, prices must be set before coverage is sold - future
losses estimated by studying past events. In statistical terms, two conditions should
hold or are desirable to achieve accurate estimates under noncatastrophe: predictable
frequency of claims over time and exposure experience loss independently of other
exposures. Catastrophe exposures differ from noncatastrophe exposures in that they
do not meet the conditions identified above.
134. To provide capital for catastrophe exposures, the Authority has provided for a
provision of five per cent of the preceding’s year’s net claims on all classes of
insurance business. (Regulation 26(a) (iv).
135. From our example of XYZ General Insurance limited, the preceding’s year’s net
claims per class of business are provided in the table below and the Capital for
catastrophe exposures is provided accordingly.
Class of Business
Property
Transport
Motor
Liability
Engineering
Accident
Guarantee
Other
Total
Preceding’s
Year Net Claims
19,378,633.49
1,495,525.93
23,182,645.25
6,832,809.26
0
7,221,180.93
0
1,888,746.13
59,999,540.99
Capital
Charge@5%
968,931.67
74,776.30
1,159,132.26
341,640.46
0
361,059.05
0
94,437.31
2,999,977.05
Capital For Catastrophe = ∑ (Line of Business Preceding’s’ Year Net claims *
Risk Factor of 5%).
= ∑ (968,931.67 + 74,776.30 + 1,159,132.26 + 341,640.46 + 361,059.05 + 94,437.31)
= 2,999,977.05
136.
This section is applicable to all reinsurers.
v.
Determination of Capital for Reinsurance Risk
137. The Authority through various provisions in the Act requires entities to effectively
manage the use of reinsurance and other forms of risk transfer. Reporting entities are
required to establish effective internal controls over the implementation of reinsurance
programmes.
42
PENSIONS AND INSURANCE AUTHORITY
138. For purposes of CAS, the entity is expected to take into account the impact of
specific capital charges that apply to specific reinsurance contracts entered into
depending on the credit rating of a reinsurer. The credit rating of the reinsurer issuing
the reinsurance contract will apply. Further, reinsurance brokers are expected to
provide up to date (at least credit ratings issued within two years of cover) credit
ratings and financial assessment of reinsurers.
139. An entity must choose the rating agencies it intends to rely on and then use their
ratings for purposes consistently for each type of reinsurer unless not just available.
Companies should not select the assessments provided by different rating agencies
with the sole intent to reduce their capital requirements (i.e. “cherry picking” is not
permitted). The Authority has provided indicative rating for most commonly used credit
rating agencies and their equivalents.
140. If a foreign reinsurer used has no credit rating – the entity should apply the
appropriate risk capital charge i.e. provide for 100% capital charge. Any rating used
to determine a factor must be publicly available, i.e. the rating must be published in
an accessible form and included in the rating agency’s transition matrix. Ratings that
are made available only to the parties to a transaction do not satisfy this requirement.
141. Regulation 26 (a) (i) provides that a reinsurer or insurer shall have the required
minimum capital which shall be the amount determined by aggregating capital
required for specific risks and reinsurance ceded. For purposes of computing capital
for reinsurance, the capital charges applicable to reinsurers are categories in the
following classes;
(a) Premium ceded reinsurers licensed under the Act (including Co-insurance &
Reinsurance risk pools);
(b) Premium ceded under mandatory cessions to ZEP-Re and Africa Re;
(c) Premium ceded under mandatory cessions to the National Re; and
(d) Premium ceded to foreign-based reinsurance companies.
43
PENSIONS AND INSURANCE AUTHORITY
142. Table 3 of the fifth schedule of the Insurance (General) Regulations, SI No. 105 of
2022.
RATING AGENCY
REINSURANCE RATING
Standard & Poors’
Above A
BBB
Below B
Moody’s
Above A
Bbb
Below Bbb
AM Best
Above B+
B,B-
Below B-
Fitch Corporation
Above A
BBB
Below BBB
GCR
Above A-
B.B-
Below B-
Ceding Ratio
Capital Charge on Premium Ceded (F2)
For First 50%
0%
15%
100%
Above 50%
10%
25%
100%
143. Assuming that XYZ General Insurance Limited reinsured premium worth ZMW
16,140,685 using a number of insurers. The table below highlights the calculation of
the reinsurance capital charge.
Reinsurer
ZEP-Re
8,070,343
Africa
Re
807,034
Zambia
Re
1,452,662
Premium Ceded
% Cede Premium
50%
5%
9%
Rating Agency
GCR
AM Best
Latest Rating
AAA
First 50% Ceded
F(2)
Capital Charge 1
Kenya Re
Malawi
Re
1,600,000
Congo Re
Asia Re
1,452,662
Emeritus
Re
1,452,662
1,200,000
105,000
9%
9%
10%
7%
1%
GCR
GCR
GCR
S&P
GCR
S&P
A
A-
AA+
A-
A
B-
B
4,035,171
403,517
726,331
726,331
726,331
800,000
600,000
52,500
0
0
0
0
0
0%
15%
100%
0
0
0
0
0
0
90,024.25
52,500
4,035,171
403,517
726,331
726,331
726,331
800,000
600,000
52,500
0
0
0
0
0
10%
25%
100%
Capital Charge 2
0
0
0
0
0
80,000
150,040.41
52,500
TOTAL
0
0
0
0
0
80,000
240,064.66
105,000
Above
Ceded
F(2)
50%
TOTAL
425,064.66
144. From the XYZ General Insurance Limited, the total reinsurance capital charge on
the ZMW 16,140,685 ceded is equal to ZMW 425,064.66. Licensed entities should
disclose the rating of reinsurers used in the notes to the calculation of the risk based
capital.
145. For purposes of the XYZ General Insurer above, it is assumed that the entity did
not exceed the mandatory cession spread among reinsurers licensed under the Act,
i.e. the cessions were below 25% - and hence did not trigger capital charges. Further,
44
PENSIONS AND INSURANCE AUTHORITY
cessions with ZEP-Re and Africa Re did not exceed the mandatory cessions provided
under the treaties and the National Re cessions.
Capital For Reinsurance Risk = ∑ ((Rating Capital Charges * Reinsurance Ceded) + (Capital
required for Premium Ceded with reinsurers licensed under the Act above the concentration
limits).
= ∑ (80,000.00+240,064.66 + 105,000.00) + 0 + 0
= ZMW 425,064.66
146. This section will also apply to retrocession arrangements carried out by a licensed
reinsurer and as such reinsurers will be required to assess the capital for reinsurance
risks.
vi.
Determination of Capital Required for Operational Risks
147. Operational Risk is the risk of loss resulting from inadequate or failed internal
processes, people and systems, or from external events. Exposure to this risk can
result from deficiencies or breakdowns in internal controls or processes, technology
failures, human errors, dishonesty/fraud and external events (e.g. physical
infrastructure failure or natural causes).
148. When making an assessment of Operational Risk capital charge, consideration
was made in relation to:
149.
o the size, sophistication, structure and complexity of operations of reporting
entities;
o the complexity, level of change and vulnerability of the IT systems utilized. It is
usual for entities that have a high degree of complexity within the IT systems
environment and are undergoing or plan to undergo significant change within
that environment to have higher levels of inherent operational risk;
o Vulnerability to business interruptions/ external events that may impact on the
business.; and
o Susceptibility to fraud (both internal and external).
Regulation 26 provides that;
A general licensed insurer or reinsurer shall have the required minimum capital
which shall be the higher of –
a) An amount determined by aggregating capital required for –
(vi). Operational risks which shall be a provision of five percent of total
premium for the current reporting period;
45
PENSIONS AND INSURANCE AUTHORITY
150. The law requires a general insurer to calculate the operational risk capital charge
using the net written premium for the current year. Entities are required to calculate
the operational risk charge on a 12-month rolling basis. This implies that the
premium used as a base for calculating the capital for operational risk should be the
aggregate of the 12 months from the time of reporting. Since the statutory CAR is
computed as at 31st December of each year, the Capital for operational risk will be
computed by aggregating premium for a 12 month period from January to December.
151. However, assuming that the Registrar requests an entity to compute and submit a
as provided under Section 65(2) of the Act, a solvency statement as at 30th June, a
reporting entity must use a rolling period to compute the capital charge as illustrated
below (period for June month-end July previous year to June Current year – 12 month
period). The capital charge shall be ZMW 9,691,377.13
Months
January
February
March
April
May
June
July
August
September
October
November
December
January
February
March
April
May
June
Premium Per
Month
21,564,347.40
19,767,318.45
14,376,231.60
8,985,144.75
10,782,173.70
10,782,173.70
8,985,144.75
12,579,202.65
14,376,231.60
16,173,260.55
19,767,318.45
21,564,347.40
24,583,356.04
22,534,743.03
16,388,904.02
10,243,065.02
12,291,678.02
14,340,291.02
12 Month Rolling
Basis
179,702,895.00
182,721,903.64
185,489,328.22
187,502,000.64
188,759,920.91
190,269,425.23
193,827,542.55
Capital Charge @ 5%
8,985,144.75
9,136,095.18
9,274,466.41
9,375,100.03
9,437,996.05
9,513,471.26
9,691,377.13
Period of Capital
Charge Period
Jan - Dec
Feb - Jan
Mar - Feb
April - March
May - April
Jun - May
Jul - June
152. For purposes of our example, XYZ General Insurance Limited capital charge as at
31st December 20XX is equal to 8,985,144.75.
Capital For Operational Risk = ∑12 months Net written premium * Operational Risk Capital
Charges.
= 8,985,144.75
46
PENSIONS AND INSURANCE AUTHORITY
153.
This section shall also apply to a reinsurer.
vii.
Determination of Capital Required for Guarantees
154. Regulations 26(a) (vii) provides that “a licensed general insurer or reinsurer shall
have the required minimum capital which shall be the higher of - (a) amount
determined by aggregating capital required for – …… (vii). Guarantees issued to
contract holders which shall be fifteen percent of the sum guaranteed.
155. The Act defines a guarantee policy as ”a policy in which a person other than a
bank, in return for a premium, undertakes to provide policy benefits if the contemplated
event in the policy as a risk relating to the failure of a person to discharge an obligation,
occurs; and includes a reinsurance policy in respect of such a policy.”
156. General insurers are required to manage the underwriting risk posed by
guarantees. Unlike other lines of business, guarantees pose a very a risk of to the
solvency of an insurer or ability to settle policyholder obligations when they fall due.
The Authority has since issued guarantee guidelines.
157. The Authority has observed a number of challenges associated with underwriting
guarantees on the market, including;
o Lack of transparency and disclosure on the impact of guarantees on the
solvency and capital – majority of the transactions are recorded off balance by
reporting entities;
o Lack of consistency in the measurement assets and liabilities associated with
guarantees across the market – make it impossible for the Authority to compare
results;
o Unclear and inconsistent technical reserving methodologies in relation to
guarantees;
o The long tail effect of guarantees on general insurance business which is short
term in nature – period of cover of contracts not matched with the short term
nature of general insurance contracts possess technical challenges – not clear
when premium is earned fully;
158. In line with the principle of conservatism i.e. providing a margin of safety to
policyholders and protect policyholders, insurers and reinsurers are required to
provide fifteen (15%) on total sum insured or guaranteed. The capital charge on
guarantee also makes it possible for comparison to be made.
159. From the example of XYZ General Insurance Limited, the entity has no capital
charge. The insurance does not underwrite guarantees. However, assuming that the
47
PENSIONS AND INSURANCE AUTHORITY
insurer issued secured and unsecured guarantees
99,450.39 as provided in the table below;
Type of
Guarantee
Premium Receipt
- and premium worth ZMW
Sum Insured
Capital Charge 15%
Performance
38,462.39
25,641,593
3,846,238.95
Customs
24,657.69
16,438,463
2,465,769.45
Performance
13,099.74
8,733,160
1,309,973.95
Customs
9,592.38
6,394,918
959,237.70
Performance
6,264.00
4,176,000
626,400.00
Customs
2,465.27
1,643,516
246,527.40
Customs
2,121.52
1,414,348
212,152.20
Customs
1,077.23
718,153
107,722.95
Credit
931.10
620,733
93,109.97
Customs
779.06
99,450.39
519,373
66,300,256.88
TOTAL
77,905.97
9,945,038.53
160. Assuming that XYZ General insurance Limited, issued policies outlined above,
capital required for CAS purposed will apply 15 per cent capital charge. The total
capital charge for CAS will be equal to ZMW 9,945,038.53.
161. This section as described above shall also apply to a licensed reinsurer with
additional guidance as provided below.
Guidance to Reinsurers on the calculation of Capital Required for Guarantees
162. Regulation 26(a)(Vii) requires reinsurers and general insurers to calculate the
minimum capital requirement for guarantees issued to contract holders – fifteen
percent of the sum guaranteed.
163. The Insurance (General) Regulation No. 105 of 2022 defines Guarantee Insurance
as “a policy in which a person other than a bank, in return for a premium, undertakes
to provide a policy benefits if the event, contemplated in the policy as a risk relating to
the failure of a person to discharge an obligation occurs; and include a reinsurance
policy in respect of such a policy.”
164. The definition of the guarantee policy or contract includes the reinsurance policy.
Reinsurers are therefore required to calculate fifteen percent of bonds risks assumed
through the reinsurance policy accordingly.
48
PENSIONS AND INSURANCE AUTHORITY
Aggregating the Capital charges for XYZ General Insurance Limited.
165.
The table below and aggregates the Minimum Capital Requirement (MCR).
CALCULATION OF MINIMUM CAPITAL REQUIREMENTS
(1) RISK BASED CAPITAL CALCULATION
(a) Capital Required for Balance sheet Assets
(b) Capital Required for investing above Concertation limit
(c) Capital Required for policy liabilities
(d) Capital Required for catastrophe risks
(e) Capital Required for Reinsurance risks
(f) Capital Required for Operational Risks
(g) Capital Required for Guarantees
(2) RISK
BASED
MINIMUM
(a)+(b)+(c)+(d)+(e)+(f)+(g)
CAPITAL
NOTES
Current
Period
ZMW
38
45
69
74
81
88
95
29,892,469
8,495,827
64,565,819
2,999,977
425,064
8,985,144
0
REQUIREMENT:
Previous
Period
ZMW
115,364,300
166. The table below highlights the standard CAS framework as envisaged by the
Authority.
XYZ GENERAL INSURANCE LIMITED
STATEMENT OF
CAPITAL ADEQUACY AND SOLVENCY REQUIREMENT
AS AT 31st DECEMBER 20XX
PART A: CALCULATION OF AVAILABLE CAPITAL REQUIREMENT
NOTES
70
71
Current
Period
ZMW
203,232,662.
11,135,121
(3) NET ALLOWABLE ASSETS: (1) - (2)
71
192,097,541
(4) TOTAL VALUE OF LIABILITIES (Statement of Financial Position)
(a) Total Policyholder Liabilities
i.
Unearned Premium Reserve (UPR)
ii.
Outstanding Claims Reserves (OCR)
iii.
Unearned Risk Reserve (URR)
iv.
Incurred but Not reported claims (IBNR)
(b) Current Liabilities (Statement of Financial Position)
(c) Non-Current Liabilities
(5) AVAILABLE CAPITAL REQUIREMENTS: (3) – (4)
70
144,178,027
70
70
70
70
42,582,762
18,544,818
0
3,438,239
52,516,582
27,095,626
47,919,514
(1) TOTAL VALUE OF ASSETS (Statement of Financial Position)
(2) LESS: TOTAL DISALLOWED ASSETS
Previous
Period
ZMW
PART B: CALCULATION OF MINIMUM CAPITAL REQUIREMENTS
49
PENSIONS AND INSURANCE AUTHORITY
NOTE
Current
Period
ZMW
84
90
116
128
137
143
149
29,892,469
8,495,827
64,565,819
2,999,977
425,064
8,985,144
0
(3) RISK BASED CAPITAL CALCULATION
(a) Capital Required for Balance sheet Assets
(b) Capital Required for investing above Concertation limit
(c) Capital Required for policy liabilities
(d) Capital Required for catastrophe risks
(e) Capital Required for Reinsurance risks
(f) Capital Required for Operational Risks
(g) Capital Required for Guarantees
(4) RISK
BASED
MINIMUM
(a)+(b)+(c)+(d)+(e)+(f)+(g)
CAPITAL
REQUIREMENT:
Previous
Period
ZMW
115,364,300
(5) ENTRY MINIMUM CAPITAL REQUIREMENT:
10,000,000
(6) MINIMUM CAPITAL REQUIREMENT = HIGHER OF (6) OR (7)
115,364,300
(7) SOLVENCY MARGIN = (AVAILABLE CAPITAL/MINIMUM CAPITAL)
0.415
(8)
41.54%
CAPITAL ADEQUACY REQUIREMENT = PART A(5) ÷ PART B(8)*100%
167. From the CAS formulae provided in the fifth schedule of the Insurance (General)
Regulations, CAR shall be equal to;
CAPITAL ADEQUACY REQUIREMENT
Capital Adequacy Requirement (CAR) = (Available Capital/Minimum Capital Requirement) x 100%
𝐶𝐴𝑅 =
168.
Available Capital (AC)
x 100%
Minimum Capital Adequacy Requirement (MCR)
From the table above, where
o Available Capital (AC) =
o Minimum Capital Requirement (MCR) =
o Therefore CAR =
o Ideal CAR Ratio =
o Minimum CAR/Solvency Margin =
o Deficit to Solvency Margin =
ZMW 47,919,514.00
ZMW 115,364,300.00
41.54%
150%
110%
(68.46%)
50
PENSIONS AND INSURANCE AUTHORITY