THE SOLVENCY STATEMENT – Part I

WHAT IS SOLVENCY?

Solvency is described ability of an insurer to meet its obligations (liabilities) under all contracts at any time. In other words solvency is a measure of an insurer’s financial health. However, due to the very nature of insurance business, it is impossible to guarantee solvency with certainty.

Thus in order to come to a practicable definition, it is necessary to make clear under which circumstances the appropriateness of the assets to cover claims is to be considered.

According to subsection 11(2) of the Insurance Act the Pensions and Insurance Authority should not issue a licence to an insurer until it is satisfied that the applicant is capable of meeting the minimum financial, solvency and liquidity requirements. Interestingly section 36 shifts the onus from the Authority to the insurer. Whereby, an insurer should not commence trading until they meet or exceed the minimum solvency threshold.

Subsection 36(1) of the Insurance Act demands that a long-term insurer should not conduct insurance business until their admitted assets exceed their admitted liabilities. Further on subsection 36(2) sets a different solvency standard for a general insurer. A general insurer’s admitted assets must exceed the admitted liabilities by at least 10 per cent.

WHO MONITORS SOLVENCY?

The financial health of an insurer is measured by the solvency margin. This implies a higher solvency margin indicates better financial health. It is thus crucial for both an insurer and the regulator, is this case PIA, to constantly monitor this financial health indicator.

In fact where the solvency is declining towards the minimum threshold the regulator engages the insurer to provide for approval a contingency plan intended to maintain sound financial health.

Where the regulator is not happy with the execution of the contingency plan or where the situation is irretrievable then winding up procedures and liquidation is considered.

WHAT ARE ADMITTED ASSETS?

The term admitted assets is introduced in the description of solvency requirements for both long term and general insurers. In fact section 38 of the Insurance Act describes which assets cannot be considered as admitted assets. This implies that any assets other than the ones stated in section 38 are the admitted assets which shall be considered in determining the financial health of any insurance company.

Therefore the following assets are not admitted assets and shall not be considered in calculating the solvency of an insurer:

[a].       An unpaid premium that became due to the insurer more than sixty days previously, except-

·      an amount due to it under a reinsurance policy; or

·      a premium that is secured under automatic non-forfeiture conditions against the surrender value of a life policy; that has not actually been received by the insurer, (even if it has been received on its behalf by a broker or other intermediary);

[b].      An asset whose title is held by a person other than the insurer. Except:

·      A financial instrument, security or other document endorsed in favour of a bank solely for the purpose of collection or realization of any interest, bonus or dividend; or

·      Assets held on trust for the insurer in compliance with any direction given under this Act, except the extent that their value exceeds the amount or proportion specified in the direction.

[c].       Any loan that is unsecured or, in the opinion of the Registrar of the Pensions and Insurance Authority, is inadequately secured;

[d].      Any asset that is mortgaged or charged for the benefit of a person other than the insurer, to the extent that it is a so mortgaged or charged;

[e].       All loans to, debentures of, or shares in any insurer that is a related company of the insurer;

[f].       All guarantee given to the insurer, other than a guarantee given by a re-insurer in the course of re-insurance transactions;

[g].       Any asset defined by regulations made under this Act to be either-

·      an intangible asset; or

·      any prepaid preliminary or operational expense;

[h].      Any asset held outside Zambia, except an amount due from a foreign insurer; and

[i].        Any other classes of assets as may be prescribed by the Minister by statutory instrument.

WHAT ARE ADMITTED LIABILITIES?

Section 39 of the Insurance Act describes the admitted liabilities in a fashion similar to that of the admitted assets.

For the purposes of calculating the solvency of an insurer the following categories of liabilities shall not be considered:

[a].       A liability in respect of share capital or reserve in lieu of capital approved by the Registrar of the Pensions and Insurance Authority

[b].      A liability in respect of such matters as the Registrar may by notice in writing direct; and

[c].       A liability prescribed by the regulations made under this Act.

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