Economic Capital Requirement of Life Insurance Companies in Ghana: A Comparative Analysis of Risk-Based Capital and Solvency II Models

Abstract

This study computed the Economic Capital Requirement of the average life insurance company in Ghana, using both the Risk-Based Capital Model as used in Ghana and an understanding of the Solvency II model used by the European Union. The Risk-Based Capital Model used in Ghana does not capture the variations in the risk variables in the life insurance industry; meanwhile, the Solvency II approach focuses on such variations. This study focused on two main risk variables: T-bill rate and inflation. These risk variables were included in the valuation models used for valuing the average life insurance company‟s assets and liabilities. The research determined that when the risk variables are adequately captured in the computation of the Economic Capital for the average life insurance company in Ghana, the life insurance company would be required to increase its available capital resources 1052 times in order to adequately meet the condition for solvency. The study, therefore, recommends that the Regulatory Authorities revise the current Risk-Based Capital Model to capture some of the variations in some risk elements so as to adequately prepare for the risks covered by the average life insurance company in Ghana. Thus, preventing the insolvency of the life insurance companies.