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Asia-Pacific Journal of Risk and Insurance

The Official Journal of the Asia-Pacific Risk and Insurance Association

Editor-in-Chief: Kwon, W. Jean

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Solvency Determinants of Conventional Life Insurers and Takaful Operators

Rubayah Yakob1 / Zulkornain Yusop2 / Alias Radam3 / Noriszura Ismail4

1National University of Malaysia

2Al-Faisal University, Jeddah

3University Putra Malaysia

4National University of Malaysia

Citation Information: Asia-Pacific Journal of Risk and Insurance. Volume 6, Issue 2, ISSN (Online) 2153-3792, DOI: 10.1515/2153-3792.1143, June 2012

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The business of insurance is based on the trust of its policyholders, who expect that their losses will be compensated should the need arise at any time. Thus, sound financial conditions constitute the most important criterion for insurance firms, as well as for takaful operators. Although the policyholder may be the most important source of insurer finance, or a debt holder from an economic point of view through premium payments, the policyholder is not well informed in assessing the financial strength or solvency of the life insurer. Various measures of the solvency of the insurer are used in the industry, such as margin of solvency (MOS), risk based capital (RBC), and claim paying ability (CPA) rating. Unfortunately, none of these can provide information to policyholders on the financial position of the insurer. This is because the MOS and RBC for each insurer is the company's and regulator’s confidential information. However, for the CPA rating, it is limited to insurers who wish to be evaluated, and therefore the assessment is not comprehensive. Because of these shortcomings, this study provides a platform for policyholders to get an idea of the solvency of the insurers/takaful operators. Furthermore, this study identifies factors that affect the solvency of the insurers/takaful operators in Malaysia. Using random effects regression on panel data for 2003-2007, it is determined that investment income, total benefit paid to capital and surplus ratio, financial leverage, and liquidity are significantly related to solvency, in which the investment income has a positive relationship, while the other three have a negative relationship. From the results obtained, the policyholders/consumers can assess the insurers’ financial strength through the solvency determinants of the insurers/takaful operators, even though the actual level of solvency is not known. To some extent, this information can help policyholders/consumers make smarter choices in choosing the insurers/takaful operators

Keywords: solvency; random effects regression; insurers; takaful operators

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