An Analysis of the Impact of Market Risk Management on the Solvency of Insurance Companies in Zambia: A Case Study of Professional Insurance Zambia
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Date
2024
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University of Lusaka
Abstract
This research aims to analyze how the effective management of market risk impacts the solvency of insurance companies in Zambia. The principal goal of this research is to determine the relationship between an insurance company’s solvency status and the market risk management techniques employed by conducting a case study of Professional Insurance Zambia. In order to achieve comprehensive analysis, methodologies such as the Value at Risk Analysis are employed. This research employs a combination of quantitative analysis and case study methodology. Data on market risk management practices, solvency ratios, and financial performance metrics of Professional Insurance Zambia are collected through interview questionnaires and secondary data collected from the company’s official website. Multiple linear regression model is employed in the study (with the dependent variable being the solvency ratio and the independent variables being total assets, total liabilities and claim reserves) in order to determine the relationship between market risk management and insurance solvency. Furthermore, Value at Risk Analysis is used to estimate the maximum potential loss in the company’s portfolio in a given one year period. Additionally, an in-depth examination of the risk management strategies and models implemented by Professional Insurance Zambia is conducted through interview questions. The findings of this study reveal a positive significant correlation between effective market risk management practices and the solvency of insurance companies, particularly in the case of Professional Insurance Zambia. That is a proportionate increase in the amount of total assets held by the firm leads to a proportionate increase in the solvency ratio and consequently an increase in the total liabilities of the company leads to a decrease in the solvency ratio and vice versa. The results from the Value at Risk Analysis indicate that at 95% confidence level, the maximum potential loss to be experienced in a class of motor insurance policies within a year (one year period) is utmost 67.10% (0.6701). The analysis of risk mitigation strategies from the interviews carried out at the company highlights the importance of proactive risk management measures in reducing exposure to market risks and safeguarding solvency levels. In conclusion, this research underscores the critical role that market risk management plays in ensuring the solvency and financial stability of insurance companies like Professional Insurance Zambia. By implementing robust risk management strategies and models, insurers can better protect their portfolios against adverse market movements, thereby enhancing their overall solvency position and not only enable an increase in the contribution percentage to the total national GDP but also increase insurance credibility and trustworthiness. Therefore, this research will provide useful insights into improving risk management frameworks which will help sustain and maintain insurance solvency amidst changing market conditions.