Modeling Internal Determinants of Capital Adequacy in Insurance Companies

Abstract

The growing concern for insurance soundness and occasional solvency regulations requires that factors that are likely to affect capital adequacy and cause insolvency be investigated. This paper examines the role of equity multiplier, deposit structure, liquidity and size of insurers in determining insurance capital adequacy. Secondary data were collected from a sample of 32 insurance firms while regression statistics was used to analyze the data. Result shows that deposit structure and size each has a significant positive effect while equity multiplier has a significant negative effect on capital adequacy. Liquidity is not among the internal determinants of capital adequacy of Insurers. These  findings  provide  important  insight  for managers  and  regulators  of  insurance  companies  to  understand  the  role  and  the  effect  that  identified factors have on the volume of capital considered to be adequate for operational effectiveness, efficiency and in the attainment of adequate solvency margin for indemnification of the insure