There has been an increased interest by insurance regulators across Africa to introduce risk-based capital (‘RBC’) .This has been necessitated by the economic turmoil of 2008 and a desire by the regulators to see that insurers review their underlying risk and manage those risks actively. However, the two main challenges of implementing RBC in Africa have been lack of actuarial resource and lack of guidance provided to the regulators.

The paper aims at designing a suitable yet less sophisticated RBC model for Life insurers operating in Africa with the objective to incentivise regulators in Africa to introduce RBC in their respective regimes. The paper also aims at expounding on the issues that should address as the regulator develops a suitable framework for their various countries.

Insurance penetration levels remain very low in Africa and this has largely been due to a lack of trust from the public who find insurance companies unable to pay claims when they arise. This is partly because of poor capitalisation of insurance companies and a lack of proper risk management. RBC therefore provides an opportunity for African insurers to improve on their risk assessment and increase public confidence in the insurance industry.

The paper begins by looking at the current RBC practises around the world with the aim of deriving a suitable model for an African life insurer. Then a theoretical background of the various risks and their measurements as experienced by a life insurer is demonstrated.  The paper then goes ahead to show how life insurer’s assets and liabilities should be valued for the purpose of capital calculation. After which the paper expounds on the methods for calculating capital risk requirements applied to each risk faced by the insurer and this will be followed by how these individual charges can be aggregated to derive a suitable economic capital for the insurer. Finally, the paper ends with an illustrative example of a simple RBC model.

The ideas and methodologies in the papers are not exhaustive. Instead, they provide an overview of a conceptual framework for RBC but more work will be needed by each country to develop suitable frameworks that suit their respective markets. The paper aims to encourage further discussion by practitioners in Africa on how best to utilise their resources to develop a framework that suits their respective companies.

Key Words: Capital Regulations, Capital Requirements, Capital Calculation, Risk and Solvency