An assessment of the business value of reinsurence as a capital management tool by Zimbabwean short-term insurence campanies

Abstract

The research sought to assess the business value of reinsurance as a capital management tool by Zimbabwean Short-Term Insurance Companies. The world over, reinsurance has evolved from being a mere risk management tool, to an integrated capital management tool allowing insurance companies to literally underwrite insurance business on the strength of the balance sheets of their reinsurers.

The period following dollarization saw the insurance industry regulator, IPEC raising capital levels three times, forcing many companies to close down as they could not meet the minimum capital requirements and were trading below regulatory solvency ratios. Hence the research sought to assess the critical role of reinsurance in the capital structure of insurance companies. The impact of reinsurance on shareholder return profile was also assessed together with the reinsurance demand variables.

The research found out that reinsurance was a key capital management tool that enhanced business value through stabilizing earnings, reducing transaction costs, reducing potential financial distress costs and easing cash flows. While the results demonstrated reinsurance formed an integral part of insurer capital structure, primary data the results were not conclusive as to the optimal capital structure. This was further supported by secondary data regression results where reinsurance, the main research independent variable was shown to be negatively correlated with shareholder value. This opens up an area for further study regarding the optima mix of reinsurance and other forms of capital.