A Critical Analysis of the Malaysian Risk-Based Capital Framework: A Comparison between General Insurance and Takaful
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Abstract
This paper aims to critically analyse the Malaysian solvency system by comparing the existing Risk-Based Capital (RBC) framework for Conventional and Takaful against the seven specific objectives of the original US Risk-Based Capital which was introduced in 1994. In addition, the Malaysian Risk-Based Capital framework is also assessed against the four extended objectives developed by Holzmüller in 2009. The critical evaluation results indicate that the Malaysian Conventional and Takaful RiskBased Capital frameworks have various shortcomings from both qualitative and quantitative aspects. The framework only fully meets three out of seven objectives of the US Risk-Based capital framework and fulfils one out of four additional objectives developed in 2009: Malaysia’s Risk-Based Capital framework only fulfils the following: the appropriate incentive for capital expansion, measurement of economic values of assets and liabilities, sound financial reporting and assessment of management. As a consequence, it is clear that the current one-size-fits-all approach must be reviewed to improve the Malaysian RBC Framework in view of different sizes and assets of existing firms in the industry.
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