Insurance Financial Soundness Indicator- Caramel Model

Abstract

Insurance has become anoteworthy and vibrant part of the financial services in almost all the developed and some developing nations. Insurance is a tool of savings which could boost the economic growth and could contribute to efficient resource allocation if governed properly. The benefit of transfer of risk over insurance services could proficiently help in reducing transaction costs, generating liquidity and facilitate economies of scale in investment. A team of International Monetary Fund (IMF) presented a paper that explored insurance as a source of financial system vulnerability who proposed some key indicators which could be used for the surveillance of financial soundness of insurance companies because ofthe risk factors in it. Thus, the researcher in this paper has tried to describethe core set of the CARAMELS[Capital adequacy, Asset quality, Reinsurance and Actuarial issues, Management soundness, Earnings/Profitability, Liquidity and Sensitivity to market risk] Model which is a financial soundness indicator of life and non-life insurance companies that includes the use of quantitative factors affecting the financial position of the insurance company.

Keyword:.  FSI, IMF, CARAMELS, Capital Adequacy, Asset Quality and Reinsurance.