Capital and solvency margin
Share Capital
Definition
Share capital is the amount of money invested in a permanent way in the company by the owners or partners as a property or cash contribution either upon the creation of the firm or on capital increase.
Share capital may be increased through the inclusion of reserves or profits or decreased by the refund of contributions or following losses.
| Role of capital | Capital Evolution |
|---|---|
Share capital assumes three functions:
| The shareholders' Extraordinary General Assembly shall decide the capital increase. Such an increase cannot occur unless the initial capital is entirely liberated. The share capital increase may be achieved through:
|
Shareholders' equity
Definition
Shareholders equity may be defined as the difference between the elements of the firms' assets (all that the firm owns) and those pertaining to external liabilities (all that the company owes).
Shareholders' equity stands for the company's property or for the capital amounts that belong to the firm as its equity. It is the shareholders' wealth.
Shareholders' equity may also be defined as financial resources, which contribute along with borrowed capital in the funding of the company.
Shareholders' equity is the sum of a set of calculations:
Shareholders' equity = share capital (companies' contributions) + reevaluation gaps + non-distributed profits or reserves – losses (negative carry or loss of the financial year) + investment grants + mandatory provisions
Shareholder's equity stands on the balance sheet liabilities as non-payable debts.
The Role of Shareholders' Equity
Within a company, shareholders' equity :
- Represents a protection for the company's creditors: a guarantee function which is of great importance to companies rights.
- Represents a financial resource which is essential in defining the capability of funding and forming the company's share capital.
- Insures risk taking pertaining to the company's economic operations.
The Difference between Share Capital and Shareholder's Equity
Share capital must not be confused with shareholders' equity for the following reasons:
- A differentiation exists at the legal, financial levels as well as accountancy wise.
- The share capital is a component of shareholders' equity.
- The amount of share capital does not depend on the results achieved by the company, whereas that of shareholders' equity varies according to the profits made or the losses incurred by the company.
Share Capital in the Insurance Sector
Minimum Capital Importance and fixing in Insurance Company
One of insurance's characteristics is minimum capital constraint: it corresponds to the required level for a company to be able to operate. This minimum capital is, in fact, set by legislation.
Upon the creation of the firm, minimum capital enables the company to face management fees and other miscellaneous charges pertaining to establishment along with start-up operations.
During operational stage, minimum capital is assessed in relation to the calculation of solvency margin. Being a component of equity funds, it is used to guarantee the commitments made by the insurers toward their clients.
Minimum capital is placed in the risk-free assets in order to avoid any invested-capital-related loss.
Solvency Margin
Definition
It is a regulatory constraint that defines the minimum amount of the resources required for the practice of insurance operations.
The solvency margin is defined as the minimum relation between equity funds and the company's activity. Any shortage in the solvency margin could trigger the dissolution of the company.
Method of calculating solvency margin
The amount of solvency margin depends on the regulations of each country. The calculation of solvency margin applied to Life business is different from that of Non-life. For the Non-Life, the solvency margin is often reckoned in relation to two criteria: premiums and losses.
Solvency Margin Insufficiency
In case of a shortage in the solvency margin, the supervising authority could:
- Require a long-term recovery plan.
- Require a short-term funding plan that enables the company to pick up equity funds.
- Finally, in case the recovery or funding plans have not been carried out, the supervising authorities could withdraw the company's license, which means that the company is put into receivership.
Examples: fixing minimum capital and method of calculating solvency margin in certain countries
| Minimum share capital | Solvency margin (non life) |
|---|---|
| Algeria | |
Cash contribution is : 450 000 000 DZD (6.36 million USD) 1. Each shareholder must pay at least one quarter of the capital in cash upon the creation of the firm. The payment of the not-yet-issued remainder (3/4) must follow within the next 5 years. |
|
Tunisia | |
The amount of minimum capital is 10 000 000 TND (7.85 million USD) wholly issued upon the creation of the firm. |
|
Morocco | |
50 000 000 MAD (5.58 million USD): totally issued in cash upon the creation of the firm. | Calculations in relation to premiums The amount of issued net premiums free of annulment and acceptance of the last financial year.
|
Countries of the CIMA area* | |
The amount of share capital must be at least equal to 500 million of FCFA (916 000 USD), (not including contributions in property). Each shareholder must pay at least half the amount of his or her subscribed shares in cash before definitive creation of the company. The payment of the remainder must follow within a three-year period |
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