An Actuarial Theory of Dynamic Solvency Regulation Under Macroeconomic Volatility in Oil-Dependent Economies

This study develops an original actuarial theory of dynamic solvency regulation for insurance companies in oil-dependent economies, with empirical application to Nigeria. Standard solvency regulation theory is developed in the context of stable, diversified economies where macroeconomic conditions evolve smoothly and regulatory capital requirements can be treated as largely static over business cycles. Oil-dependent economies like Nigeria experience dramatically different macroeconomic dynamics, including sharp commodity-driven fiscal cycles, currency volatility, and co-movement between insurance loss experience and insurer investment portfolio values that create distinct solvency regulatory design challenges. This study develops a dynamic insurance solvency model in which macroeconomic conditions, driven by oil price shocks and fiscal policy responses, affect simultaneously the level of insurance claims, the value of insurer assets, and the regulatory capital requirement trigger. Optimal dynamic capital requirement rules are derived that minimize the expected social welfare loss from insurance market disruption across the oil price cycle, balancing solvency protection against pro-cyclical capital constraint amplification. The model is calibrated using Nigerian oil price history, macroeconomic time series, and insurance financial data from 2000 to 2023. Model predictions regarding optimal capital buffer countercyclicality are tested against NAICOM's historical supervisory responses to oil price shocks. Findings demonstrate that existing Nigerian insurance solvency regulation is excessively pro-cyclical, tightening effective capital requirements precisely when oil price shocks reduce insurer investment returns. The study contributes an original oil-economy solvency theory and recommends a countercyclical solvency buffer add-on mechanism for NAICOM's regulatory framework.

Keywords: solvency regulation, oil dependency, dynamic capital requirements, countercyclical buffer, Nigeria.