The Insurance Authority issues Financial Regulations to Traditional and Takaful Insurance Companies
Al Mansouri: The UAE is the first to adopt the latest solvency requirements in the Middle East
The financial regulations represent a significant move ahead in developing the regulatory principles and technical rules for the development of UAE insurance market performance.
An actuary is accredited for every insurance company operating in the UAE.
New investment rules to protect the rights of policyholders and companies against risks.
Abu Dhabi 2 February, 2015
H. E. Eng. Sultan bin Saeed Al Mansouri, UAE Minister of Economy and Chairman of the Insurance Authority, issued Decision No. (25) of 2014 Pertinent to Financial Regulations for Traditional Insurance Companies and Decision No. (26) of 2014 Pertinent to Financial Regulations for Takaful Insurance Companies, which regulate the financial, technical, investment, and accounting operations of Traditional and Takaful insurers operating in the UAE.
On this occasion, H.E. Al Mansouri said in a press release that the Financial Regulations that regulate the financial, investment, technical and accounting operations of UAE insurance companies are seen as asignificant move ahead in developing the regulatory principles and technical rules for the development of UAE insurance market performance, and to protect the rights of policyholders and shareholders; and they represent an advanced and key step toward regulating the operations of Traditional and Takaful insurance companies operating in the UAE and boosting their performance as per the best competitive standards worldwide.
He confirmed that the issuance of such Financial Regulations puts the UAE at the forefront of the Middle East with regard to adopting the latest solvency requirements similar to the European model.
H.E. Al Mansouri also confirmed that the Regulations are in line with the best practices applicable in the insurance industry worldwide, whether in terms of solvency, technical provisions, investment policy, or financial and accounting procedures of insurance companies. “The best international legislative practices were followed in drafting the Financial Regulations for Traditional and Takaful insurance companies in a manner that facilitates their application and supervision”, added Al Mansouri.
He indicated that the Financial Regulations aim at protecting the rights of policyholders and shareholders of insurance companies, as well as protecting insurance companies from potential risks they may encounter, through proactively ensuring the solvency of insurance companies and the integrity of their financial procedures. They are also intended to enhance the technical principles and rules needed to promote the establishment of modern and advanced regulatory principles for the UAE insurance market as per the best international practices in order to boost the contribution of the insurance sector in the gross domestic product (GDP) and support the growth of national economy in all areas based on sound and robust principles.
H.E. Al Mansouri added that “by issuing the Regulations, the Insurance Authority seeks to complete the legislative frameworks needed to activate oversight and control over the insurance sector; achieve many goals including ensured stability and sustainability for the insurance market by ensuring the solvency of insurance companies and their ability to meet all liabilities, and create harmony among investment policies of the insurance companies and general economic policies of the UAE.
He emphasized that the Financial Regulations enable the presentation of financial statements of the national and foreign insurance companies operating in the UAE in a more advanced form compared to the current form, which helps identifying the financial position of companies.
He noted that the Financial Regulations were issued based on the UAE insurance market situation and after discussing their provisions with the insurance companies, actuaries, and specialized international consultation firms and after studying their comments and adopting their suggestions as appropriate to serve the interests of the national economy and local market and in compliance with the best practices adopted in the financial, accounting, and investment regulation of the insurance industry. He explained that the Regulations include provisions related to the period allowed to companies to adjust their positions according to each section of the Regulations. Such period ranges between one and three years.
He added that in view of the special nature of the Takaful insurance business, separate Regulations were developed for Takaful insurance companies operating in the UAE that are compatible with the Takaful insurance Regulations applicable in the UAE and in line with the Islamic Sharia. The Regulations identified the policies that should be adopted in such companies in terms of the Wakala model or Wakala & Mudaraba Model, in addition to provisions pertaining to the distribution of surplus on participants in Takaful insurance business and the importance of separating the assets of participants’ accounts and shareholders’ accounts in the company.
He stated that such Regulations come in line with the Insurance Authority’s continuous efforts and endeavor to regulate the UAE insurance sector and enhance the performance of the local insurance market and all entities working therein based on robust legal, technical and financial principles and upgrade the competitiveness of the insurance sector at the regional and international levels as per the best practices prevailing worldwide.
The Financial Regulations issued in a combined legislative instrument in a single document comprise the following seven key regulatory sections addressing the financial, technical, investment, and accounting aspects:
The Basis of Investing the Rights of the Policyholders;
The Solvency Margin and Minimum Guarantee Fund;
The Basis of Calculating the Technical Provisions;
Determining the Company’s assets that meet the accrued insuring obligations;
The Records which the Company shall be obligated to Organize and Maintain as well as the Data and Documents that shall be made Available to the Authority;
The Principles of Organizing Accounting Books and Records of Each of the Companies and Agents and Determining Data to be inserted in these Books and Records; and
Accounting policies to be adopted and the necessary forms needed to prepare reports and financial statements and presentations.
The Basis of Investing the Rights of the Policyholders
Regulations on The Basis of Investing the Rights of the Policyholders aim at protecting the rights of policyholders and shareholders of insurance companies alike, in addition to protecting the companies themselves against future potential risks by the regulation and control of the investment activities of the insurance companies.
Such principles are intended to establish controls for investment activities of the insurance companies to ensure liquidity, profitability, safety, and diversity without engaging in investments incompatible with the nature of the company’s activities and business, which may undermine its financial position. They also aim to direct the insurance companies to focus and give priority to developing and promote their main operational activity, namely insurance business.
The Regulations adopted the frameworks applicable internationally, in particular ICP No. (15) issued by the International Association of Insurance Supervisors (IAIS) concerning the investment of policyholders’ rights, in terms of management of insurance copmanies’ investment and selection of suitable investment instruments by emphasizing diversity of investments, minimizing focus on reducing risks while considering the limited scope of local investments, and setting determinants on high-risk or inappropriate investments such as unlisted shares, real estate investments and foreign investments.
The Regulations include many provisions that boost the role of Boards of Directors in supervising the investment performance and promoting the role of specialists such as the actuary, and consequently, emphasizing the principles of corporate governance, activating risk management, and adopting stress tests when developing, implementing and evaluating the investment policy of the company.
These Regulations enforce the insurance companies to assess risks and evaluate their solvency in key risk areas, including risks related to underwriting, investment, credit, liquidity and operational risks, under the risk management framework system.
General Requirements for Investment
The Regulations include the general requirements for the investment of policyholders’ rights through compliance by the insurance companies with certain rules in their investment operations, including the diversity and distribution of assets in a manner that enables the company to efficiently respond to the changing economic conditions including the developments taking place in the financial markets and real estate markets. The companies should assess the extraordinary impact of the market conditions on their assets. They should diversify their assets in a manner that mitigates such impacts.
The Regulations stipulate that investing in products or instruments issued by the same issuer affiliated with the same group as the insurance company should not expose the company to high-risk concentration; and thereby, the prescribed limits for related assets and related parties should be observed. The company must create an investment committee that ensures adequate separation of functions between implementation, registration, delegation, settlement and related auditing activities.
Assets must be in an adequate amount, in a current currency and for an appropriate term to ensure cash flows generated from such assets are enough to meet the expected cash out-flows for the company’s liabilities when they are accrued.
General Rules for investment policy
The Regulations set the general rules for the investment policy. Most significantly, each insurance company shall develop a special policy for investment and risk management that complies with the risk tolerance level determined by the Board of Directors of the company to ensure sound investment of the company’s funds. The investment and risk management policy shall be approved and reviewed on an annual basis by the Board. Such policy shall cover the general investment strategy and appropriate risk management regulations,including the mechanism to control such regulations. The risk management regulations shall cover the risks pertaining to investment operations that might impact the fulfilment of insurance and capital adequacy obligations. The key risks include market, credit, and liquidity risks. Appropriate procedures shall be taken to control and ensure compliance with limits of assets and limits of corresponding parties. The assessment of the credit solvency of related parties which the company is exposed to their significant transactions shall be adequately reviewed.
The companies must set a policy and a framework for stress tests of all its investments to be conducted once a year as per the company’s policies. Foreign insurance company branches shall prove to the Insurance Authority in all cases that the frameworks and policy of investment stress tests related to operations implemented within the UAE are in place at the company’s head office level in a manner that shows operations within the UAE.
The company shall also adopt a separate investment strategy for insurance of persons and funds accumulation operations on the one hand and property and liability insurance operations on the other hand, especially in the cases where the company practices both types of insurance.
Limits of Investments
The Financial Regulations determine the limits of distribution and allocation of invested assets permitted for insurance companies. For real estate assets, thirty percent (30%) was set as a ceiling limit for overall exposures in a particular asset class while there is no maximum sub-limit for exposure of a single counter-party of related assets. For equity instruments assets including units in mutual funds in listed and unlisted companies within the UAE, thirty percent (30%) was set as a ceiling limit of overall exposures in a particular asset class, and ten percent (10%) as a maximum sub-limit for exposure of a particular class of related assets. For equity instruments assets including units in mutual funds in listed and unlisted companies in capital markets outside the UAE, twenty percent (20%) was set as a ceiling limit of overall exposures in a particular asset class, and the ten percent (10%) was maintained as a maximum sub-limit for exposure of a particular class of related assets.
For governmental securities and bonds issued by the State or those issued by one of the UAE Emirates, one hundred percent (100%) was set as a ceiling limit for overall exposures in a particular asset class, and twenty five percent (25%) was set as a maximum sub-limit for the exposure of a certain class of related assets. In the area of governmental securities and bonds issued by foreign countries with “A” rating, eighty percent (80%) was set as a ceiling limit of overall exposures of a particular asset class, and twenty five percent (25%) was set as a maximum sub-limit for the exposure of a particular class of relates assets. For assets of cash and deposits with banks such as current accounts, call deposits, time deposits, notice deposits, deposit certificates and other deposits within the UAE, five percent (5%) was set as a minimum limit for overall exposures in a particular asset class while fifty percent (50%) was set as a maximum sub-limit for exposure of a particular class of related assets. For assets of financial derivatives or complex financial instruments used for hedging purposes, one percent (1%) was set as a ceiling limit for overall exposures in a particular asset class while there is no maximum sub-limit for the exposure of a particular class of related assets.
For secured loans, non-banking deposits, debt securities, warranted bonds and other debt instruments rated as ‘strong’ and ‘very strong’ by a reputable and independent rating agency, thirty percent (30%) was set as a ceiling limit of overall exposures in a particular asset class, and twenty percent (20%) as a maximum sub-limit for exposure of a particular class of related assets. For other assets and investments, ten percent (10%) was set as a ceiling limit for overall exposures in a particular asset class while there is no maximum sub-limit for the exposure of a particular class of related assets.
Alignment of Positions and Reports required by the IA
For the purpose of facilitating alignment of positions according to the new requirements, the issued Regulations requires companies whose limits of distribution and allocation of real estate assets are higher than the limits of distribution and allocation of the specific assets to adjust their positions in accordance with the limits of asset distribution and allocation with a period of no more than (three) years commencing from the next day the Regulations are published in the official Gazette. Companies whose limits of distribution and allocation of non-real estate assets are higher than the limits of asset distribution and allocation are required to adjust their positions in accordance with the limits of asset distribution and allocation within a period of no more than (two) years commencing from the next day the Regulations are published in the official Gazette.
Regulations on Solvency Margin and Minimum Guarantee Fund
The Solvency Margin bears paramount importance in the insurance industry as it serves as an additional parameter for control and oversight and a tool to verify the company’s ability to meet its obligations in the manner that ensures maintaining the soundness of the insurance companies’ financial positions and detecting any flaw that may occur in such positions. Furthermore, the Solvency Margin serves as an ancillary indicator that directs the risk tolerance policy of the company, in addition to the prudent corporate management’s endeavor to enhance the Solvency Margin as a key goal pursued to ensure the continuity of the company, since the higher the Solvency Margin of a company is, the safer, more secure and more reputable the company will be, which increases its opportunities to get a larger market share.
This section of the Regulations was developed based on the key principles of Solvency Margin (Solvency II), which measure the key risks that may compromise the ability of companies to meet their obligations, due to the international requirements imposed by the IAIS, where the UAE is an active member, in addition to the multiple and diversified risks that the insurance companies are exposed to.
One of the most important objectives of issuing these Regulations is to provide an early warning system to detect flaws in the companies’ financial conditions, which would increase the potentials for addressing such financial flaws in the early stages, which in turn would help fortify the control and monitoring regulations over the insurance companies. Additionally, these Regulations aim at enhancing the ability of insurance companies to accommodate potential financial shocks and crises, and thereby creating a reliable insurance market and help the financial stability in this market.
The Regulations on Solvency Margin include provisions related to the Solvency Margin, Minimum Capital Requirements, Minimum Guarantee Fund , Solvency Capital Requirements, and assessment of Solvency in key risk areas through IA can identify the ability of companies to provide the funds needed to meet their obligations as per the Solvency model, which is based on predefined factors.
The requirements of Minimum subscribed and paid-up capital determine it at 100 million UAE Dirhams for insurance companies and 250 million UAE Dirhams for reinsurance companies. The Minimum Guarantee Fund is set at no less than one third of the Solvency Capital Requirement. The Minimum Guarantee Fund is calculated on the basis of the minimum amount required to be maintained to cover any class of insurance underwritten by the company, which includes a minimum limit and a percentage of the net earned premiums or an equivalent percentage, whichever is higher as determined by the IA.
Principles of Solvency Margin Model
The Solvency Margin Model approved by the IA is based on many principles, the most important of which is to calculate the Solvency Capital Requirements based on the assumption that the company will continue operation on going concern basis. Solvency Capital Requirements shall be calibrated to make sure that the company observes all measurable potential risks, provided that this includes that current business and new business that the company is expected to practice within the next twelve (12) months. Solvency must correspond to the value vulnerable to risks in basic own funds of the company at a confidence rate of (99.5%) over one year.
The Solvency Capital Requirements must cover underwriting, market, liquidity (investment risks), credit and operational risks.
All companies shall comply at all times with the Solvency Margin Requirements to ensure maintaining own funds that meet the higher amount of the Minimum Capital Requirement, Solvency Capital Requirement and Minimum Guarantee Fund.
The Company shall immediately report to IA in the event of non-compliance with maintaining the Minimum Capital Requirement, Solvency Capital Requirement and Minimum Guarantee Fund.
Regulations on the basis of calculating the technical provisions
The Financial Regulations related to the basis of calculating technical provisions are issued in line with the international trends in the insurance industry that the companies must maintain adequate and appropriate technical provisions that reflect the nature of operations of the insurance companies, and to avoid variance in the estimates of technical provisions made by the companies and the corresponding underwriting obligations, whether in terms of their value or time of occurrence. These include the technical provisions that must be created by the insurance companies operating within the UAE and that should be maintained within the UAE, in addition to determining the methods to calculate the technical provisions so that they are consistent with the international best practices used in the calculation of technical provisions.
These Regulations aim at regulating the technical principles of calculating technical provisions and standardizing them for all companies in order to attain fair comparison, and objective control and analysis of the positions of companies by the IA and in order to provide fairer financial statements that reflect the financial positions of the companies.
Furthermore, binding the companies to have an assessment for their technical provisions by an Actuary is the starting point towards directing the companies to work in accordance with sound technical foundations and avoid price competition that leads to non-technical products. Besides, having an Actuary Report on the assessment of technical provisions increases the fair presentation of financial statements that match the actual financial positions of the companies.
Determining the Company’s assets that meet the accrued insuring obligations.
The Financial Regulations in this area address the evaluation of the company’s assets corresponding to its insurance obligations in a manner that ensures the alignment of the types and maturity terms of such assets and the nature and maturity terms of insurance obligations, in addition to identifying methods to evaluate the assets related to the calculation of solvency margin of the company.
These Regulations set forth the general rules for the assessment of assets that should be adopted by the company. They also set forth the limits of assets acceptable for Solvency whereas the admissible assets are taken into account in the calculation and measurement of Solvency in a manner that all invested assets are assessed as per the limits defined in the Regulations concerning the basis for investing policyholders’ rights as set forth in section (1) of the Regulations. Other assets shall be assessed as determined by the IA.
The Records which the Company shall be obligated to Organize and Maintain as well as the Data and Documents that shall be made Available to the IA.
These Regulations aim at providing a safe supervisory environment within the companies by determining the classes of records that should be maintained, and the period of retention, forms thereof as well as their backup copies of all records that should be kept in a safe with easy access for the IA to conduct the required supervisory procedures.
The companies that practice insurance of persons and funds accumulation insurance on one hand and property and liability insurance on the other hand must maintain separate nooks and records for each type of insurance. Furthermore, operations related to each insurance type shall be separated. The insurance company must keep the accounting records and any other records, as necessary, in order to determine all assets and liabilities related to each type.
The Regulations determine the period of retention by the companies for the records, as well as types of such records.
The Principles of Organizing Accounting Books and Records of Each of the Companies and Agents and Determining Data to be inserted in these Books and Records.
These Regulations aim at regulating the principles of daily recording of the operations of the companies and agents by identifying the types of accounting books and records in accordance with the nature of business of the parties concerned.
The Regulations require companies that practice insurance of persons and funds accumulation insurance on one hand and property and liability insurance on the other hand to maintain separate books for each type of insurance. Transactions related to each insurance type must also be separately maintained. The insurance company must keep the accounting and technical records necessary to determine all assets and liabilities thereof.
The Regulations obligate each company to appoint one or more qualified and experienced auditors to audit their accounts for each fiscal year and to provide the IA with the management letter issued by the external auditor on the internal control systems before the annual financial statements are published. The Board of Directors of the company shall form an audit committee comprising at least three members. The company shall form a department for internal audit (control) to be immediately reporting to the Audit Committee. The company shall also appoint a compliance officer to ensure compliance with all rules, regulations and instructions.
Accounting policies to be adopted and the necessary forms needed to prepare reports and financial statements and presentations.
The Regulations pertaining to the accounting policies aim at standardizing presenting the financial statements by binding the companies to draft the financial statements in accordance with the accounting policies and the International Financial Reporting Standards (IFRS) in order to provide transparency and disclosure without concealing any material information that may misguide the beneficiaries of the financial statements and the oversight authorities.
The company shall present its annual financial statements including the notes thereon to the IA in Arabic and English. Furthermore, the company shall present its interim (quarterly) financial statements including the notes thereon to the IA in Arabic; and an English version may be attached thereto. The company shall also provide the IA with the annual financial statements using the approved forms.
Source: Insurance Authority