Solvency Regulation in the UAE: A Benchmark and Impact Study

14 NOV 16

DUSIT THANI HOTEL

DUBAI

RAGHAV OHRI, ASA

CONSULTING ACTUARY

AGENDA

• Principles of new Regulations

• Risk Based Capital Approach

• Solvency Capital Requirements (SCR): Principles & UAE

Implementation

• Solvency II and QIS-5

• Market Benchmarking

• Conclusions & Questions

2 Solvency Regulation in the UAE

SOLVENCY REQUIREMENTS

To protect the interests of policyholders or beneficiaries by ensuring the

financial stability of insurance and reinsurance undertakings

3 Solvency Regulation in the UAE

WHAT IS THE PURPOSE OF INSURANCE REGULATIONS?

• Key aspect of new Regulations is to put in place a regime which has

(i) risk based capital requirements

(ii) complemented by relevant non-financial measures and which

(iii) enables as much transparency as possible through statutory

reporting requirements

4 Solvency Regulation in the UAE

New focus for supervisor Level of harmonisation

Group supervision

More pressure from capital markets, investors and

shareholders

Valuation of assets and liabilities

Quantitative capital requirements

Technical provisions

Minimum capital requirement (MCR)

Solvency Capital Requirement (SCR)

Qualitative supervisory review process

Corporate Governance

Principles for internal control and risk management

Disclosures

Enhance market discipline through public disclosures

Annual FCR and Solvency reports

Provide additional (non-public information to the supervisors

Pillar 1: Pillar 2: Pillar 3:

THE THREE PILLAR APPROACH

5 Solvency Regulation in the UAE

• Will restrict the volume of business that can be RETAINED by the

company.

• Less business is written.

• More reinsurance is required to maintain a net retention consistent with

the capital base.

• Will restrict the growth and profitability of an insurer in times of hardening

profitable markets.

• Raising additional capital by issuing more shares will depress the share

price of the company [if it is listed], in the short term until the new capital

generates additional profits.

PROBLEMS WITH TOO LITTLE CAPITAL

6 Solvency Regulation in the UAE

• It is a matter of concern for investment analysts.

• Management has to demonstrate what they plan to do with the excess

capital i.e. will they generate a return on capital greater than the investors

could gain themselves?

• The excess capital may be “wanted” on over-priced or ill-judged

acquisitions or unprofitable growth initiatives.

PROBLEMS WITH TOO MUCH CAPITAL

7 Solvency Regulation in the UAE

Three capital thresholds

• Solvency Capital Requirement (SCR)

• Minimum Capital Requirement (MCR)

• Minimum Guarantee Fund (MGF)

Differences in calculations, repercussions in case of breach, limitations in

eligibility of own fund items

CAPITAL REQUIREMENTS IN INSURANCE REGULATIONS

8 Solvency Regulation in the UAE

• Capital values which trigger regulatory intervention

• The amount below which the amount of financial resources should not fall

• Must be calculated quarterly

CAPITAL REQUIREMENTS IN INSURANCE REGULATIONS

9 Solvency Regulation in the UAE

• AED 100 million for insurance company

• AED 250 million for a reinsurance company

• Must be covered 100% with Basic Own Funds

If the value of the Own Funds slips below the MCR plan for recovery within

six (6) months of the date of observation of non-compliance with the Minimum

Capital Requirement

MINIMUM CAPITAL REQUIREMENT

10 Solvency Regulation in the UAE

INSURANCE COMPANY BALANCE SHEET

Solvency Capital Requirement

Minimum Capital Requirement

Technical Provisions

Ancillary Own Funds

Basic Own Funds

Assets Covering Technical

Provisions, MCR and SCR

11 Solvency Regulation in the UAE

• “The economic capital to be held by an undertaking in order to ensure that ruin occurs no more than once in 200 cases”

• The SCR corresponds to the Value at risk of the basic own funds of a company subject to a confidence level of 99.5% over a one year holding

• Calculated based on the formula as set out in the Regulations (Solvency Template)

12

SOLVENCY CAPITAL REQUIREMENT

Solvency Regulation in the UAE

Solvency Capital Requirement

Non-life underwriting

risk

Premium

Reserve

Life underwriting

risk

Technical Provisions

Sum at Risk

Investment Risk

Interest rate

Equity

Property

Spread

Currency

Concentration

Credit risk

Reinsurance Recoverables

Receivables

Derivatives

Operational risk

13

SOLVENCY CAPITAL REQUIREMENT

Solvency Regulation in the UAE

Solvency Regulation in the UAE

SOLVENCY II AND QIS-5

• EU Insurance & RI Regulation

• Report in March 2011

• Used to assess impact of SII on capital position

• ~70% market participation

• Feedback into regulation

40

14

UAE MARKET SAMPLE: ASSETS HELD

15

20% 24%

6% 4% 2%

21%

0% 0% 0% 7%

16%

0%

30% 30%

20%

100%

80%

5% 0%

100%

1%

30%

10%

0% 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% O

F TO

TAL

ASSET CLASS

INVESTED ASSETS BY CLASS

% OF TOTAL % PERMITTED

Solvency Regulation in the UAE

UAE MARKET SAMPLE: SOLVENCY POSITION

16

0%

8%

16%

24%

32%

40%

48%

56%

64%

72%

80%

Underwriting Risk - Property andLiability Insurance

Underwriting Risk - Life Insurance Investment Risk Credit Risk

% O

F TO

TAL

BSC

R

CAPITAL CHARGE

COMPARISON OF BSCR CONSTITUENTS

UAE QIS5 (NON LIFE SOLO COMPANIES)

Solvency Regulation in the UAE

UAE MARKET SAMPLE: BUSINESS WRITTEN

17

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

HEALTH MOTOR OTHERS FIRE MARINE_&_AVIATION

RET

ENTI

ON

NW

P A

S %

OF

TOTA

L

LOB

SIZE OF LINE VERSUS RETENTION (12 MONTHS)

NWP_% RETENTION

Solvency Regulation in the UAE

UAE MARKET SAMPLE: UW RISK CHARGE (NON LIFE)

18

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

HEALTH MOTOR OTHERS FIRE MARINE_&_AVIATION

% O

F TO

TAL

LOB

UW SCR (NON-LIFE): WRITTEN PREMIUM BASIS

NWP_% SCR_WP_%

Solvency Regulation in the UAE

UAE MARKET SAMPLE: UW RISK CHARGE (NON LIFE)

19

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

HEALTH MOTOR OTHERS FIRE MARINE_&_AVIATION

% O

F TO

TAL

LOB

UW SCR (NON-LIFE): TECHNICAL PROVISIONS BASIS

NTP_% SCR_TP_%

Solvency Regulation in the UAE

UAE MARKET SAMPLE: INVESTMENT RISK

Solvency Regulation in the UAE 20

UAE MARKET SAMPLE: CREDIT RISK

40 Solvency Regulation in the UAE 21

CAVEATS

• Concentration risk not considered

• Changes in SII after QIS 5 not considered

40 Solvency Regulation in the UAE 22

CONCLUSIONS

• Health & Motor Market: UW capital requirement too high?

• Assets held in line for the Market but individual insurers out of line.

• Regulatory intent to discourage smaller insurers: low retention disallowed & asset concentration limits.

• Insurance & RI receivables have a significant impact on solvency: need to tighten controls!

Solvency Regulation in the UAE 23

QUESTIONS?

24 Solvency Regulation in the UAE

THANK YOU

WWW.LUXACTUARIES.COM

25 Solvency Regulation in the UAE