Solvency Regulation in the UAE: A Benchmark and Impact Study
Transcript of Solvency Regulation in the UAE: A Benchmark and Impact Study
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
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SOLVENCY REQUIREMENTS
To protect the interests of policyholders or beneficiaries by ensuring the
financial stability of insurance and reinsurance undertakings
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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
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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
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• 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
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• 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
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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
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• 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
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• 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
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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
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• “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)
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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
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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
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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
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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
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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)
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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_%
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UAE MARKET SAMPLE: UW RISK CHARGE (NON LIFE)
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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
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UAE MARKET SAMPLE: CREDIT RISK
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CAVEATS
• Concentration risk not considered
• Changes in SII after QIS 5 not considered
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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!
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QUESTIONS?
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THANK YOU
WWW.LUXACTUARIES.COM
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