Introduction
A spate of recent articles in the press have announced a "three year solvency reprieve" for UAE insurance companies carrying on composite business (life and non-life) within the same corporate entity. The "reprieve" appears to refer to an extension of the deadline imposed by UAE Federal Law 6 of 2007 (the Insurance Law) for insurance companies carrying out composite business, prior to the Insurance Law coming into effect, to adjust their status within a five year period, ending August-2012. The Insurance Law envisaged that insurers would need two separate undertakings to undertake life and non-life business, but has failed to provide any guidance as to how this might be achieved. The UAE Insurance Authority has recently given composites a reprieve, confirming that the deadline for the splitting of composite business has been extended for another three years. The news coincides with efforts to revamp solvency rules for the UAE insurance industry, which are similarly on hold at present.
Composite insurance companies' reprieve
The "reprieve" relates to Article 25 of the Insurance Law, which states that: "A company may not conduct life assurance and fund accumulation operations and property and liability insurance operations at the same time.", and not to specific solvency requirements per se. This deadline has now been extended for a further three years to allow composite companies until August 2015 to segregate their business in accordance with the provisions of Article 25.
It has been reported in the press that the decision to extend the deadline was influenced by the impact the global downturn has had on the industry. His Excellency, Engineer Sultan Bin Sa'ed Al Mansouri, the Minister of Economy and Chairman of the UAE Insurance Authority, has said that the extension has been granted to allow composite companies further opportunity to adjust their situation in order to foster a competitive environment in the UAE. According to Her Excellency, Fatima Mohammed Ishaq Al Awadi, Deputy Director General of the United Arab Emirates Insurance Authority, there are 13 composite insurers in the UAE, 11 of which are UAE national companies and 2 of which are foreign companies.
The news of the extension to the deadline for composites has been reported in the press to have been well received by local insurance companies. Composites have been allowed to postpone the costs and additional capital requirements that will inevitably be associated with the segregation of their life and non-life business through the establishment of two distinct undertakings. Other than the operational costs of a new company (including, for example, establishment costs, listing costs, staffing costs etc.) the solvency requirements of the business would have increased significantly as each undertaking would need to be capitalised separately. These requirements are also now postponed.
Although the reasons for the postponement of the splitting out of composite insurers have not been made known, at a practical level under the existing UAE Companies Law, such a separation would be difficult to achieve. The fact that locally established insurance companies are also required to be listed companies, further exacerbates the practical difficulties associated with splitting a composite insurer, which is a public company, into two separate entities. A new UAE Companies Law is expected shortly, which may address some of the issues, but the UAE Insurance Authority will need to consider how listed UAE insurers will deal with the new requirements. It is hoped that the relevant regulators (which will also include the stock market regulators) will issue timely guidance as to how it is envisaged the industry can comply with the new requirements within the next 3-year period.
Recent efforts to strengthen the UAE insurance sector also include the issuance of Cabinet Resolution No. 42 of 2009, which came into force on 31 January 2010. This resolution changed the minimum capital requirements for insurance companies to AED100 million. At least 75% of this capital must be owned by a UAE or GCC national or legal entities wholly owned by a UAE or GCC national. All insurance companies operating at the time of the issuance of this resolution have been given three years to rectify their status in line with the new requirements. This deadline has not been extended and will need to be met in 2013.
New solvency rules
We are seeing the signs of a general shift in the approach to solvency in the raft of solvency instructions that the UAE Insurance Authority has waiting in the wings. Currently applicable legislation is not especially detailed in terms of solvency and reserving requirements. The current regime requires, in addition to a fixed capital requirement and security deposit, that insurers maintain a Solvency Margin and a Minimum Guarantee Fund related to the type of insurance transacted; Technical Provisions as estimated at the end of each financial year; and Reserves the company must keep in the State. Although these terms are defined in the Insurance Law there is little other guidance provided by the UAE Insurance Authority.
The potential developments in solvency regulation in the UAE are currently in the form of three draft instructions, published by the UAE Insurance Authority, which provide more detail in relation to solvency issues: (i) Instructions pertinent to the Solvency Margin and Minimum Guarantee Fund; (ii) Instructions pertinent to the Basis of Calculating the Technical Provisions; and (iii) Instructions pertinent to the Basis of Investing the Rights of the Policyholders.
These drafts suggest a move away from a 'one size fits all' regime to one based on individual capital assessments initiated by insurers themselves and then considered by the regulator, backed up by actuarial and board certification.
The draft instructions on 'Solvency Margin and Minimum Guarantee Fund' provide specific minimum capital requirements which will have to be met within 60 days, and guidance on the principles that companies must use when determining their solvency margins based on their own risk profile. The instructions include criteria for the assessment risk and evaluation of solvency to include underwriting risks, investment risk, credit risk, liquidity risk and operational risk as well as the use of scenario and stress testing as a part of calculating the capital required (although no method for quantifying these is prescribed). And prescribe that all models used for the calculation of solvency capital requirements must be validated annually by an independent party. The instructions also set out annual reporting requirements.
The draft instructions on the 'Basis of Calculating the Technical Provisions' provide details of the methodology to be used by insurance companies when calculating their technical provisions in respect of Unearned Premium Reserves, Unearned Risk Reserve, Outstanding Loss Reserves, Incurred but not Reported Reserves, Unallocated / Allocated Loss Adjusted Expense Reserves, Actuarial Reserves and Catastrophic Risk Reserves. Insurers are required to report their technical provisions on a quarterly basis to the IA and to submit an actuarial certification and Board of Directors certification to the IA on an annual basis. The instructions require that each insurer appoint an actuary accredited with the IA to assess the quality of the data used for calculating the technical provisions. The actuary is responsible for reporting exceptional and significant risks to the Board of Directors of the insurer. The methodology used by the actuary to calculate IBNR is required to be approved by the IA. This methodology is to be consistent from year to year.
The draft instructions on the 'Basis of Investing the Rights of Policyholders' set out guidance in respect of general requirements for investments and investment policies including the characteristics and diversification of investments. The instructions also set out specific guidance on asset distribution and allocation limits, guidance on investment related risks, the domiciling of investments, the use of derivatives.
The draft instructions in principle are intended to create a more sophisticated and risk based approach to determining capital and solvency requirements than the current regime. This is a positive move, in line with an international trend towards a risk based approach that takes into consideration a wide range of risks and the interaction between those risks. However, the current draft instructions are themselves very high level and we anticipate that further clarification of operational detail will be provided by the UAE Insurance Authority. Although the Insurance Authority has held a number of consultation sessions with the industry, there has been no indication from the UAE Insurance Authority as to when the draft instructions will be issued into law.
Looking into the future
In three years time, when composite companies are segregating their business, insurance companies may be required to capitalise their undertakings in line with a radically different approach to solvency. The new solvency regime may well intensify the forces of change which will be unlocked by the abolition of composites when it eventually occurs, triggering movements of books of business and corporate acquisitions, and disposals. It is hoped that new companies legislation in the UAE, together with guidance from the regulators, will facilitate these transitions. However, it is clear there is much still to do to allow this to be achieved.
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