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Tightening The Screw - Insurance Authority Prudential Regulations

Recent moves in the UAE and Oman mean an increasingly regulated Islamic Insurance sector throughout the GCC region. Barry Greenberg and Raghad Hammad of BSA examine these changes and their impact.

What's happening and why?

The UAE has recently enacted new prudential Takaful regulations covering the Takaful insurance market and Oman is introducing similar regulations. These new requirements are intended to improve the overall capital condition of Takaful insurance markets, by mitigating negative effects of market turmoil on insurers’ ability to meet their obligations by giving insurers and regulators earlier warnings if these disruptions could create an unwarranted level of risk. These new requirements represent a sea change and also impose fiscal regimes not unlike the soon to be implemented European system Solvency II. Substantial, if not wholesale reform, of many Takaful insurers’ current business models are now required to ensure compliance. They will have to ensure their compliance with the regulatory framework is consistent with the underlying terms and conditions of Takaful insurance contracts they have marketed and sold to customers,” Barry Greenberg explains.

“This is motivated in part by both the need for greater financial stability in the marketplace and an increasing demand for Takaful insurance products. By tightening regulatory requirements, the various jurisdictions hope to increase market penetration by presenting their respective marketplaces as stable and reliable sources of Takaful products which consumers can rely on when needed,” Raghad Hammad says.


“The recently issued UAE Insurance Authority Regulations are a long-awaited development in the methodology underlying the way the financial affairs of Takaful insurers in the UAE are regulated. The Regulations can be divided into three primary areas of concern, each with its own sub-categories. These are capital adequacy, policyholder fund requirements and data keeping. From a strategic viewpoint, the focus of these rules collectively represents a move towards a risk based approach, where insurers are required to maintain certain levels of capital in specified, diversified investment categories, and have accurate and consistent data keeping and reporting protocols. The capital adequacy provisions deal with three modules: solvency, asset liability management (ALM), and technical provisions. The solvency requirements in turn include provisions on the solvency margin, minimum capital requirements, minimum guarantee fund, solvency capital requirements and assessment of solvency in key risk areas. All insurers must immediately advise the Authority if they fail to meet requirements in these metrics. The ALM requirements provide guidelines on how insurers allocate their investments with specific limitations on various classes of aggregate investments. These broadly include 30% in real estate, 30% in UAE company equity, 20% in non-UAE company equities, 100% in UAE government instruments, 80% in highly rated foreign government instruments, 30% in various classes of secured loans, 1% in derivatives or complex financial instruments and 10% in other investments. Additional sub-limits are set out which restrict the amount which may be invested in any one particular sub-class in each investment class. Notably, a minimum of 5% must be invested in cash deposits with a UAE regulated Islamic bank,” Greenberg says.

“There are also regulatory exceptions to account for various material factors which will impact investment percentage calculations. For example, real estate valuation must now be stated as market, not book value, of relevant property, which could cause a new allocation imbalance in some cases so applications may be made to the Authority to vary these percentage limitations. Assets must also be valued using ‘mark to market’ principles whenever possible. When ‘mark to model’ rules are used because a mark to market rationale can't be, they must be based on independently tested, evaluated and actuarially certified criteria. Real estate valuations must also be conducted by independent accredited firms, with two or more separate appraisals done for assets with a value of 30 million AED or over. Insurers must also establish detailed investment strategies with a view to fulfilling insurance and capital adequacy obligations, as impacted by key risks, including market, credit, and liquidity risks. Insurers' Board of Directors must establish, implement and monitor their company's investment strategies and regulatory systems. Every insurer is also now required to conduct a stress test of all its investments annually. Each Takaful company must clearly spell out the role of their company Sharia Committee in ensuring effective Sharia governance. Participators’ funds and shareholders’ funds (including Qard Hasan funds available from shareholders) will also continue to have distinct investment strategies,” Hammad says.

“The Technical Provisions include modern actuarial reserving principles designed to mitigate volatility like unexpired risk provision and incurred but not sufficiently reported risk, which is a subset of the more general incurred but not reported risk. Also covered is the unknown level of risk inherent in the existence of insurable losses ultimately payable by the insurer, but which has not been fully identified or accurately reserved, because they have not been reported or have not yet occurred but will in all probability occur in the future during an in force policy period. Actuarial oversight is given high priority and actuarial certification of the adequacy of the mathematical reserving practices is needed at least annually. The metrics to be identified in these reports are set out very specifically. Claims handling is also referenced, to the extent it must reflect the development and changing exposure which could result at different points in each claims’ pendency."

"The data keeping provisions consist of regulatory data, financial statement data and accounting data. Standardised accounting and data recording procedures must be maintained, a compliance officer and internal and external auditors appointed and quarterly and annual reports provided to the Authority. Records must be maintained for ten years after the last transaction of a claim or policy. A detailed template for financial reporting requirements is also provided. In terms of surplus and deficit allocation, the policy developed must consider the relevant International Islamic Standards connected to the Accounting and Auditing of Islamic Financial Institutions (AAOIFI) Board including the ‘Disclosure of Bases for Determining and Allocating Surplus or Deficit in Islamic Insurance Companies’ standard."


“Oman is also in the process of issuing new Prudential Regulations and its State Council passed a draft law in February. These establish a regulatory code for Takaful operators, including oversight and reporting requirements, product standards and liquidity levels. Takaful operators must be listed on the Stock Exchange and have a minimum capital of 10 million Riyals which is similar to requirements for conventional insurers. The draft law also states only dedicated Takaful firms can operate in the Omani market, preventing traditional insurers from offering Takaful complaint products, ” Hammad concludes.

Elsewhere in the GCC

“Each GCC state has its own regulations. Some have more developed regulatory frameworks specific to Takaful insurers and more stringent prudential requirements. For example, Bahrain’s Central Bank and Qatar’s Financial Centre have specific Takaful insurance regulations with varying levels of prudential requirements. Others, like Kuwait and Qatar have little or no distinction between Takaful and traditional insurers. There are discussions in these GCC states about instituting some kind of prudential regulations, which will regulate both Takaful and traditional insurers. In practice, Takaful models can vary significantly across different markets based on local insurance regulation differences, Sharia compliance and regional standards. The AAOIFI identifies four main Takaful models (Wakalah, Mudarabah, Hybrid (Wakalah and Mudarabah), and Waqf) each of which can be implemented and interpreted differently, creating multiple sub-variants."

"However, the prudential regulations can affect how Takaful insurers conduct their affairs, regardless of the particular Takaful insurance model they use. Given trends towards greater fiscal accountability, Takaful insurers throughout the GCC should take note, even if their particular country does not currently have prudential regulation. If those jurisdictions who have enacted prudential reform see improvement in their Takaful market fundamentals, we can expect other GCC states to follow suit,” Hammad concludes.

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Published: To be published in print in June/July2015
Publication: Lexis Nexis Middle East
Title: Tightening the screw - Insurance Authority Prudential Regulations
Practice: Insurance & Reinsurance
Authors: Barry Greenberg, Raghad Hammad
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