Solvency Regulation in the UAE: A Benchmark and Impact Study

Transcription

1 : A Benchmark and Impact Study RAGHAV OHRI, ASA CONSULTING ACTUARY 14 NOV 16 DUSIT THANI HOTEL DUBAI

2 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

3 SOLVENCY REQUIREMENTS To protect the interests of policyholders or beneficiaries by ensuring the financial stability of insurance and reinsurance undertakings 3

4 WHAT IS THE PURPOSE OF INSURANCE REGULATIONS? Key aspect of new Regulations is to put in place a regime which has (i) (ii) (iii) risk based capital requirements complemented by relevant non-financial measures and which enables as much transparency as possible through statutory reporting requirements 4

5 THE THREE PILLAR APPROACH Pillar 1: Pillar 2: Pillar 3: 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 Valuation of assets and liabilities New focus for supervisor Level of harmonisation Group supervision More pressure from capital markets, investors and shareholders 5

6 PROBLEMS WITH TOO LITTLE CAPITAL 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. 6

7 PROBLEMS WITH TOO MUCH CAPITAL 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. 7

8 CAPITAL REQUIREMENTS IN INSURANCE REGULATIONS 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 8

9 CAPITAL REQUIREMENTS IN INSURANCE REGULATIONS Capital values which trigger regulatory intervention The amount below which the amount of financial resources should not fall Must be calculated quarterly 9

10 MINIMUM CAPITAL REQUIREMENT 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 10

11 INSURANCE COMPANY BALANCE SHEET Ancillary Own Funds Basic Own Funds Solvency Capital Requirement Minimum Capital Requirement Assets Covering Technical Provisions, MCR and SCR Technical Provisions 11

12 SOLVENCY CAPITAL REQUIREMENT 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

13 SOLVENCY CAPITAL REQUIREMENT Solvency Capital Requirement Non-life underwriting risk Life underwriting risk Investment Risk Credit risk Operational risk Premium Technical Provisions Interest rate Reinsurance Recoverables Reserve Sum at Risk Equity Receivables Property Derivatives Spread Currency 13 Concentration

14 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 14 40

15 % OF TOTAL UAE MARKET SAMPLE: ASSETS HELD 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 30% 30% 20% 24% INVESTED ASSETS BY CLASS 100% 100% 80% 20% 21% 6% 4% 2% 5% 0% 0% 0% 0% 1% 7% 30% 16% 10% 0% 0% ASSET CLASS % OF TOTAL % PERMITTED 15

16 % OF TOTAL BSCR UAE MARKET SAMPLE: SOLVENCY POSITION 80% 72% 64% 56% COMPARISON OF BSCR CONSTITUENTS 48% 40% 32% 24% 16% 8% 0% Underwriting Risk - Property and Liability Insurance Underwriting Risk - Life Insurance Investment Risk Credit Risk CAPITAL CHARGE UAE QIS5 (NON LIFE SOLO COMPANIES) 16

17 NWP AS % OF TOTAL RETENTION UAE MARKET SAMPLE: BUSINESS WRITTEN SIZE OF LINE VERSUS RETENTION (12 MONTHS) 50% 100% 45% 90% 40% 80% 35% 70% 30% 60% 25% 50% 20% 40% 15% 30% 10% 20% 5% 10% 0% HEALTH MOTOR OTHERS FIRE MARINE_&_AVIATION LOB 0% NWP_% RETENTION 17

18 % OF TOTAL UAE MARKET SAMPLE: UW RISK CHARGE (NON LIFE) 50% UW SCR (NON-LIFE): WRITTEN PREMIUM BASIS 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% HEALTH MOTOR OTHERS FIRE MARINE_&_AVIATION LOB NWP_% SCR_WP_% 18

19 % OF TOTAL UAE MARKET SAMPLE: UW RISK CHARGE (NON LIFE) 50% UW SCR (NON-LIFE): TECHNICAL PROVISIONS BASIS 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% HEALTH MOTOR OTHERS FIRE MARINE_&_AVIATION LOB NTP_% SCR_TP_% 19

20 UAE MARKET SAMPLE: INVESTMENT RISK 20

21 UAE MARKET SAMPLE: CREDIT RISK 21 40

22 CAVEATS Concentration risk not considered Changes in SII after QIS 5 not considered 22 40

23 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! 23

24 QUESTIONS? 24

25 THANK YOU 25