Out-Law News 3 min. read

New solvency standards among updated regulations for UAE traditional and Islamic insurers


Insurers operating in the United Arab Emirates (UAE) will be among the first to adopt new solvency standards based on those that will come into force in the EU next year, the country's Insurance Authority (IA) has announced.

Detailed new rules published by the regulator will apply to both traditional and Islamic 'takaful' insurers. They cover technical provisions, investment limits and record-keeping requirements, amongst other areas of insurance regulation. Firms will have between one and three years to implement each aspect of the new regime.

UAE economic minister and IA chair Sultan bin Saeed Al Mansouri said that the new rules would protect the rights of policyholders and shareholders while boosting the performance of firms.

"The best international legislative practices were followed in drafting the financial regulations for traditional and takaful insurance companies in a manner that facilitates their application and supervision," he said.

"By issuing the regulations, the Insurance Authority seeks to complete the legislative frameworks needed to activate oversight and control over the insurance sector; achieve many goals including ensured stability and sustainability for the insurance market by ensuring the solvency of insurance companies and their ability to meet all liabilities, and create harmony among investment policies of the insurance companies and general economic policies of the UAE," he said.

The regulations introduce new controls on insurers' investment activities, intended to protect policyholders and shareholders as well as minimising firms' exposure to risk. They require firms to develop investment and risk management policies for annual approval by the board of directors, to be overseen by a sufficiently independent investment committee. Separate investment strategies should be adopted for a firm's life and non-life businesses, if both are practiced. Firms will have to 'stress test' their investments once a year.

Limits on firms' exposures to different types of investment are included in the regulations, based on the perceived riskiness of that type of investment. These include a 30% limit on real estate investment; 30% investment in equities of which no more than one third may be invested in a particular class of asset; and a 20% limit on mutual fund investment of which no more than half may be invested in a particular asset class. Firms may invest 100% of their assets in UAE government bonds, with a 25% limit on each investment; or 80% in non-UAE government bonds, with a 25% limit on each investment. They must also deposit a minimum of 5% with a bank.

New solvency requirements, based on those due to be introduced through the EU's Solvency II regime from 1 January 2016, are also included in the regulations. These requirements will act as an "early warning" system for regulators, as well as improving the ability of individual firms to cope in a financial crisis, according to the regulations. The capital requirement set out in the regulations much cover firms' underwriting, market, liquidity, credit and operational risks.

The regulations also require firms to maintain "adequate and appropriate" technical provisions, and include a standard calculation method based on international best practices. Technical provisions are based on the capital firms need to cover their liabilities. Firms will be required to appoint an actuary to assess their technical provisions and oversee their financial statements, which must be drafted in accordance with the International Financial Reporting Standards (IFRS). The regulations also set out for how long accounting and other records must be retained, as well as the types of records that must be retained.

The package also includes separate regulations for takaful insurers, recognising the "special nature" of the takaful business. Takaful is based on the concept of mutuality, with the takaful company overseeing a pool of funds contributed to by all policyholders. The new rules include provisions on the distribution of surplus funds to policyholders and separation of policyholders' and shareholders' accounts.

Insurance law expert Roger Phillips of Pinsent Masons, the law firm behind Out-Law.com, said that although the UAE was the first Gulf state to issue new rules, others would soon follow.

"We expect similar prudential rules in other jurisdictions shortly, such as Qatar where the Qatar Central Bank is about to issue new insurance regulations," he said.

"These new regulations come on the back of the economic growth in the state and in recognition of the important role that insurance is providing in support of and protection of the energy and infrastructure developments. For many years the insurance sector has been looking for improvements and modernisation of the regulatory framework and more professionalism in the assessment and management of risk locally – these new prudential requirements are an important step forward," he said.

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