IA announces reinsurance regulations

The Insurance Authority Board of Directors recently released regulation on reinsurance operations.

The Decision No.(23) of 2019 applies to reinsurance companies established in the UAE, branches of foreign reinsurance companies, reinsurance business ceded by an insurance company licensed and registered with the Authority, accepted reinsurance business by a licensed company registered with the Authority, and an insurance or reinsurance pool in which an insurance or reinsurance company licensed and registered with the Authority or an underwriting syndicate.

The reinsurance company may practice reinsurance operations in the insurance of persons and funds accumulation on the one hand and the reinsurance operations in the insurance of property and liabilities on the other hand.

The regulations also include takaful insurance and reinsurance companies. The practice of these operations of both types shall be among the purposes set forth in its Articles of Association, complying with the provisions of The Insurance Authority’s Board of Directors Resolution No (10) of 2016 concerning the separation between the insurance of persons and fund accumulation operations on the one hand and property and liability insurance operations on the other hand. All operations related to takaful reinsurance should also be compliant with the Islamic Shari’ah provisions. Reinsurance companies practicing takaful reinsurance business should adopt complete technical and financial separation between the reinsurance business and takaful reinsurance business.

Conventional insurance companies registered with the regulator may practice the ceded and accepted reinsurance business including: ceding reinsurance operations (treaty, facultative and facultative obligatory) with reinsurance companies or conventional insurance companies; accepting reinsurance business (conventional and takaful) treaty, facultative and facultative obligatory, provided that reinsurance operations are set among its purposes in its Articles of Association; and the insurance company that wants to accept treaty takaful reinsurance complies with Article 39 of the regulation.

In addition, takaful insurance companies may practice treaty, facultative and facultative obligatory ceding takaful reinsurance business with takaful insurance companies or takaful reinsurance companies or to insurance companies or reinsurance companies; accepting takaful reinsurance businesses provided that takaful reinsurance operations shall be among the purposes set in the Articles of Association and complies with Article (39) of the regulation.

With respect to the licensing and registration, the regulation states that the Founders’ Committee of the reinsurance company shall submit the application for the license to the director general enclosing:

1. The Memorandum of Incorporation and Articles of Association of the reinsurance company stating the names of the founders, the number shares allocated to them and the percentage of their respective participations.
2. The economic feasibility study and the work plan for the first five years of the reinsurance company and the types and classes of reinsurance that will be carried out by the company and the local, regional or international markets where the company will practice its business;
3. A certificate from an Actuary that includes the adequacy of the Technical Provisions and the prospects of the company’s compliance with the Solvency Margin and the Minimum Capital Requirements ;
4. A declaration by the founders’ committee that none of the company founders has been convicted of a crime that violates honor or has been declared bankrupt;
5. A declaration by the founders’ committee that all the data and documents submitted to the Authority for obtaining the license are true.
6. The amount of the proposed capital;
7. Complete information about the founders, the nature of their business, 
their experience and their shares in the insurance companies, reinsurance companies or the insurance related professions inside and outside the State;
8. The Retrocession covers to be set by the Company to protect its liabilities and the name of the leading reinsurer nominated to deal with;
9. The estimated budget for the first five years of the company’s work;
10. During the incorporation stage, the Founders shall appoint an Actuary, 
Legal consultant, Financial consultant and Auditor,
11. Any other data or documents specified by the bylaws and regulations or 
deemed necessary by the Board to consider the application;
12. A certificate from the Auditor and the Actuary indicating the ability of the 
company to provide the Solvency Margin and to allocate the Technical Provisions.

This application will in turn be submitted by the director general to the Board of Directors together with his opinion on the feasibility of establishing the company. The company is not authorized to carry out its business unless the final approval, licensing and registration in the register accomplished.

In case of initial approval, the reinsurance company shall submit and enclose to the Authority the following:

1. A list of the proposed names for the position of the director general and its senior officers, with a detailed description of their respective qualifications and experiences and attaching proof of these qualifications and experiences;
2. Approvals and other licenses that must be obtained pursuant to the laws and regulations in force.

The subscribed and paid up capital of the reinsurance company shall
not be less than AED250,000,000.

The Authority may determine a minimum capital for the Company greater than that stipulated if the Feasibility Study indicates that the Company will be involved in a short term from its incorporation in the reinsurance business at the regional and international level.

At least 51 percent of the capital of the reinsurance company incorporated in the State shall be owned by natural persons who are UAE Nationals or GCC Nationals or by legal persons fully owned by UAE nationals or GCC Nationals.

The work Plan that must be submitted for the approval of the incorporation of the reinsurance company shall include: types and classes of reinsurance that the company will focus after commencing operations; geographical distribution of the accepted businesses locally, regionally and internationally; direct acceptance policy or through reinsurance brokers; retention limits of risks in each class of reinsurance; reinsurance covers to protect liabilities and covers for accumulation and catastrophes; names and addresses of the retrocessionaires who will be dealing with the company and their rating; the Financial Principals of the reinsurance that will be applied by the company; report on the financial position of the Company, the adequacy of the general and technical reserves to be taken, and the rules of the Company’s accounting system; investment policy adopted, organizational structure of the company; and future plans for development of the business.

The regulation also mentions a set of documents required to be attached for opening a branch of the reinsurance company. A foreign company specialised in reinsurance shall not be permitted to operate within the State through an agency, taking into consideration the special case of the underwriting Syndicates and P & I Clubs.

The regulations also specify a minimum classification for branches of reinsurance companies: BBB by S&P, Baa by Moody’s, B+ by AM Best or BBB according to Fitch Ratings. This classification has to be maintained during the period of its licence.

A foreign reinsurance company licensed by the Authority and registered in the Authority’s register as a branch of a foreign company may open other branches within the State after obtaining the approval of the Director General. Such branches should annually submit a certified certificate from its head office in the home country in which it supports that the insurance business subscribed within the State and which exceeds its retention is covered by reinsurance covers with reinsurers who have the classification stipulated in Article (18) of these Regulations, taking into consideration the exceptions contained in the Article.

Ceding reinsurance business

Local companies shouldn’t cede its reinsurance business to another insurance company unless the other company is licensed by the competent regulatory and supervisory authority to practice the type and class of insurance entrusted to it to reinsure. The reinsurance relationship between a local insurance company and a reinsurer may not be finite, where the relationship between the ceding company and the reinsurer is similar to that of a lender and borrower.

The reinsurers with whom the insurance company established in the State is dealing shall be classified according to the classification stipulated in Article (18).

The Company shall prepare a three-year plan and submit it to the Board of Directors for approval concerning the Retention and Reinsurance for each type and class of insurance types and classes that company carries out, based on the nature of the underwritten risks, the number of companies and their accumulation and based on available statistical data on loss ratios in each class of insurance and its trends and future projections affecting those potentials. The plan shall be reviewed annually during the three months prior to the commencement of each year in order to amend whatever is required to be amended in light of the experience achieved during the previous period.

The plan shall include at least the following main lines:

1. Retention and Reinsurance treaties limits and the ceded Facultative 
Reinsurance operations.
2. The type of reinsurance treaties (proportional: quota-share or surplus, non- proportional: Excess of loss or stop loss) or a program combining the aforementioned types.
3. Facultative reinsurance ceded locally and abroad and facultative obligatory reinsurance covers.
4. The leading reinsurer and follower reinsurers, their credit rating and monitoring the accumulation cases.
5. The Reinsurance brokers to be contracted with the Company and the reasons for their selection.
6. How to protect the company’s retention in cases of accumulation or catastrophes and in cases of unknown accumulation.
7. The Commissions payable to the Company and whether they are flat or variable according to the loss ratios and profit commissions and rules of their calculation.

The Company shall include a condition in its reinsurance treaty with the reinsurer that binds the reinsurer to maintain the provisions of its unearned premiums for reinsurance premiums ceded by it.

The company may cede to the insurance or reinsurance pool after obtaining the prior approval of the Director General. It may also cede the reinsurance business to the insurance underwriting syndicates without the need for a prior approval.

The Takaful Insurance Company, when ceding its business to a reinsurer, that practices both reinsurance and Takaful reinsurance, shall request that reinsurer to provide provision which has to be Islamic Sharia compliant in all parts of its funds to meet the payments that may be required to pay to the Company.

The management of the insurance company shall immediately inform its board of directors and the Authority if there is a probability of a problem in reinsurance arrangements which may affect its capability to meet its obligations with the necessary clarifications and procedures to remedy the situation.

The Director General shall direct the Company to cease dealing with a particular reinsurer in case the Authority has a confirmed information concerning the reinsurer default financial position or its failure to pay its obligations, provided that the cease time from dealing with the company is determined by a deliberation with the company management.

The Director General may request that no renewal shall be made with any reinsurer who has lost the conditions stipulated in these regulations and that no new business shall be ceded to it.

Local insurance companies shall bind in the preparation of its annual financial statements and its final accounts to allocate 0.5 percent of the total reinsurance premiums ceded by them in all classes in order to create a provision for the probability of failure of any of the reinsurers with whom the Company deals to pay what is due to the company or default in its financial position. These provisions shall be accumulated year after year and may not be disposed of without the written approval of the Director General.

The new regulation also has a section pertaining to reinsurance business accepted by local insurance companies.

All the provisions of the legislation governing the direct insurance business shall be applied to the reinsurance companies as far as they are consistent with the nature of the reinsurance business, including the Financial Instructions of the Insurance Companies and the Financial Instructions of the Takaful Insurance Companies.