1. Presentation to the Insurance Business Group 8 June 2015

2.  Insurance/Takaful industry regulated by Federal Law No.6 of 2007  Implementing Regulations under the law were issued in 2009  Draft versions of Financial Regulations issued in 2011 ◦ Went through an extensive process of testing and consultation  Finally issued in end 2014

3.  Pre-Regulation Regulatory Effectiveness in the UAE was very low ◦ Although the implementing regulations required FCRs for life and medical this was not universally implemented ◦ No standards for reserving. Although some standard practices existed for UPR, weaknesses existed in case of  Determination of IBNR claim reserves  Determination of any reserves for premium deficiency  Determination of Loss Adjustment Expenses (allocated and unallocated) ◦ No control on assets - some companies borrowed and invested in risky assets (including real estate)  Current regulations take us a long way towards a state-of-the- art regulatory regime ◦ Mid-way between a rule based regime (“Solvency I”) and a principles based regime (“Solvency II) ◦ This is a huge jump – from no regulation to a fairly sophisticated regime ◦ The question must be asked-can this be effectively implemented without causing huge disruption in the market? ◦ Also - do the regulations address all concerns of the industry?

4.  Overview of Regulations ◦ A summary of the important aspects of each regulation; potential difficulties; and suggested clarifications to be issued by the Insurance Authority  Implementation Phasing ◦ Understanding of what is required and when  Likely Challenges ◦ Difficulties which are likely to arise and suggested actions.  Further Areas for IA to Address

5.  There are two separate sets of regulations – one for Takaful Insurance Companies and one for Insurance Companies  The regulations cover the following areas: 1.The Basis of Investing the Rights of the Policyholders; 2.The Solvency Margin and Minimum Guarantee Fund; 3.The Basis of Calculating the Technical Provisions; 4.Determining the Company’s assets that meet the accrued insurance liabilities; 5.The Records which the Company shall be obligated to Organize and Maintain as well as the Data and Documents that shall be made Available to the Authority; 6.The Principles of Organizing Accounting Books and Records of Each of the Companies and Agents and Determining Data to be inserted in these Books and Records; and 7.Accounting policies to be adopted and the necessary forms needed to prepare reports and financial statements and presentations.

7.  Applies both to Shareholders’ Funds and Funds held against Insurance Liabilities ◦ Most of the regulations do not apply to unit linked funds except to the extent that there is an investment return guarantee  The regulations require the following: ◦ Active investment committee ◦ Investment policies and risk management policies for managing investment risks ◦ Diversification of investments ◦ Matching of assets held against insurance liabilities with liabilities ◦ Stress testing framework and policy for all investments ◦ Separate investment strategy for each Fund (life and non-life) ◦ Processes in place to ensure policies are adhered to. ◦ Funds invested in UAE – higher of UAE liabilities and 50% of total invested assets.

8.  Limits and sub-limits prescribed as proportion of Total Invested Assets ◦ Real Estate 30% (but IA can increase to 40%) ◦ UAE Equities30% ◦ Non-UAE Equities20% ◦ UAE Bank depositsMax 50% in single entity  Limits seem to be limits on actual investments and not admissibility limits for solvency purposes ◦ This will be extremely difficult to control (eg., if value of a property increases will the company have to sell it ?) ◦ Suggest that the IA review this.  Time for compliance with limits ◦ Real estate – end 2017 ◦ Other than real estate – end 2016

9.  The Company needs to submit quarterly report analyzing its investment portfolio per the classifications given in the regulations – to be authenticated by the External Auditor.  The Company needs to submit annually Risk Analysis Report covering investment portfolio, strategy and management processes. ◦ Needs to be signed off by Actuary and authenticated by External Auditor  The report should, at minimum, include the following: ◦ Summary of Investment Strategy ◦ Analysis of Investment Portfolio ◦ Analysis of Market, Liquidity and Credit Risk (Including scenario and stress testing)

10.  Detailed guidance given on how strategy to be formulated  Assets required to be marked to market  Where this is not possible a mark to model approach may be used ◦ Actuary to vet the model  For real estate valuation to be done. ◦ If real estate value is more than AED 30 million, the regulations require the revaluation of the investment in real estate from the two independent real estate firms, perform annually ◦ The same independent real estate firm shall not be appointed for two consecutive years

12.  Minimum capital for insurance company AED 100 million (AED 250 m for reinsurance company)  Minimum Guarantee Fund – 1/3 of solvency capital  Solvency Framework defined ◦ For groups calculated on a consolidated basis  The Solvency Capital Requirement shall be calculated on the presumption that ◦ the Company will pursue its business as a going concern. ◦ the Solvency Capital Requirement calibrated to take into account  All quantifiable risks  Existing business plus new business expected in next year  Corresponds to Value at Risk at a 99.5% confidence level over one year period (i.e., to cover maximum deterioration over 1 year with a 99.5% confidence level)

13.  IA has issued a solvency template along with the revised financial regulations  This template forms the framework to determine the required solvency capital as well as it is a reporting requirement to submit the template  Solvency requirements in the region had generally been based on the liability side, whereas the new regulations have extended this to the assets side ◦ Limits of assets considered to be “admissible” as per the limits prescribed in section 1.

14.  Group provisions appear not to have been thought through  Regulations say that “The Group capital requirement is the sum of the capital requirements calculated on the consolidated insurance Companies/ branches and capital requirements of other regulated entities.”  This implies that solvency elements (including admissible assets) need to be determined based on consolidated financial statements. This has two issues: ◦ No cognizance for whether or not net assets of subsidiaries or foreign branches are capable of being used if there is a need – e.g., could be that the jurisdiction in which the subsidiary or branch is based has a more stringent solvency regime ◦ Bank accounts held by subsidiaries in aggregate appear to be admissible only to the extent of 10% of consolidated total invested assets.  Surely an anomaly as non-UAE equities have a limit of 20%

15.  The regulations require companies to: ◦ have in place a documented risk management framework and strategy, risk management policies and procedures, and allocated responsibilities and controls. ◦ establish a stress testing framework and policy.  Further guidance on the risk management system and framework in Addendum (2) of the regulations herein shall be applied.

16.  Each insurer is required to submit the Solvency Capital Requirement Report, certified by the actuary, on a quarterly basis  The companies are also required to submit on an annual basis the solvency template to IA – validated by actuary and external auditors and endorsed by Chairman of Board of Directors.  The Company shall at all times comply with the requirements of the Solvency Margin, which means maintaining for the largest of the following: ◦ Minimum Capital Requirement; ◦ Minimum Guarantee Fund; and ◦ Solvency Capital Requirement.  At least 100% of the MCR should be met by the Basic Own Funds  At least 100% of the SCR and MGF should be met by the Basic Own Funds + 50% of ancillary own funds

17.  Under the regulations, IA may require any insurer to submit a Financial Condition Report (FCR) ◦ Apparently the FCR is not required unless asked for ◦ In most regimes there would be an annual submission requirement – no separate on technical provisions would then be required  FCR components will be as follows: ◦ An Actuarial certification of technical provisions ◦ A risk-based analysis of its investment portfolio, strategy and management process ◦ An analysis of the solvency capital requirement ◦ Evaluation of its reinsurance structure and management process ◦ A risk-based analysis of the UW policies and procedures of the company ◦ Evaluation of the pricing policies and procedures of the Company ◦ Evaluation of the ERM policies and procedures of the Company

19.  Insurers are required to appoint an actuary who shall review and approve the technical provisions. These shall include ◦ Unearned Premium Reserves ◦ Unexpired Risk Reserves ◦ Outstanding Loss Reserves ◦ Incurred But Not Reported Reserves ◦ Allocated Loss Adjustment Expense and Unallocated Loss Adjustment Expense Reserves ◦ Mathematical Reserves  Detailed guidance given as to calculation methods  Company needs to ensure the accuracy of data used for valuation purposes. Actuary has to check and report if quality is not adequate.  Detailed Actuarial Report to be submitted Annually  Quarterly reserves also to be certified by Actuary.

20.  Article 2 requires investments equal to gross of reinsurance UPR, URR and Mathematical Reserves to be maintained in the UAE plus net of reinsurance claims reserves and related expense reserves  This is an obvious anomaly which needs to be corrected as, if strictly implemented, this would have serious repercussions on major lines of business.

21.  The actuarial report, at minimum, shall cover the following:  Section 1 – An overview of the Insurance Company and its business  Section 2 – A description of the data used (including reliance and limitations, if any)  Section 3 – The methods used to determine reserves including assumptions made.  Section 4 – Evaluation of the results  Section 5 – A summary of the overall results  Section 6 – Attachments (including the data collected, the compiled cumulative figures, the calculation sheets and the final results)  Section 7 – Certification

23.  Assets must be prudently invested ◦ Especially those held to back MCR, SCR & MGF  Linked liabilities must be backed by assets to which they are linked  Addendum provides for details of how each class of asset to be valued for solvency purposes

24.  Section 5 deals with types of records which need to be maintained and retention periods  Section 6 deals with accounting records and auditing (both internal and external) thereof  Section 7 deals with accounting policies and financial statements ◦ Quarterly and Annual financial statements to be submitted- audited ◦ IFRS to be followed ◦ Formats Given ◦ Separate financial statements for life and non-life  A management report to be submitted – contents given in Addendum

25.  The latest regulations require the following to be signed off the Company’s actuary: ◦ Annual Risk Analysis Report ◦ Solvency Template and Solvency Capital Requirement Report – quarterly and annually ◦ Technical Provisions and Actuarial Report – quarterly and annually ◦ Financial Condition Report, when required by IA ◦ For examination of records, actuary may report to the IA any concerns held regarding material failures by the Company to comply with regulatory requirements

26.  The Company must have the following as per the IA regulations: ◦ Submit to the IA, a quarterly report and analysis of its investment portfolio ◦ Submit to the IA, separate financial statements for life and General business both annually and quarterly ◦ Submit to the IA, a management report as per the Addendum (2) of Section 7 ◦ Investment and risk management policies must put in place ◦ Establish a stress testing framework and policy ◦ Must have in place effective risk management framework

28.  For concentration and asset allocation limits ◦ Assets in real estate –within 3 years ◦ Other than real estate –within 2 years  For Solvency Margin and Minimum Guarantee Fund – within 3 years  Basis of calculating the Technical Provisions – within 2 years  Company’s assets that meet the accrued insurance liabilities – within 3 years  Organize and maintain data and documents – within 1 year  Accounting books and records for agents and brokers – within 1 year  Accounting policies and necessary forms needed to prepare and present the reports and financial statements – within 1 year  During the alignment period, the Company shall provide the Authority with the financial reports, solvency templates and reports as required by IA that demonstrate progress in aligning its operations according to the requirements and regulations.

30.  Challenges for Insurance Companies ◦ Higher technical provisions and inadmissibility of assets ◦ Set up internal governance structure for investments, risk management and internal audit ◦ The higher technical provisions impact on pricing ◦ All of the above require significantly more capable human resources than is available in many companies at present  Challenges for the regulator ◦ Regulations existed even prior to the new regulations but were not effective ◦ The IA needs to have an internal capacity for both off-site surveillance and on-site inspections  Challenges to the actuarial profession ◦ There is no single actuarial body in the UAE although an attempt is being made to create one ◦ Currently Associates of the UK and US professional bodies are also accepted as full actuaries. Also little attention paid to experience and specialization  This is likely to result in very different actuarial standards being applied  Suggest that this aspect be examined by the IA

32.  Important issues facing the industry include: ◦ Business being written at unsustainable rates – particularly in motor and medical (where companies largely retain risks and therefore do not have pressure from reinsurers to price sensibly) ◦ Life insurance commissions for business written through banks and brokers being so high so as to more or less destroy any value for the policyholders ◦ Many life insurance products being sold without formal approval and without necessarily being actuarially priced ◦ No Life Insurance illustration format  None of the above are covered by the new regulations  Suggest that the IA should consider introducing regulations relating to motor and medical pricing along the lines of those issued by the Saudi Arabian Monetary Agency.  The IA also needs to be more communicative in areas where laws apparently exist but no one believes that these will be implemented ◦ Eg., the requirement to separate life and non-life business in separate legal entities ◦ Need to address this – decide once and for all – and then strictly implement

34.  All in all the new regulations are a step in the right direction ◦ Perhaps a smaller step in the first phase would have been better but certainly the movement is in the right direction  The phased approach is also very sensible as it gives companies time to adjust to the new regulations  The IA is requested, however, to seriously look at the need for regulating pricing of insurance products in the market as this is perhaps the greatest challenge that the industry faces at the moment.