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The Insurance Authority (IA) of the United Arab Emirates’ (UAE) recently issued new “Financial Regulations to Traditional and Takaful Insurance Companies” aim to improve the risk profile and policyholder security of UAE insurers by placing limits on higher-risk investments, introducing risk-based solvency calculations and standardising reporting and actuarial practices.
In a new Best’s Special Report, titled, “A.M. Best Comments on the New UAE Insurance Authority Financial Regulations,” A.M. Best notes that whilst many UAE insurers have strong risk-adjusted capitalisation accompanied by unleveraged balance sheets and sound underwriting performance, there are a number of common issues. These issues include insurers with significant exposure to high-risk assets, inadequate and varied treatment of accounting principles, unsophisticated measurement of technical reserves and weak – although developing – enterprise risk management (ERM) practices. In A.M. Best’s opinion, the new rules are well placed to address these issues.
“The asset composition of most insurers’ investment profile is currently highly weighted toward real estate and equity assets, with the investment decisions of many insurers made by their boards of directors, with limited involvement from their senior management team,” said Mahesh Mistry, director, analytics. “The new investment rules are designed to improve the asset profile of insurers by reducing insurance companies’ exposure to higher-risk assets. This should provide greater stability of returns to insurers’ investment profiles and thereby reduce volatility arising from fluctuating asset prices on their operations and balance sheets. A.M. Best believes that this de-risking of the asset base should improve the financial strength of companies.”
The new regulations also stipulate that companies must have a risk management system, including strategy, policies and procedures. Michael Dunckley, financial analyst, added: “Standards of ERM differ significantly between insurers in the UAE. A.M. Best’s Credit Rating Methodology states that a company’s risk control capability should be appropriate to its risk profile, placing greater emphasis on the practice rather than the form of risk management. The requirement of an ERM framework and policy represents a step toward effective risk management, but it must influence practice and strategy to effectively manage risk in regulated companies.”
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