New regulations can help UAE's reinsurance market to mature, says expert

Out-Law Analysis | 04 Dec 2017 | 11:46 am | 6 min. read

ANALYSIS: The introduction of a new robust reinsurance framework in the UAE would be a major step towards growing the local market, but it may not convince international reinsurers to move away from the current practice of spreading risk through other international markets.

The UAE’s Federal Insurance Authority (IA) has proposed a new reinsurance regime. It has published draft regulations. Following on from its game-changing life insurance regime, the IA shows no sign of slowing down in its quest to spread its regulatory framework into all corners of the UAE’s insurance market.

Main highlights

  • Whilst still not 100% clear, the regulations do not seem to be altering the position that local insurers are free to cede their risks to non-admitted reinsurers; nor does it impose a minimum retention on local insurers that some feared.
  • Reinsurance licensing categories for new companies, branches of foreign (re)insurers and IA-licensed insurers are formulated; a big shift from the IA’s traditional position of treating the insurance and reinsurance markets as largely interchangeable in terms of regulatory oversight.
  • Local insures can only cede their risks to reinsurers that meet minimum classifications as issued by accredited bodies (S&P, Moody’s etc).
  • Local insurers are required to put in place comprehensive, three-year plans detailing their retention and reinsurance projections across each product line and report to the IA on the same.  A number of important ongoing requirements will also apply that will may require insurers to review and amend existing treaty arrangements.
  • Takaful insurers can obtain reinsurance from reinsurers that also carry on Takaful/non-Takaful provided their reinsurance is only funded from the Takaful operations of the reinsurer.

Article 24 – a ban on non-admitted reinsurance?

Article 24 of the draft regulations provide that a local insurer cannot cede a risk 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".

'Insurance company' is defined under Law No. 6 of 2007 – the UAE’s insurance law. It is defined as a company licensed by the IA to carry on insurance business.

The logical interpretation seems to therefore be that where one IA-licensed insurer seeks to obtain reinsurance of a particular risk from another IA-licensed insurer the second insurer must be licensed to cover that type and class of risk. What we do not believe it is saying is that local insurers can only obtain reinsurance from other IA-licensed (re)insurers.

This interpretation would be consistent with the IA's introduction of a new 'reinsurance endorsement' for existing IA-licensed insurers to carry on reinsurance business alongside specialist reinsurance entities. 

Two caveats apply to this position, however.

Firstly, as there is no guidance from the IA and the regulations are still in draft there is a risk Article 24 could be being mooted as a prohibition on non-admitted reinsurance that may be clarified in a further draft of the regulations.

Secondly, whilst foreign reinsurers should still be free to cover risks ceded by local insurers, the regulations do not alter the position that foreign reinsurers cannot be seen to carry on any (re)insurance activities on the ground in the UAE and they should still exercise caution when interacting with local cedents.

The new reinsurance licensing categories

The draft regulations provide for: the establishment and licensing of reinsurance companies in the UAE; the registration and licensing of branches of foreign reinsurers in the UAE and; the endorsement of IA-licensed insurers, to carry on reinsurance business. 

UAE reinsurance company

Applicants for the reinsurance company licence need to provide comprehensive information as part of their application including a five-year feasibility study, details as to their retrocession coverage as well as general fit and proper eligibility of founders/key management. Companies are required to be UAE public companies with 51% UAE/GCC ownership and paid-up capital of AED 250m ($68m). 

Branch of foreign (re)insurer

Foreign company branches must supply similar information to reinsurance companies albeit in respect of its parent/wider group operations. They must also provide a three-year work plan, actuarial certification of the applicant’s compliance with technical provisions, solvency margin and minimum capital requirements and the proposed funds to be held in the UAE to meet local obligations.

Foreign reinsurers need to maintain a rating at least equivalent to any of the following:

  • Standard & Poors – BBB
  • Moody's – Baa
  • AM Best – B+
  • Fitch Ratings – BBB

Importantly, the rating must be granted on the basis of the internal information of the company, not on its published financials alone and the company cannot be incorporated in a state that has a lower rating than the above minimum ratings.

Existing IA-licensed insurers

IA-licensed insurers must apply to the IA to have an endorsement to carry on reinsurance business applied to their licence. Applicants must provide details of their work plan, financial position, technical/management personnel and retrocession program. Applicants must also meet the minimum rating requirements that apply to foreign insurers, excluding where they only provide facultative reinsurance, and hold paid up capital of AED 350m ($95m). 

There are also several important ongoing requirements that insurers must adhere to including:

  • reinsurance can only be provided for the same lines the insurer is licensed to write directly;
  • reinsurance cannot exceed 49% of total annual written premium;
  • where 'accepted liabilities' exceed the company's retention it must either have an existing reinsurance treaty in place that allows it to accept the surplus liability;
  • where coverage of 'accepted liabilities' is to be covered by facultative reinsurance the company must seek the prior approval of the cedent.

A reinsurance framework for local cedents

IA-insurers must now put in place comprehensive three year reinsurance plans setting out retention and reinsurance treaty limits, distinction between local and foreign reinsurance coverage, brokerage arrangements, reinsurer ratings and commission payable to the company.  The plan is very much a living document needing to be approved by the board, reviewed annually and amended where unforeseen events require it.

The regulations introduce several new requirements that will require insurers to review existing as well as proposed treaties going forward:

  • reinsurers must hold a rating that meets the specified ratings;
  • an amount equivalent to 1% of total reinsurance premiums ceded shall be held by the insurer as provision for a failure of any of reinsurer;
  • a new clause must be included in their treaty wordings requiring that the reinsurer maintain provisions of unearned premium for the reinsurance premiums ceded to it. 

Finally, there are a number of ongoing requirements, including in respect of what the local cedent must have in place. This includes a requirement on the local cedent to have a designated reinsurance officer, including for each business line reinsured if it provides both life and general coverage.

Takaful (re)insurers

Except where noted, the regulations apply to Takaful (re)insurers in the same way they apply to normal (re)insurers. 

IA-licensed reinsurers may practice Takaful business provided their articles of association provide for them doing so and that all Takaful operations are separated from the non-Takaful business and carried on in accordance with Shariah requirements. 

In the case of a UAE Takaful insurer, when obtaining reinsurance, it must ensure that to the extent the reinsurer practices both normal and Takaful lines, that its reinsurance is only provided from funds attributable to the Takaful operation.

Analysis

To date, local insurers have been largely left to their own devices when it came to managing their reinsurance. By comparison both Saudi and Oman have detailed requirements in respect of reinsurer selection, local market retention and periodic reporting. Given that most local insurers are heavily reliant on international capacity it seems natural and sensible that the IA would seek to increase its oversight of the local market’s reinsurance arrangements.

The recognition of reinsurance as a distinct category of risk carriers is an important step in the evolution of the UAE’s insurance regime. That said, both international reinsurers and local insurers seem quite settled on the current status quo of locally covered risks being ceded offshore into London or other international markets. When you combine this with the DIFC’s well-established position as the leading reinsurance market in the GCC, the commercial drivers for an international reinsurer to establish a new licensed reinsurance entity in the UAE are not altogether clear.

Finally, consideration should be had as to what, if any, further aims the IA has towards its domestic (re)insurance market. The fundamental lack of capacity in the local market means that, at least for the near future, insurers need to be unfettered in securing capital outside of the UAE. However, if the IA has a long term goal of stemming this outflow of capital, a first step would surely be to develop and bed down a robust reinsurance framework like the one it has just introduced.

Tom Bicknell is a Dubai-based specialist in insurance regulation at Pinsent Masons, the law firm behind Out-Law.com.