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New regulations to strengthen asset quality and solvency of UAE insurance sector

  • 15 February, 2015

Sunday, Feb 15, 2015

Dubai: The long awaited insurance regulations announced by the UAE Insurance Authority earlier this month for both conventional and Islamic insurance (takaful) firms is expected to boost the profitability and solvency of insurance firms and could eventually lead to consolidation in the sector analysts and officials said.

The regulation has set investment limits for the sector with a ceiling of 30 per cent for overall exposures to real estate assets. For equity assets including units in mutual funds in listed and unlisted companies within the UAE, the overall ceiling is set at 30 per cent; for equities outside the UAE the limit is 20 per cent. The authority has also set a limit for exposure to cash and deposits at 5 per cent.

“The new insurance regulations issued by the Insurance Authority will strengthen several credit characteristics of insurers, including capital, asset quality (by reducing risk-taking) and reserve adequacy,” said Mohammed Ali Londe, an analyst with Moody’s.

The new regulations have been in the making for the last three years. Authorities say the rules are in tune with the market realities of the UAE and have given enough time for companies to comply with these.

The new rules comprise sections pertaining to financial, technical, investment and accounting aspects of insurers. Companies with asset allocations that are higher than these limits have three years from the start of February 2015 to adjust their positions in accordance with the new regulations.

“The regulations put the UAE at the forefront of the Middle East with regard to adopting the latest solvency requirements similar to the European model,” said Sultan Bin Saeed Al Mansouri, the UAE minister of the economy and the chairman of the Insurance Authority.

The new financial regulations aim to ensure the stability and sustainability of the insurance industry by improving the solvency of the 60 insurance companies operating in the country with 26 of which are foreign insurers.

Risky asset classes

Although the new set of regulations are expected to improve the asset quality of UAE insurers Moody’s said, even under the new rules UAE insurers can invest a substantial portion of their assets risky asset classes such as equities and real estate.

Minimum capital requirements remain Dh00 million for insurers and Dh250 million for reinsurers. However, the financial regulations also now require insurers to meet minimum guarantee fund and solvency capital requirements that are company-specific calculations incorporating a more economic view of the risks borne by insurers, including underwriting, market, liquidity, credit and operational risks.

The financial regulations also set out specific requirements on investments, including maximum limits on individual asset classes and single-name counterparty limits.

“These changes will improve insurers’ asset quality, with new limits on risky asset classes and concentration risk. However, we note that UAE insurers would still be able to invest up to 80 per cent of their investments in real estate and equities, limiting the potential improvements in asset quality. We consider asset quality to be the key credit weakness for many UAE insurers and these steps are a positive development,” said Londe.

The UAE insurers’ direct premiums grew at a compound annual growth rate of 16 per cent between 2006 and 2013, reaching more than Dh29 billion ($8 billion) in 2013, although that rate has slowed recently.

The requirement for actuarial-led reserve setting, monitoring and reporting will enhance reserve adequacy and improve underwriting profitability by encouraging insurers to set premiums in line with underwriting risks and become increasingly selective about the risks they underwrite.

Analysts say the enhanced regulations and implied additional costs of monitoring, managing and reporting may also encourage consolidation among some smaller market players, potentially reducing competitive pressures and aiding market stability.

By Babu Das Augustine Banking Editor

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