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Limiting Factors: how will investments flourish when insurers are blocking them?

Limiting Factors: how will investments flourish when insurers are blocking them?

George Belcher of Dewey & LeBoeuf's Abu Dhabi office analyses the impact of the UAE Insurance Authority’s proposals to impose limits on investments by insurers.

June 28, 2011 8:13 by

Insurers in the UAE would be required to hold at least 80 percent of their investments in the UAE itself thus limiting their investment options, under the draft regulations proposed by the UAE Insurance Authority. This would effectively force them to hold a high proportion of their assets in the form of UAE fixed deposits, the sole asset class where there is no restriction.

The UAE Insurance Authority has recently introduced a number of draft regulations, which it has circulated to the industry for consultation. These will apply to all insurers that are authorised by the Insurance Authority, be they UAE insurers or branches of overseas insurers. In this article, we discuss one of these, namely investments by insurers.

The current UAE regime makes no requirements as to the nature and admissibility of investments beyond the high-level requirements for the deposit that an insurer must make to secure its capital requirements. The draft regulations on the other hand introduce hard limits for investments covering technical provisions, MCR and SCR (see box). These include limits by not only asset class and issuer/ counterparty, but also establish a maximum limit of investment outside the UAE.

We discuss below the likely consequences that the draft regulations would have for the UAE insurance market. We also make a number of suggestions as to how they may be modified to produce the optimal effect for all stakeholders in the industry.

High level requirements

The draft regulations set out some high level “principles” whereby investments should:

–          Secure the sufficiency, liquidity, security, quality, profitability of the portfolio as a whole

Be of a sufficient amount, currency and term to ensure that cash inflows will meet expected cash outflows resulting from insurance liabilities (taking into account of any options to which the insurer is bound)

–          Allow the insurer to respond adequately to changing economic circumstances (with particular reference to developments in the financial and real estate markets)

–          Avoid “excessive risk concentrations” to (i) counterparties that are related to each other (ii) counterparties to which the insurer is related (iii) single industry/ business areas, and (iv) single geographical areas. (This does not apply to index or property-linked assets (except in respect of any guaranteed element) or to government bonds/cash or cash equivalent (bank deposits)

–          Be invested in the best interests of policyholders and beneficiaries (particularly in the case of any conflict of interest

–          Be localised so as to ensure availability

The draft regulations also provide that investments should:

–          If unlisted, be approved by the Insurance Authority and kept to prudent levels, within the risk appetite set by the insurer (see “Policies, Systems and Controls” below); and

–          Be “marked to market” where possible.

The Insurance Authority may, following an assessment of an insurer’s risk profile, require it to invest (or refrain from investing) in specified assets.

Policies, systems and controls

The draft regulations provide that the board of an insurer must put in place, and regularly review, investment and risk management policies, systems and controls. These must be documented with responsibility for their implementation clearly allocated. An insurer shall undertake regular stress-testing using a range of realistic market scenarios and changing investment and operating conditions. The draft regulations also provide that third party investment management must meet certain criteria.

Limits by asset class/ counterparty

The draft regulations go further by setting out hard limits (expressed as a percentage of total assets) on the extent to which assets are permissible to cover an insurer’s technical provisions, MCR and SCR (see box). These limits are set out below:

Overseas investment cap
The draft regulations state that: (i) all investments held to support technical provisions must be invested within the UAE and (ii) investments outside the UAE must not exceed 20 percent of an insurer’s total investment portfolio.

Transitional provisions

The draft regulations provide for a transitional period for compliance with the requirements from the date of issue of the regulations as follows:

–          Equities: five years (on a progressive basis)

–          Real estate: five years

–          Other assets: two years.

–          Impact

–          The table shows on an aggregate basis the investment profile of both UAE and overseas insurers, based on information that is contained in the Insurance Authority’s 2009 report.

It can be seen that, with the exception of “other assets”, UAE insurers are on an aggregate basis comfortably within the limits set by the draft regulations. However, it can also be seen that the draft regulations would have a radical effect on overseas insurers. They would need to slash the amount of equities and particularly overseas equities to come into compliance. They would also be required to reduce the level of “other assets” held. These would need to be supplemented with other assets held within the UAE.

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